The stock has recently become more appealing, but has it declined enough to be considered a good investment?
Nvidia (NVDA 3.30%) has experienced a downturn lately. After reaching a 52-week peak of $212.19 in late October, its shares closed last week at $175.02, marking a roughly 17% decline. This drop comes as investor sentiment around artificial intelligence (AI) has turned more cautious, with a demand for clearer returns on investments and tangible evidence that the current AI surge will continue.
Evaluating Demand Trends
Nvidia, a leader in graphics processing units (GPUs) that drive the data centers supporting AI models, has greatly benefited from the AI boom. However, this also implies that the stock could be vulnerable if AI demand wanes.
Strong Fiscal Performance
Despite the recent negative sentiment surrounding AI, the demand for AI chips remains exceptionally strong. Nvidia’s fiscal third-quarter results paint a promising picture, revealing that “Blackwell sales are off the charts, and cloud GPUs are sold out,” according to CEO Jensen Huang. The company’s revenue surged by 62% year-over-year to $57.0 billion, outpacing the 56% rise seen in fiscal Q2, signaling a return to accelerating growth.
Profitability and Future Guidance
The data center sector, which mainly caters to AI hardware demand, also displayed a positive outlook in fiscal Q3, with revenue rising 66% year over year to $51.2 billion. Additionally, Nvidia’s profitability remained strong, with operating income increasing by 65% year-over-year to $36.0 billion and earnings per share jumping 67% to $1.30. Looking ahead, Nvidia projects fourth-quarter fiscal 2026 revenue at approximately $65.0 billion, suggesting a sequential growth of about 14% and around 65% year-over-year growth.
Investment Risks
While the recent stock price drop makes Nvidia a more attractive buy, investors should exercise caution due to inherent risks. Currently trading at roughly 43 times earnings, this valuation is justifiable if Nvidia sustains its rapid growth and maintains a high gross margin. However, any indications of slowing growth in either area could further depress the stock price.
Competitive and Regulatory Challenges
The semiconductor industry is notoriously cyclical, and competition is intensifying as major players like Alphabet and Amazon develop their own chips, which could offer viable alternatives to Nvidia’s offerings. Regulatory and geopolitical factors, particularly concerning sales of AI chips to China, also contribute uncertainty to Nvidia’s future prospects in that critical market.
Conclusion
Although a decline in Nvidia’s stock price increases its attractiveness compared to a few months back and the company’s business fundamentals remain robust, its high valuation necessitates a margin of safety for potential buyers. There are currently no strong signs that the AI market is weakening, but a slight shift in sentiment could lead to significant stock price drops. Investors should be cautious, as the current margin of safety does not seem adequate.
