Nvidia Stock: A Controversial Investment Amid AI Boom

Nvidia's Stock Is A Gift At $105 (NASDAQ:NVDA)

In my view, the price action has gotten ahead of the underlying fundamentals, particularly as growth slows due to the law of large numbers, not vice versa. The downgrade has proven to be timely, with the stock down 22% since my previous coverage, with the broader market (SP500) remaining mostly unchanged. Naturally, downgrading a hyped company like Nvidia is never a popular move among hardcore fans. Still, as investors, we need to be mindful of the price we pay in relation to the value we get. Just to set the record straight, I have not sold any of my Nvidia shares. Instead, I added some more, around $90/share, during the broader market slump in August. In fact, Nvidia is among my top holdings right now, thanks to the strong year-to-date performance with the stock doubling. I never try to time the market, particularly with momentum stocks like Nvidia, where the market may be more often irrational than rational; however, I am not willing to pay any price. Instead, with Nvidia's strong growth, the maximum I am willing to pay is 25-35x its forward earnings. Today, after Nvidia released its Q2 FY25 earnings in August, news surfaced about the upcoming delay of Nvidia's Blackwell platform. The broader market has pulled back from the stretched valuation territory, the setup is once again favoring the bulls. Let me walk you through the events of the past months and explain why I once again have upgraded Nvidia back to a "Buy" rating. Nvidia's stock has been the number 1. beneficiary of the AI gold rush, with the stock up 108% on a year-to-date basis and 360% in the past three years alone, rewarding patient shareholders. At the end of the day, Nvidia's stock has a 1.67 beta with an annualized volatility of 48%, either way. To put it into perspective, Nvidia's stock is 5.19x more volatile than the Dow Jones Industrial Average, perhaps not the best fit for every investor's stomach. Yet, not all semiconductors are created equal. Companies that did not jump on the AI bandwagon early enough or simply cater to different semiconductor uses, such as Intel Corporation (INTC) or Texas Instruments Incorporated (TXN), showcase very different stock performances. With Nvidia's business aimed to provide fundamental infrastructure through its Hopper and Blackwell GPU platforms to build state-of-the-art data centers enabling companies to train large language models ("LLM") to unlock AI-enabled applications for their customers, I like to refer to Nvidia's success as selling shovels during a gold rush. Jensen Huang, Nvidia's CEO, has recently become the new business superstar, taunting the success of the company's business as humanity navigates a generational shift in computing: The next industrial revolution has begun - companies and countries are partnering with NVIDIA to shift the trillion-dollar traditional data centers to accelerated computing and build a new type of data center - AI factories - to produce a new commodity: artificial intelligence. Indeed, AI has become a new commodity. While it's not a widely accepted fact among governments globally, private companies are racing to build the most advanced and immense AI data centers to stay at the forefront of innovation. They would rather overinvest now than underinvest and become obsolete in the fiercely contested tech field. To name a few recent AI infrastructure investments: Now, there are some risks to Nvidia's business model and AI in general as well: Indeed, all these issues are real and potential threats to Nvidia's superior growth. Nevertheless, the major tech companies are not yet showing signs of exhaustion, and their CAPEX spending continues to balloon to record levels. The estimated price for Nvidia's H100 chips is between $25,000 and $30,000. If we assume Meta is paying the lower end of the range, with 350,000 chips, Meta alone plans to spend approximately $8.75B on Nvidia's GPUs this year. In 2024, AI represents the largest pie of CAPEX spend of many other Mag7 businesses. That's precisely the reason behind Nvidia's explosive growth, with the revenue reaching $30B in Q2 FY25, growing 15% QoQ and 122% from the prior year. As the competition does not come close to challenging Nvidia's engineering superiority, particularly with Nvidia's aggressive 1-year product cycle (now Advanced Micro Devices, Inc. (AMD) announced a 1-year product cycle as well), the company is enjoying monumental pricing power. This allows the company to capitalize on the opportunity while the rest of the industry catches up, with Gross Margin during Q2 FY25 at 75.1%, a slight contraction from 78.4% in Q1 FY25. As a result of the aggressive product-cycle development, Nvidia's operating expenses increased 48% YoY, but that's easily offset by the combination of 122% top-line growth and 5.0ppts margin expansion from the period year. Altogether, Nvidia brought in a record-breaking $16.6B in net income during the quarter, or a 1.68x increase from a year ago. Following the earnings call, despite the record-beating results, which beat analyst estimates on both the top and bottom lines, Nvidia's stock fell as much as 6.4%. The reason behind the pullback is simply analysts' lofty expectations. At the high end, they were hoping for as much as $37B in revenue, which has proved unrealistic, partially due to the law of large numbers, with growth deceleration on tap. While historically, Nvidia's business revolved around GPUs powering gaming, the narrative has shifted, and the business has reinvented itself. Data centers now make up 87.5% of the total revenue, while gaming and automobile segments have become minor parts of the business. If you are confused about the large variety of AI chips that Nvidia currently markets, let me show you the most important ones: Despite the high demand, the lead times of Nvidia's core products reduced significantly from the previous 8-11 months waiting time to 8-12 weeks. The reduction in lead times can be partially explained by Taiwan Semiconductor Manufacturing Company Limited (TSM) allocating more production capacity to Nvidia. Overall, Nvidia's business is currently enjoying a reasonable degree of stability, with the Mag7 business making up 46% of its total Q2 FY25 revenue. Nevertheless, the concentration is real. Let's not forget that if the AI capex spending shows signs of weakness with