Is Nvidia stock a buy after crashing 36%?

Is NVDA overvalued, or undervalued?

Nvidia stock recently suffered its worst crash in two years.

Peak to trough, NVDA crashed 36%.

Does that mean investors should sell Nvidia stock, or buy the dip?

Let’s do a quick analysis…

AI chip sales are off the charts…

America spent $600 billion (in today’s dollars) building its highway system.

Big tech companies will spend more money constructing AI data centers in the next four years.

It’s the biggest infrastructure buildout ever, and it’s not even close.

Heavy-hitters Microsoft (MSFT), Google (GOOG), Amazon (AMZN), and Facebook (META) all reported earnings over the past two weeks.

The #1 takeaway: Big tech continues to plough historic sums of money into AI.

Google’s first “data center” was a tiny steel cage stuffed with 30 PCs. Now, tech companies are spending hundreds of billions of dollars (each year) building high-tech meccas to power ChatGPT and its competitors.

Microsoft and Google both announced a near doubling of the amount of money they’re spending on chips, servers, switches, and cooling equipment.

Look at Microsoft’s AI-related spending surging:

Source: Microsoft

Facebook plans to plough $40 billion into its AI data centers this year. And there’s no end in sight.

On its earnings call, Facebook CEO Mark Zuckerberg said the amount of chips needed to train its next AI model will be 10X what it used to train its last one. And Facebook already bought 600,000 Nvidia A100 and H100 AI chips!

Would you rather own the companies spending all this money… or those receiving it?

There are few no-brainer choices in investing. Investing in the companies capturing the hundreds of billions of dollars of guaranteed AI chip spending is one of them.

Nvidia is the clearest winner of the ongoing AI infrastructure buildout.

Is Nvidia overvalued or undervalued?

Even after the recent crash, Nvidia stock is up 103% in 2024 alone. It’s the second best-performing S&P 500 stock behind Super Micro Computer (SMCI).

NVDA is also up +800% in the last two years, and 2,000% since I first recommended it in 2018.

The company is now more valuable than Intel (INTC), AMD (AMD), and Taiwan Semiconductor (TSM) combined.

Now, every investor is asking: “Is Nvidia overvalued?”

Let’s look at some metrics…

It’s trading at 35X forward earnings, which is certainly not cheap.

But realize that Nvidia is trading on the cheaper side of its forward-earnings valuation in the last 3 years:

Source: Koyfin

Because although its stock price has surged, its expected profits have surged even faster.

Nvidia is delivering on the AI hype like nobody else.

Just look at Nvidia’s chip sales, they’ve 3X over the past year.

Source:AppEconomyInsights

Huge demand for Nvidia’s AI chips from the likes of Google (GOOGL)… Microsoft (MSFT)… and Amazon (AMZN) has fueled record earnings.

Data center revenue is expected to continue growing at a rapid pace. And it’s already more than Intel’s and AMD’s data center sales combined!

You would think Nvidia’s valuation would be well above its AI chip-making peers… but it’s not:

Source: Koyfin

Nvidia’s trades at a forward PE of 35, slightly higher than AMD. While Intel (INTC) trades at a ludicrous 47.5 forward PE.

Conclusion: There’s little proof Nvidia is overvalued. It’s trading at a reasonable valuation.

Is Nvidia stock a good buy in 2024?

While NVDA is no longer a slam-dunk investment like it was when I recommended it in 2018, the recent crash is a good buy-the-dip opportunity for long-term investors.

But it’s not my top AI stock to buy.

The thing is Nvidia is moving too fast for its own good. Its AI chips are 100X faster than they were a decade ago.

All the other parts that make up a data center — networking equipment that allows the chips to “talk” to each other and so on — have only gotten about 4X faster.

This creates a major bottleneck where Nvidia’s chips can only work 30% of the time. The other 70% of the time, these $50,000 chips sit idle… but still take up full power.

It’s like driving a Ferrari in Manhattan. You can only go so fast.

Nvidia will keep on winning. But I expect a lot of spending to shift toward the lagging parts of the data-center equation: cooling equipment, storage, next-gen fiber optic cables, and so on. Those are the top AI stocks to buy.

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— Stephen McBride, Chief Analyst at RiskHedge

Is Nvidia stock a buy after crashing 36%? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.