Until last week, it seemed the only question worth asking about Nvidia Corporation (NASDAQ:NVDA) was how high share prices would get? Was $200 the cap on NVDA stock? What about $300?
Then Friday happened.
Goldman Sachs’ Robert Boroujerdi put out a report that poured cold water on the tech sector, calling out valuations in companies like Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX). He wrote:
“Driven by the rise of megatech, momentum, as a factor, has built a valuation air pocket underneath it creating cause for pause.”
NVDA stock, which still is up more than 40% year-to-date, dropped by about 6% on the news, recovering a small bit of those losses over the past few trading days.
But with a little bit of the froth whisked away, the question is: Is now a good entry point for Nvidia?
The Bull Case for Nvidia
You can’t walk a yard without tripping over reasons to be bullish about Nvidia Corporation. The company’s core graphics technology has become critical for low-cost processing of huge amounts of data. This is what will power virtual reality, augmented reality and artificial intelligence into the future.
This also has been rocket fuel for NVDA stock. The company’s most recent earnings report received rave reviews, thanks to a 48% jump in revenues to $1.94 billion, and a 144% spike in net income to $507 million.
Nvidia is running at peak performance.
It’s also making an aggressive move into the data center business, currently dominated by Intel Corporation (NASDAQ:INTC). (Note that the full-year revenues for this segment jumped by more than 3X to $1 billion). And there is much more upside. According to Nvidia’s own estimates, the data center market opportunity is forecast to hit $30 billion by 2020.
What’s more, NVDA has continued to see traction with its autonomous vehicle business. A testament of this is a recent deal with Toyota Motor Corp (ADR) (NYSE:TM).
The Bear Case for Nvidia
There are a few issues to consider, too.
Nvidia still must contend with tremendous competitive forces. Advanced Micro Devices, Inc. (NASDAQ:AMD), for instance, will soon launch its own chips for the datacenter market – and the offering (Naples, based on the Zen architecture) is getting plenty of hype.
Even Alphabet Inc (NASDAQ:GOOGL) has been building its own AI chips, which can process voice search and images at 15 to 30 times better than the alternatives from NVDA. The company also has the advantage of a massive platform of web apps — like YouTube and Gmail — to test its technologies.
Then there’s Intel itself, which has been developing its own next-generation chips but also engaging in aggressive M&A to keep up. Moreover, Intel isn’t averse to lowering the pricing on its chips to maintain market share.
And the AI market, while appealing in its potential, still is in the early phase. And investors assume that adoption will be extremely quick. But sophisticated technologies often take time before buyers really start to commit. How many corporate managers really understand the nuances of AI — especially for those companies in traditional industries?
We’ll need to see mass education first before we get widespread adoption.
Bottom Line On NVDA Stock
A 5% dip is nice, but it doesn’t counter all of the good news that investors have already baked into Nvidia. There’s still a hairline margin for error at this point, with a steep forward price-to-earnings of more than 40, and a price-to-sales ratio in the double digits!
That might be reasonable for a dot-com, but it’s a stretch for a capital-intensive company that’s subject to cyclical swings in demand.
NVDA stock is highly sensitive to negative news, and even a slight deceleration in the growth ramp could put shares at risk.
For now, the best approach toward Nvidia is to wait for still-better prices. And that could come soon given the recent volatility.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is the author of various books, including All About Commodities, All About Short Selling and High-Profit IPO Strategies. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.