one of the key players, that can be interpreted as a general pullback, with other players potentially reducing their spending. This is particularly true if the monetization question of AI will grow in importance from the investor's side. On the flip side, there are some signs that the AI tailwinds are widening. Governments, regional cloud providers, and smaller enterprises are all looking to invest in their own custom-specific AI infrastructure to elevate dependence on the top few players. There are increasing numbers of chatbots, copilots, and industrial solutions which could further boost Nvidia's growth. Likewise, while Nvidia currently holds 80% of the AI chip market share, the company is not the only player in town. AMD is playing catch-up, and cloud providers such as Amazon and Google all release their AI chips. For instance, AMD's product pipeline is similar to Nvidia's 1-year product-cycle releases as a direct challenge: So far, we cannot say with certainty that any of AMD's AI chips have proven to be direct contenders, particularly as Nvidia's business still enjoys industry-leading pricing power. However, the company has announced a delay in its Blackwell architecture due to a mask issue impacting the chip's yield. The product ramp-up is now scheduled for Q4 FY25. This points to a three-month delay. It could cost Nvidia a few percentage points of market share and create an "air pocket" if customers such as Microsoft, Meta, Google, and Amazon wait on the new infrastructure instead of buying the current, Hopper one. Heading into Q3 FY25, Nvidia expects to deliver $32.5B in revenue, representing another 79% growth. Gross Margins are expected to keep slightly contracting towards 74.4% to 75%. Given the impressive returns in 2023 and year-to-date in 2024, most investors would automatically avoid investing in Nvidia's stock, claiming it must be too expensive. Well, that's partially correct, but in my opinion, it does not capture the whole story. Nvidia's trailing twelve months P/E is at a high of 46.5x. However, it would be a shame not to capture inside the valuation the forward expected growth, which has so far proven to be spot on. If we instead consider the expected growth of Nvidia's bottom line, the narrative changes: From the growth expectations, we can see that Nvidia's growth is indeed decelerating as a result of the law of large numbers, where it's virtually impossible to keep growing 100%+ a year for a prolonged period with a revenue run rate of $100B. Nevertheless, even if the decelerating growth materializes, Nvidia's stock is priced at: That's a 12-month forward P/E of 32x its projected earnings, given that we still have two quarters to go in FY25 and two quarters to go in FY26. Overall, 32x forward earnings is by no means a cheap valuation, but it's a significant contraction from the trailing 12-month P/E and a valuation I am willing to buy Nvidia's stock at. Naturally, the future is inherently uncertain, and a slowdown in AI-CAPEX spending or a recession could hinder Nvidia's strong momentum and growth. Nevertheless, at a 12-month forward PEG ratio of just 0.4, Nvidia's stock appears to be undervalued. If the stock contracts below $100/share or lower, I will scope the shares with both hands. If the growth materializes and Nvidia's stock trades at a P/E of 46.7x (15Y average) by the end of 2027, investors could see up to 23% annual ROR. Nvidia's reinventing of computing and the last few years' stock performance are success stories I have never seen before and might never see again in my life. The company has delivered a revolutionary product line-up at the right time to the market, which has the opportunity to unlock a new era of productivity and enable organizations and individuals to become more efficient. Despite Blackwell's platform's three-month delay, Nvidia's aggressive one-year product cycle positions it to remain at the forefront of AI GPU innovation with industry-leading pricing power. The Mag7 business appears to continuously pour billions of dollars into CAPEX to build state-of-the-art AI data centers, ensuring their companies do not become obsolete, rather overinvesting than underinvesting. Following Nvidia's stock price slump and the tech-driven sell-off, I once again view Nvidia as a good deal, upgrading my rating from Hold to Buy.

Nvidia: AI Is Not Translating To Higher Corporate Earnings (NASDAQ:NVDA)

Looking for a helping hand in the market? Members of High Yield Landlord get exclusive ideas and guidance to navigate any climate. Learn More " I have been covering Nvidia Corporation (NASDAQ:NVDA) for a while and have been warning against chasing the stock higher. Recently, in June, I published an article called Nvidia: Likely To Lose Its Dominant Position Over Time. In that article, I argued that, despite an indisputable competitive advantage, from a historical perspective it's extremely unlikely that Nvidia would be able to maintain the high growth and high margin trajectory it has been on. In fact, I showed that since 1985 there has only been one company which has managed to maintain 50%+ EBIT margin for 10 consecutive years. And since NVDA's expensive valuation required its high growth and margin trajectory to continue, I proceeded to rate the stock a SELL at $123 per share. Since June, Nvidia stock has fallen by almost 17% while the broader market, characterized by the S&P 500 (SPX), has been roughly flat. The majority of the downside came after the company reported its Q2 2024 results, which, although they beat expectations, resulted in a price drop from $125 to just above $100 per share. Today, I publish an update for the stock to decipher what happened and guide for a way forward. I suspect that the sell-off may have been caused by a combination of three factors, some short-term and some which will very much affect where the stock goes in the future. First, Blackwell chips, which are critical to Nvidia's future performance as they form the basis for the competing MI 300x chips from Advanced Micro Devices (AMD), have experienced significant production delays recently. The delays are a result of the chip redesign and have been expected before the release of Q2 earnings. But the most recent earnings release, and especially management's commentary which followed, have likely disappointed investors as management was unable to specify the expected length of these delays and the corresponding