Nvidia’s Worst Month in a Year Is a Gift For Bulls

by Jeran Wittenstein, Ryan Vlastelica of Bloomberg News, 9/26/23

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Investors that missed out on this year’s dizzying rally in Nvidia Corp. have an attractive entry point this month.

That’s according to Morgan Stanley, which argues that concerns about demand sustainability for Nvidia’s chips used in artificial intelligence computing will soon be quelled by management comments or financial results. That will make the stock’s decline of 14% in September an excellent buying opportunity, analysts led by Joseph Moore said.

“Numbers are likely to continue to be strong, and to the extent that investors are concerned about near term demand that’s a good thing, as it is a negative thesis that the company can quickly disprove,” the analysts wrote in a research note on Monday.

Nvidia’s valuation has become a subject of intense debate among investment professionals after its stock tripled this year amid soaring demand from customers rushing to beef up AI computing capacity. While Wall Street analysts are nearly universally bullish, skeptics like Rob Arnott, founder of Research Affiliates LLC, argue that Nvidia is priced so high that it can’t possibly live up to expectations. It’s even too expensive for Ark Investment Management’s Cathie Wood.

The selloff in Nvidia comes as technology stocks are under pressure from rising Treasury yields, with the Federal Reserve signaling its willingness to keep interest rates high to combat inflation. Still, Nvidia has fallen much more than the Nasdaq 100 Stock Index, which is down 5% this month.

The stock’s decline combined with rising profit estimates have pushed Nvidia’s valuation to the cheapest in nearly a year. At 29 times profits projected over the next 12 months, Nvidia is half as expensive as it was in May, before the first of its two consecutive blow-out earnings reports and below the stock’s average of 32 times over the past decade, according to data compiled by Bloomberg.

Of course, that places a lot of faith in estimates, which have been jumping at a breakneck pace. The average analyst projection for earnings per share in Nvidia’s fiscal 2025, which ends on Jan. 31, 2025, has more than tripled in the past six months.

That hasn’t deterred Thomas George, portfolio manager at Grizzle Investment Management, which counts Nvidia among its top holdings.

“Nvidia is really reasonably priced for the growth it is generating,” George said in an interview. “In a few years, you’ll look back and see it as very attractively priced right now. The demand isn’t a mirage.”

For some investors, Nvidia’s failure to rally after beating second quarter sales estimates by more than $2 billion in August is a sign that the stock has priced in a lot of future growth despite faltering momentum.

But analysts have only gotten more bullish since then with the average price target for Nvidia rising to $646, implying a gain of more than 50%. With the stock’s retreat, the gap between expectations and current share price is close to the widest on record, according to data compiled by Bloomberg.

Tech Chart of the Day

The Nasdaq 100 Index’s recent pullback has brought valuations lower, but with yields on the rise, it’s still quite pricey. On a forward price-to-sales basis, the tech-heavy index trades at 3.8 times, well above its 10-year average, indicating that the frothiness is still there.