Nvidia share crash: second bite of the cherry or red flag?
A market-wide sell-off that saw shares in this AI leader plunge as much as 25% in just a few days, has grabbed the attention of Rodney Hobson. Here’s what the overseas investing expert thinks of the stock now.
7th August 2024 08:46
by Rodney Hobson from interactive investor
One of the most popular stocks on the interactive investor platform has been, for many months now, tech giant NVIDIA Corp (NASDAQ:NVDA). Recently it has been, for them, the most traded stock in the world. Nvidia certainly provides plenty of excitement, with moves of 5% or more in the share price quite commonplace. Its recent heavy fall could be the chance for latecomers to buy.
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Nvidia, which makes chips for artificial intelligence (AI) products, had seen its market capitalisation leap from $2 trillion to $3 trillion in only 30 trading days, overtaking Microsoft Corp (NASDAQ:MSFT) as the world’s most valuable publicly-listed company. When the shares topped $1,300, the company split them into 10 new shares for each one held to make them more acceptable for small investors, many of whom in the UK would baulk at putting up £10,000 and getting only 10 shares in return.
Share splits normally occur when the company involved is confident that the share price will continue to edge higher. Alas, timing is everything. The hardly surprising decision by the Federal Reserve to keep US interest rates steady for another month was followed by the more unexpected news that fewer jobs were being created and unemployment was rising, raising fears that the American economy was heading into recession.
Throw in concerns about quarterly results from Google owner Alphabet Inc Class A (NASDAQ:GOOGL) and electric vehicle maker Tesla Inc (NASDAQ:TSLA) and the perfect storm hit US tech stocks, wiping more value off the shares of the seven biggest companies than on any day since 2012. Nvidia promptly slipped back to third-most valuable company.
However, Nvidia has not gone away. It has an 80% share of the market for AI chips, a market that will continue to expand rapidly despite concerns that it will destroy traditional jobs, spread misinformation and attract the attentions of regulators around the globe.
Whether Nvidia has done better than other tech stocks will become clearer with figures due later this month, but the last announcement, issued towards the end of May, was highly encouraging. In the three months to 28 April, its first financial quarter, net income multiplied sevenfold to $15.9 billion on revenue 262% higher at $26 billion compared with the same quarter last year.
Both figures were clearly higher than analysts had expected. Revenue forecasts for the second quarter are for around $28 billion.
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Founder and chief executive Jensen Huang believes he is spearheading a new industrial revolution that will transform traditional data centres into artificial intelligence factories. Nvidia makes units that help personal computers to process graphics. These units are also suitable for the gigantic number of calculations needed for AI programmes to create text, music, images or video.
Already data centre revenue is by far the major part of Nvidia’s business, generating record revenue of $22.6 billion in the first quarter, up 427% on a year earlier.
Nvidia shares, restated to allow for the share split, started motoring in October 2022 when they were only $11 to a peak of $140 in June and $136 in July this year. They have since slumped to $100, having been as low as $91 in intra-day trading, but have come off the bottom to stand at $104.
Source: TradingView. Past performance is not a guide to future performance.
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Hobson’s choice: Like it or loathe it, artificial intelligence is not only here to stay, it is here to grow exponentially. While Microsoft has led the way, Alphabet is splashing out nearly $50 billion on capital expenditure this year, mostly on playing AI catch-up.
The historic fundamentals for Nvidia are, on the surface, not great, with a price/earnings ratio of nearly 60 and a yield of 0.02% despite a 150% boost to the dividend three months ago. However, the rating is based on a potentially dazzling future. While it is always risky to buy just ahead of results, the chance to get in at just above $100 may not last beyond the next couple of weeks. I was too cautious about the stock in July last year when the fundamentals were far worse, but the future looks much clearer now. Buy.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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