expected drag on earnings. Second, despite record booked quarterly revenue driven by strong buying from hyper-scalers, demand for AI chips in the U.S. seems to have peaked as revenue came in at just $13 Billion, down quarter-over-quarter from $13.5 Billion last quarter. Lower revenue in the U.S. could, of course, be a temporary phenomenon. Management did indeed try to justify it by saying that the location where the product is bought is not necessarily the location where the product ends up with the end-customer. This implied that they don't see looking at revenue on a per country basis as relevant. But I do find it worrying because the U.S. has by far the most data centers in the world and should therefore be the main driver of AI-related chip sales. Moreover, I think that investors were slightly disappointed by a relatively small size of the earnings beat, which was the smallest since January 2022. Third, the last two weeks have been tough for the whole market, as the Nasdaq 100 (NDX) declined by 6% on recession fears. A market wide sell-off was, understandably, felt more by higher beta stocks that were, arguably, already trading at rich valuation. The recent dip could very well be a buying opportunity, and that is precisely what I want to examine today. The AI market is expected to grow with a CAGR of 28%, primarily thanks to machine learning, from under $200 Billion this year to over $800 Billion by the end of the decade. Currently, the expectation is that AI will translate into significant productivity and earnings growth. Specifically, McKinsey predicts that AI has the potential to generate incremental global earnings of $2.6 to $4.4 annually, realized predominantly in banking, high-tech, and life sciences, as about half of today's work activities could get replaced by AI between 2030 and 2060. But here's the thing. While the AI opportunity is huge, it's unlikely that it will translate into significant earnings overnight. Specifically, I worry that investors may have got ahead of themselves (again), similarly to the early 2000s and the dot-com bubble. Back then, companies were also very heavily investing in new Internet infrastructure and investors drove valuations to very high levels ahead of rapid earnings growth. But as that growth took significantly longer to materialize than expected, and stocks of these companies suffered considerable losses. Today, Amazon and other big tech firms are spending billions of dollars on AI, without much to show for it. This has led to a series of disappointing earnings calls, with Wall Street questioning whether AI will live up to its hype after all. It is true that valuations were much higher during the dot-com bubble, and many of the companies, including Amazon at the time, were much less established than Nvidia today. Still, I do worry that optimism is currently running too high and that it will take significantly longer than expected to see any sort of AI-related earnings growth. This may result in significant downside once investors lose their patience. The question then becomes, whether we're getting compensated enough for this potential downside. Nvidia has around a 90% share of the AI-chip market, which means that it is unlikely to capture further share of the market and is therefore unlikely to grow by more than the market itself. At the same time, it's likely that competition -- mainly AMD and Intel (INTC) -- will eventually start to catch up and capture more market share. Therefore, I expect that revenue growth will likely be capped at around 20% annually going forward. Now, 20% is still pretty high, especially if Nvidia can maintain its industry-leading margin which currently stands at an impressive 76% (much above AMD's 47% and Intel's 41%). Even from a currently somewhat stretched forward P/E of 36x, the company can deliver solid double-digit returns over the next 5 years or so if the growth forecast materializes and if we assume an exit multiple of 25x. To sum up, the market's overreaction to Q2 earnings and delay of Blackwell chips may have created a buying opportunity. This is especially true if Nvidia manages to deliver on the revenue growth forecast and maintains its incredibly high margin. Then, it will likely turn out to be a good investment over time. This will, however, depend entirely on whether (and when) the recent AI investments, which have fuelled Nvidia's earnings, will translate into actual corporate profit growth. Only the future will tell. However, knowing (1) what happened in the early 2000s, and (2) following a round of fairly disappointing big tech earnings calls, which are upping their AI spend without clear ways to monetize the technology, I'm worried that the downside may be significant. For this reason, I rate Nvidia Corporation stock a SELL.

Nvidia: Cheapest It's Been In A Decade (NASDAQ:NVDA)

Risks include competition, potential custom chip development by cloud players, and regulatory scrutiny, but Nvidia's product superiority supports its market position. Introduction Nvidia Corporation (NASDAQ:NVDA) is a stock that needs no introduction, as it has seemed to singularly capture the world's attention as the darling of AI. Since November 2022 and the release of ChatGPT, Nvidia's stock price has appreciated a whopping c700%. Unlike some other hyped AI names, Nvidia's earnings have actually roared ahead of its stock price as demand for the firm's GPUs has proved insatiable. Following a shift in sentiment in markets and a negative response to the firm's recent earnings, shares are now trading at the most attractive level relative to growth in a decade. Investors need to be realistic about what time of return they might achieve, given the stock has grown into a $2.5 trillion behemoth. Expecting a repeat of the 700% since over the last two years is not realistic, but based on my own DCF analysis, I believe the stock is set up to deliver mid-teens returns for investors. I believe it can deliver solid returns at least over the medium term given its market-leading position in AI chips, the continued pace of capex at its biggest customers and a valuation that isn't as punchy as before. Given these factors, I am happy to initiate Nvidia with a buy rating. Recent Price Action Following a truly parabolic price appreciation, Nvidia stock has gone into reverse over the past two and a half months. The stock achieved an all-time high on June 18th and has fallen 20% since then as of the close Friday. Shares were down as much as 26% in early August as a mix of factors spooked investors. These included the risk of a US recession, concerns about the return on capex investment for Nvidia's biggest customers, and a generation rotation within markets away from Tech and Communications in favor of more defensive sectors. The negative price performance was punctuated with a drop of nearly 6.5% following the release of fiscal Q2 earnings on August 28th. Expectations for the stock clearly got ahead of realism, as markets were disappointed despite a solid earnings beat on both the top and bottom lines. Revenue grew a staggering 122% year-on-year, with data center specific revenue up 154%. What earnings clearly showed in my view was the lack of potential air pockets in demand, as was reported by some media outlets. There had been some fear that as customers, in particular large-scale cloud operators, took time to integrate their existing GPU purchases, that there would be gaps in their demand patterns. This concern has been shown to be demonstrably false, given data center revenue grew over 150%. Additionally, less than 50% of data center sales went to Big Tech cloud players. This indicates that the insatiable demand for high-end GPUs is extending meaningfully to broader players such as Sovereign cloud operators, like in the Middle East, and enterprise customers seeking to keep up. Blackwell and Beyond Investors were concerned going into earnings on reports that Nvidia's next-generation of chips, known as Blackwell, was delayed due to a design defect which impacted on production yields. CEO Jensen Huang confirmed that all issues had been resolved, and the new platform was set to begin shipment to customers in Q4 of this year. Blackwell promises to be a truly generational step forward in full-stack data center GPU computing. Nvidia claims the performance uplift over the hopper family of GPUs will be as much as 25x. Demand for the platform is likely to be voracious as Big Tech players in particular seem fixated on achieving the holy grail of Artificial General Intelligence or AGI. Mark Zuckerberg of Meta Platforms (META) was recently quoted as saying the next generation of AI models will consume 10x the compute to train. It would seem that all roads lead to Blackwell, with the new platform becoming table stakes for the Tech giants in their competition to build out cutting-edge infrastructure. On the issue of spending cadence, Zuckerberg stated: "It's hard to predict how this will trend multiple generations out into the future. But at this point, I'd rather risk building capacity before it is needed rather than too late, given the long lead times for spinning up new inference projects." (Mark Zuckerberg, Meta Press Release.) A simple examination of capex forecasts at Big Tech players is a good proxy for future demand for Nvidia chips, given a large portion of incremental capex has been allocated in that manner. Microsoft (MSFT) increased 2024 capex by 58% and is expected to raise further in 2025 by nearly another 30%. Google (GOOG) is expected to raise their capex level by 55% in 2024 and Meta is expected to increase its number by 40%. It is clear to me that demand for Nvidia's Blackwell platform will be as robust as it was for Hopper. The risk of missing a trick in AI development is a cost Nvidia's largest customers are not willing to bear. Valuation For me, valuation has consistently been a hurdle to finding a good entry point for Nvidia stock. Recently, the stock has consistently traded at or above a 40-50x forward P/E, this contrasts to a twenty-year average P/E from 2000 to 2020 of closer to 26x. However, as earnings have continued to grow substantially as noted above and the stock price has come back down to earth, the valuation multiple once again looks reasonable. Nvidia is trading on a 30x P/E which is in-line with Big Tech peers Microsoft and Apple (AAPL). However, despite an equivalent P/E multiple, Nvidia is forecast to grow substantially more in the medium term, with an EPS forecast nearly 3x Microsoft's and over 4x Apple's. As we can see below, on a PEG basis, Nvidia is the cheapest it has been in a decade. I expect ownership of Nvidia to likely entail much higher volatility than the likes of Apple, a defensive trait that allows the latter to justify such a high multiple despite relatively modest growth. However, I believe if investors have realistic expectations about growth prospects for Nvidia from here, and can stomach a bit of volatility, they should be rewarded with above market performance for holding the stock from here. Adopting a discounted cash flow ("DCF") approach, I model conservatively. The medium term analyst growth forecast for the stock is currently 36%, I have chosen to use 30% for my DCF to give us some margin of error in estimates. Nvidia has tended to beat estimates historically, so I would not be surprised if my forecast proves quite conservative. For the second stage of growth, I selected 10% EPS growth for two reasons. First, as Nvidia grows, the base effect of higher earnings will naturally lead to lower growth due to the law of large numbers. Secondly, 10% growth is akin to the long term EPS growth rate of the broader S&P 500 (SP500). I once again view this estimate as likely conservative, as I would be surprised if in only 5 years' time Nvidia was growing just at the same pace as the index. My DCF tells me that when adopting conservative estimates, it looks reasonable for investors to expect a return in the mid-teens from the current entry point. The recent strong sell off in the stock looks to have created a nice spot for investors looking to buy or add to existing positions. Risks The first obvious risk to Nvidia's trajectory is the threat from other chip plays and hyperscale cloud players' in-house efforts to develop custom chips. As it stands, Nvidia has a clear lead over competitors such as Advanced Micro Devices (AMD), a study from TechInsights showed Nvidia with a market share in the high-90s for data center GPU, which suggests a massive lead ahead of competition. However, such dominance can create uneasiness for customers as they end up locked in to one vendor, creating an uncomfortable over-reliance. Another risk which Nvidia's dominance creates is the threat of government antitrust action. Just last week, we saw reports that the Department of Justice had sent a probe to Nvidia, which the company strangely may not have received. Whatever the case may be, it is clear that Nvidia is now in the sights of regulators. Elizabeth Warren, a prominent US senator, has been quick to voice her support for an investigation into Nvidia. The firm claims, rightly in my view, that its dominance of markets is a function of its superior products rather than market manipulation. This risk is newly unfolding. In the short term, I do not expect anything which changes my buy thesis, but it will remain an issue to watch. Conclusion Wrapping it all up, I believe that Nvidia now represents a solid buying opportunity for investors, given the recent sell-off has taken some froth out of the stock. The valuation looks fairly reasonable both vs. the firm's history and vs. some of its Big Tech peers, and adjusting for expected growth rates one could make the case Nvidia is the most attractive in a decade. The firm does indeed face threats from growing competition and the watchful eye of regulators, but the demand for its chips doesn't look to have much end in sight. Hyperscale cloud players and others will have no choice but to fork out for Blackwell chips when they become available later this year. Failure to do so would allow competition in the race to develop ever more sophisticated AI models to gain a sizable lead. The performance uplift from Blackwell is simply too great to miss out on, as a result, I expect demand to hold firm for years to come and the stock to perform nicely from here. Professional equity portfolio manager for a boutique buy-side asset manager.My focus is on finding high-quality companies, applying a disciplined approach to valuation and identifying underappreciated opportunities. My goal is to identify opportunities in cash-rich companies with strong balance sheets and shareholder friendly policies. I endeavour to incorporate a mix of quantitative and qualitative measures to identify opportunities in stocks. Long-only approach with a long-term investment focus. Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Nvidia Stock Has Plunged 22%. Here's Why 1 Top Wall Street Analyst Thinks It's Time to Load Up on the Artificial Intelligence (AI) Stock. | The Motley Fool

None of the issues behind Nvidia's recent sell-off should be concerning, according to one top analyst. For years, Nvidia (NVDA 3.54%) has been a superstar prospect in the investing world. However, the stock isn't as highly sought after at the moment as it was earlier in 2024. Nvidia's share prices are down over 22% from the peak it set in June. The stock was down even more a month ago before mounting a temporary comeback that quickly faded. Is it time to sell Nvidia? Some might believe so. But one top Wall Street analyst thinks it's instead time to load up on the artificial intelligence (AI) stock. There are multiple factors behind Nvidia's recent decline. The delay in shipping GPUs based on the company's new Blackwell architecture is a top one. Investors had hoped the revenue from these powerful new chips would begin hitting Nvidia's top line sooner rather than later. Nvidia's second-quarter earnings results also arrived with a thud. The company beat Wall Street's revenue and earnings estimates. However, sometimes the official estimates aren't really what analysts want. Nvidia failed to achieve the so-called "whisper numbers" in Q2. Some investors have also been concerned that the AI boom has run its course. They worry that Nvidia's customers could reduce spending on the GPUs they need to power AI models. Finally, Bloomberg News reported last week that the U.S. Department of Justice issued a subpoena to Nvidia as part of an investigation into potential violations by the company of federal antitrust laws. Nvidia denied receiving a subpoena, but the story caused its shares to sink further. These issues could cause some investors to choose to stay on the sidelines. However, Bank of America analyst Vivek Arya thinks now is a great time to buy Nvidia stock. Arya acknowledged in a note to investors last week that "market forces could enhance near-term stock volatility." But he added that Nvidia's valuation is "compelling" with shares trading at roughly 27 times consensus earnings for fiscal year 2026 -- the cheapest valuation for Nvidia over the last five years. Bank of America's 12-month price target for the stock is $165. That reflects an upside potential in the ballpark of 55%. What about the Blackwell delay? BofA expects Nvidia to confirm that shipments are underway over the next several weeks. This view seems to align with comments made by Nvidia CEO Jensen Huang in the company's Q2 earnings conference call. Huang said that shipments will begin in Q4. Even without Blackwell, Arya projects that the demand for Nvidia's previous-generation Hopper chips will remain strong. BofA doesn't believe the AI boom is anywhere close to being over. Arya wrote, "The tech industry will give itself at least another 1-2 years of intense buildout" of Nvidia's Blackwell chips. He added, "Efforts thus far with the first wave of large language models (LLM), using NVDA Hopper was just the teaser." As for the reported Department of Justice probe, Bank of America doesn't expect any impact on Nvidia at this point. The Wall Street firm stated that federal investigations aren't unusual with big U.S. technology companies. I can't find much to quibble about with anything Bank of America said about Nvidia. The stock's valuation is arguably the most compelling it's been in quite a while. I suspect Nvidia will confirm Blackwell shipments in the near future. The demand for the company's Hopper GPUs will almost certainly remain robust until Blackwell GPUs are available in high quantities. BofA is almost certainly correct that the AI boom will continue for at least another year or two. Comments made by executives at cloud services giants Amazon, Microsoft, and Alphabet in their recent quarterly calls support this view. I also agree that it's way too early to assume that any DOJ investigation will impact Nvidia. Such probes can lead nowhere. My only qualm with Bank of America's take on Nvidia is that I'm not sure if the stock will soar 55% over the next 12 months. However, I wouldn't bet against it happening. Even if Nvidia doesn't hit BofA's price target, the beaten-down AI stock looks like a good pick to load up on during the current pullback.

Is Nvidia Stock a Buy Now? | The Motley Fool

The stock is down recently partly on concerns that the AI bull market may be over. Some market prognosticators would argue that, as Nvidia (NVDA 3.54%) stock goes, so goes the artificial intelligence (AI) bull market. Wall Street rallied around Nvidia, thanks to its dominance in the AI chip market. It's the flagship company representing the emergence of large language models and other AI technology, which is arguably the largest technological leap forward since the internet started developing in the late 1990s. After soaring for most of the past two years, Nvidia's stock price has reversed course. The stock is down about 22% from its June 2024 high. Buying the dip on winning stocks has been a successful investing strategy for years. And to be honest, it's hard to imagine an AI future without Nvidia playing a significant role. However, you may want to consider these risks before buying the stock today. Nvidia's AI-friendly GPU chips have become the go-to choice for technology companies building large data centers to run powerful AI models. Approximately $26.3 billion of Nvidia's overall $30 billion in Q2 revenue was from its data center segment, so Nvidia has effectively become a pure play on AI chips. The good news is that data center revenue grew 154% year over year in Q2 and 16% from the prior quarter, a sign that chip demand remains strong. Analysts now estimate Nvidia will earn $2.84 per share this year and $4 per share next year. Using next year's estimates, that prices Nvidia at a forward price-to-earnings ratio (P/E) of 26. If Nvidia grows earnings by 40% annually over the long term, as analysts believe it will, it's arguably a bargain now. However, there's an argument that Nvidia's revenue, as impressive as it could wind up being, is risky enough that investors may want a tremendous margin of safety to buy the stock. A small handful of companies are propping up Nvidia's sales. Specifically, four companies make up 40% of Nvidia's total revenue. To make matters worse, all four of them -- Microsoft, Meta Platforms, Alphabet, and Amazon -- have worked on developing their own custom AI chips. These companies will not necessarily discontinue using Nvidia's chips entirely (though anything is possible). But Nvidia has enjoyed remarkable pricing power since the AI rush began early last year. AI became a race where speed to market became the priority. There are signs that the AI market is slowly evolving. Investors have openly questioned whether big technology companies see the returns needed to justify all this data center spending. Market research has indicated that traffic to ChatGPT, once the fastest-growing app in history, has dropped in recent months. Amazon's management noted in the company's Q2 earnings call that its AI customers want better value. Price didn't matter when AI was new, but it's starting to become a conversation. That could spell pricing pressure for Nvidia moving forward. The company may have to choose between sacrificing market share to competition or accepting lower margins to retain share. This year, Nvidia is guiding to gross margins in the mid-70s, so this is something to watch in 2025 and beyond. You can see that margins this high are well beyond anything before the pandemic: It's tempting to ignore such a long-term concern, but remember that Nvidia only looks cheap because everyone expects stellar sales and profits years into the future. Margins reverting to long-term averages would be disastrous for investors. These concerns aren't to dissuade you from owning Nvidia. They are raised to keep you aware of the risks. As impressive as Nvidia's financials are today, they've been propped up by a few deep-pocketed customers throwing money at being the early AI winner. Nvidia could be the leading AI chip company 20 years from now, but sales and/or profit margins could also fizzle out and collapse the stock. The tricky part is that both things could be true. Long-term investors who would like to buy the stock on this dip should do so responsibly. Consider a dollar-cost averaging strategy to accumulate shares slowly. That way, volatility is more of an opportunity than a reason to stress. Nvidia could be a bumpy ride for the foreseeable future, even if it makes investors money in the long run.

Unlocking Opportunities: Upgrading AMD To Buy On AI Prospects (NASDAQ:AMD)

Upgraded the stock to a buy due to its potential to compete effectively with Nvidia in AI and data center markets. I last wrote about Advanced Micro Devices, Inc. (NASDAQ: NASDAQ:AMD) on December 4, 2023, giving the stock a hold rating. Although the stock has been up 13.31% since that recommendation, it underperformed the S&P 500's (SPX) 18.35% rise. Although the stock has risen higher since my hold recommendation, there are reasons it might outperform at higher prices. Companies do not like having NVIDIA Corporation (NVDA) as a sole source for AI accelerators because it would have too much power to negotiate higher product prices. Additionally, having only one AI infrastructure supplier adds the risk that a customer may not be able to receive its products when it wants. AMD has recently introduced an AI accelerator to the market that performs similarly to Nvidia's GH200 Grace Hopper chip. Its second-quarter 2024 report strongly suggested that its new AI chip is gaining traction in the market, helping the company's fundamentals improve. Investors are increasingly confident that AMD can become a second supplier of chips to the AI infrastructure market. This article will discuss how AMD is slowly catching up to Nvidia's capabilities and how the company's fundamentals are improving. It will also examine a few risks, its valuation, and why I have upgraded the stock to a buy. One way Nvidia leads AMD is its ability to provide customers with complete system solutions, also called rack-scale. Investors familiar with Super Micro Computer, Inc. (SMCI) may have heard of the rack-scale. My last article on Super Micro discussed what the term means (emphasis added): Around 2022, the company [Supermicro] emphasized what it called Total IT Solutions at Rack-scale. This term refers to a new data center architecture that separates traditionally bundled server components of compute, network cards, GPU (Graphics Processing Unit) acceleration, and storage into independent, standalone modules. For instance, one rack-scale module may contain only network cards. Another may contain only central processing units. A rack is a metal frame that can hold multiple modules connected by high-speed fiber, PCIe, or InfiniBand interconnects. One or more racks share cooling and power inside a larger enclosure called a cabinet. Rack-scale architecture is ideal for high-performance computing and generative AI applications. Rack-scale has become increasingly popular as cloud companies and enterprises build more data centers geared to generative AI. Nvidia is ahead of its competitors, including AMD, in providing networking hardware, software, water-cooled GPUs, and expertise in combining multiple components within a rack-mounted server system. Nvidia's primary high-speed interconnect is NVLink. It connects an Nvidia GPU to another GPU within a rack or a small cluster and can also connect a GPU to a CPU. Until recently, AMD has lacked similar interconnect products. To replicate high-speed short-distance interconnects between non-Nvidia accelerators, a consortium of companies that includes AMD, Broadcom Inc. (AVGO), Cisco Systems, Inc. (CSCO), Alphabet Inc. (GOOGL)(GOOG), Hewlett Packard Enterprise Company (HPE), Intel Corporation (INTC), Meta Platforms, Inc. (META), and Microsoft Corporation (MSFT) created an open industry standard called Ultra Accelerator Link (UALink). According to one article, UALink may hit the market in 2026. However, AMD is not waiting for its appearance. When asked about UALink on its second quarter 2024 earnings call, AMD Chief Executive Officer Lisa Su said (emphasis added): First of all, we're very pleased with all of the partners that have come together for UALink. We think that's an important capability. But we have all of the pieces of this already within sort of the AMD umbrella with our Infinity Fabric, with the work with our networking capability through the acquisition of Pensando. And then you'll see us invest more in this area. So this is part of how we help customers get to market faster is by investing in all of the components, so the CPUs, the GPUs, the networking capability as well as system-level solutions. The company defines Infinity Fabric in a paper describing its networking strategy: "AMD Infinity Fabric™ (IF) is a high-speed intra-host interconnect that can be used to connect multiple AMD CPUs and GPUs." Essentially, it is AMD's version of NVIDIA's NVLink. AMD acquired Pensando Systems on May 26, 2022. The company specializes in speeding up data transfer through software infrastructure and its Data Processing Unit ("DPU"), an increasingly vital component enabling advanced computing applications such as AI, machine learning, IoT (Internet of Things), 5G, and hybrid cloud configurations. SmartNIC (smart network interface controller) often incorporates DPUs. With Pensando, AMD may develop products that equal or exceed NVIDIA's ConnectX family of NICs. AMD has improved the quality of its CPUs and GPUs and should soon have networking products to potentially make it capable of gaining market share against NVIDIA. Still, one more piece is needed to become a genuine threat: the system-level solutions piece. It recently acquired that piece on August 19, 2024, when it announced it was buying ZT Systems. This company specializes in designing and manufacturing complex systems for rack-level solutions. AMD Chief Technology Officer Mark Papermaster said the following about the proposed ZT Systems acquisition at the Deutsche Bank Technology Conference on August 28, 2024 (emphasis added): When you think about the announcement that we made last week in acquiring ZT Systems, it's the next stage in really our strategic growth of ensuring that we have the full complement of skills that we need to have not only the best AI hardware, not only competitive and leadership AI software, but the ability to integrate it and optimize it at the system level. And so, ZT Systems represents exactly that. They have 15 years of experience with building some of the most complex heterogeneous system designs, integrating CPUs, GPUs, networking, advanced thermal management and cooling capabilities, as well as the kind of control software that you need to efficiently run these complex rack designs. Due to this potential acquisition, AMD will be able to design custom hardware and software configurations for different AI applications. It will also be able to bring those AI solutions to market more quickly, possibly differentiating its solutions in the marketplace and gaining a competitive advantage. Although AMD should benefit from AI adoption, investors shouldn't expect the same triple-digit revenue growth as its competitor, Nvidia. In contrast to its faster-growing rival, two of AMD's segments are underperforming and acting as an anchor on its overall performance. AMD's Data Center and Client segments are outperforming. Data Center grew 115% over the previous year's comparable quarter. In comparison, Nvidia grew second-quarter data center revenue by 154%. However, the following table shows that AMD's Gaming and Embedded segments are significantly underperforming, acting as a deadweight regarding total revenue and profitability. CEO Su said the following about the data center business on the second-quarter earnings call (emphasis added): Turning to our data center AI business, we delivered our third straight quarter of record data center GPU revenue with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft expanded their use of MI300X Accelerators to power GPT-4 Turbo and multiple co-pilot services including Microsoft 365 Chat, Word, and Teams. Microsoft also became the first large hyperscaler to announce general availability of public MI300X instances in the quarter. The new Azure VMs leverage the industry-leading compute performance and memory capacity of MI300X in conjunction with the latest ROCm software to deliver leadership-inferencing price performance when running the latest frontier models, including GPT-4. AMD's Instinct MI300X is a high-performance AI accelerator optimized for large language models ("LLMs") used in inference and training workloads. The company needed to show investors that it could gain a toehold in a massive cloud provider like Microsoft for its prime AI products, such as GPT-4 and Microsoft 365-mission accomplished. The company showed Wall Street that its offering is a viable alternative to Nvidia's AI accelerators. ROCm software is an open-source competitor to Nvidia's CUDA software. If AMD can establish ROCm, it could break down another of Nvidia's competitive advantages. AMD also raised guidance for its data center segment. CEO said on the earnings call: In summary, customer response to our multi-year Instinct and ROCm roadmaps is overwhelmingly positive and we're very pleased with the momentum we are building. As a result, we now expect data center GPU [Graphics Processing Unit] revenue to exceed $4.5 billion in 2024, up from the $4 billion we guided in April. AMD's second-quarter 2024 Data Center segment operating income margin rose 15.1 points to 26.2% year over year. Data Center Operating income was up 405%. The company's second-quarter 2024 total revenue grew 9% year-over-year to $5.8 billion. AMD GAAP (Generally Accepted Accounting Principles) gross margin rose 352 basis points ("bps") to 49%. The company's non-GAAP gross margin was up 340 basis points year-over-year to 53%. The rapid rise of the more profitable data center revenue helped total gross margins rise. The following table shows that the largest difference between GAAP and non-GAAP gross margins is the amortization of acquisition-related intangibles. This is how the company accounts for the decline in value of an acquisition's non-physical assets like patents, trademarks, and copyrights over their useful lives. It is similar to depreciation for physical assets. The company's second-quarter 2024 non-GAAP operating income rose $190 million year over year to $1.3 billion. In the second quarter, the non-GAAP operating margin was up 2 points to 22% compared to the previous year's comparable quarter. Operating expenses/revenue was up 2 points year over year to 32%, meaning the company is investing more to produce revenue growth. Still, revenue growth and gross profits outpaced rising operating expenses during the quarter. Investors should monitor how long management can maintain that scenario, since competition remains fierce. AMD may need to increase investments in research and development (R&D) to keep pace with Nvidia in AI chips, possibly hurting operating margins in the future. The company's second-quarter 2024 GAAP diluted earnings per share ("EPS") grew by 700% year over year to $0.16. Its non-GAAP diluted earnings per share were $0.69, an increase of 19% year over year. AMD's cash from operations ("CFO") to sales ratio was 8.23%. The following chart shows that the company's CFO-to-sales ratio is cyclical and will often rise above 20% at the cycle's peak. The company is potentially going into an upcycle in its server and PC markets, boosted by AI growth. If that assessment is accurate, look for CFO-to-sales to rise above 20% over the next one to two years, which would bode well for free cash flow ("FCF") growth. AMD's second-quarter 2024 trailing 12-month ("TTM") free cash flow ("FCF") was $1.357 billion. The following chart shows that before the traditional server and PC market decreased in 2023, the company's TTM FCF was above $3.2 billion. Suppose AMD's main end markets emerge from its downturn in the second half of 2024, as some analysts expect; investors may see FCF rise much higher in 2025. The company ended its June quarter with $5.34 billion in cash and marketable investments against $1.719 billion in long-term debt. AMD has $2.245 billion in total debt and $4.046 billion in TTM EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Its debt-to-EBITDA ratio is 0.55, meaning the company can pay its debt down with its profits. Its debt-to-equity ratio is 0.04, which means the company has a low risk of defaulting on its debt. The chart below shows the company's guidance for the third quarter of 2024. If the company hits its revenue guidance of $6.7 billion, it will produce revenue growth of 15.51% year over year, slightly above analysts' estimates. If the company hits its gross margin guidance of 53.5%, the gross margin will rise 2.5 points over the previous year's comparable quarter. Suppose AMD hits its third-quarter operating expense guidance of $1.9 billion. In that case, operating expenses will grow around 12% over last year's second quarter, around 3.5% lower than forecasted revenue growth. Investors want to see revenue growth continue to outpace operating expense growth. AMD has several risks that investors need to monitor. Over the last several months, many of the stocks that people associate with being AI beneficiaries have underperformed in the market. The Roundhill Generative AI & Technology ETF (CHAT) underperformance compared to the S&P 500 is evidence of investors' sentiment cooling to generative AI. One of the things investors fear is that cloud companies like Microsoft's Azure and Meta Platforms are overbuilding AI infrastructure and may not quickly see returns from their investments. There is a potential that some of these companies may pull back on some of their AI investments at some point, which is why some feel that generative AI infrastructure stocks are in a bubble. The only significant customers of AMD's Instinct MI300X AI chips that the company announced are Microsoft, OpenAI, and Meta Platforms. AMD could have revenue growth or profitability issues if those customers stop buying its AI chips since they are the company's most significant growth driver. Another issue the company has is that it has always been a laggard in the CPU (Central Processing Unit) and GPU (Graphics Processing Unit) markets against Intel and Nvidia. Both markets are intensely competitive, and there is no guarantee that AMD can maintain or gain market share without engaging in price wars, which could hurt profitability in the long term. Additionally, the company will likely need to spend significant sums to keep up in the AI chip market, especially since Nvidia recently decided to release a new AI chip annually instead of every two years. In response, AMD has committed to releasing new AI chip architecture at the same pace. On AMD's second-quarter 2024 earnings call, the CEO said (emphasis added), "Looking ahead from a roadmap perspective, we are accelerating and expanding our Instinct roadmap to deliver an annual cadence of AI accelerators, starting with the launch of MI325X later this year." The company will likely have to up spending on R&D to keep pace with NVIDIA, which could hurt operating margins in the long term. AMD's price-to-earnings ratio is 162.92, well above its three- and five-year median, suggesting overvaluation. However, the company is coming off a cyclical bottom, and earnings could grow into its valuation. Industry experts expect the server and PC (personal computer) markets to rebound strongly from their recent downturn next year. AMD's projected EPS growth in fiscal 2025 reflects that. AMD's one-year forward Price-to-Earnings Growth ("PEG") Ratio is 0.41 (Fiscal 2025 forward P/E of 24.83 divided by EPS growth rate of 60.04). Some investors consider a PEG ratio of one fairly valued. So, investors may undervalue AMD's projected earnings growth rate in 2025. If the stock sells at a fair valuation PEG ratio of 1.0, it would be $324.82, up 142% from its September 6 closing price of $134.35. AMD's price-to-FCF is 161.63. Although this figure is well above its price-to-FCF three- and five-year median, remember that the company may be just coming out of a down cycle, where its FCF may be at its lowest point in the cycle. Suppose AMD can return to an FCF of $3.2 billion (slightly below its peak in the last upcycle) at the September 6, 2024, closing stock price of $134.35; its price-to-free-cash flow would be 68.89, below its five-year median of 92.52. So, the market may undervalue the stock's potential FCF if it returns to near its last FCF peak. The stock price at an FCF of $3.2 billion and a five-year median price-to-FCF of 92.52 would be $180.41, a 34.28% rise above its September 6 closing price. The company could exceed $180 if tailwinds from AI adoption lift FCF past $3.2 billion over the coming years. In the past, I have been reluctant to recommend AMD until it showed it could achieve some traction in the market with its AI chips. Its first and second-quarter 2024 earnings reports provide enough evidence that it should become a significant beneficiary of the global AI infrastructure build out. The company's fundamentals should improve significantly as its main end markets improve over the next year. The company's end markets are cyclical. Investors who are uncomfortable with the chip industry's volatility should probably avoid investing in this company. However, consider buying AMD if you seek a growth stock that should provide alpha over the coming years. In addition to AI, it benefits from the secular growth of the cloud, the Internet of Things ("IoT"), the electrification of autos, edge computing, and 5G. I have upgraded AMD from a hold to a buy.