NVIDIA Corporation (NASDAQ:NVDA) stock hasn’t had a great run recently. But neither has the rest of the tech sector. When the market gets hit, the hyper-growth tech darlings of the market tend to be the biggest drags. This dynamic can sometimes make NVDA stock investors feel like an agitated Aaron Rodgers.
But deep breath.
The secular, artificial intelligence based growth story which sprung NVDA stock to all-time highs hasn’t gone anywhere. AI is still the wave of the future. Autonomous driving is still the next big thing in the auto industry. Cloud computing is still growing globally. Augmented and virtual reality are still the next leg of innovation in the gaming world.
The whole NVDA growth story is still intact.
So does that make this sell-off in Nvidia stock a buy the dip opportunity?
I think so.
Negative Headlines Have Created an Opportunity in NVDA Stock
Here’s the simple thesis. A few negative headlines have recently weighed on NVDA stock. Those negative headlines, though, don’t materially change the Nvidia growth narrative, so this sell-off is a buying opportunity.
There was the CNBC report that claimed Tesla Inc (NASDAQ:TSLA), a big NVDA customer, was building its own chip for handling autonomous driving, and doing so on top of Advanced Micro Devices, Inc. (NASDAQ:AMD) intellectual property. That report really weighed on NVDA stock as it illustrated that AMD is actually a formidable competitor to NVDA in these high-end, secular growth markets.
But the report was later denied by AMD partner GlobalFoundries. All in all, it looks like the CNBC report misconstrued the situation. GlobalFoundries CEO Sanjay Jha mentioned Tesla as an example of a company that is expressing interest in working with chip fabricators, but didn’t specifically mention Tesla as a GlobalFoundries customer.
Maybe AMD isn’t actually a formidable competitor to NVDA in the valuable high-end, secular growth markets.
NVDA stock also dropped after Intel Corporation (NASDAQ:INTC) unveiled its new generation of Core processors, which offer a 25% boost in frame rate. Naturally, Nvidia will have competition. Also naturally, the competition will unveil new products from time to time.
That doesn’t mean those competitors are going to dramatically eat market share.
After all, shortly after INTC announced their new processors, NVDA announced that they will provide AI GPUs accelerators to China tech giants Alibaba Group Holding Ltd (NASDAQ:BABA), Baidu Inc (ADR) (NASDAQ:BIDU), and Tencent Holdings Ltd (OTCMKTS:TCEHY).
The takeaway? NVDA is the king of this space. Almost assuredly, Nvidia will be subject to ever increasing competition. The company won’t run in an open field forever. AMD and INTC will launch competitive products.
But even in the face of that competition, NVDA remains and will continue to remain the undisputed king in the critical, secular growth markets of AI and cloud computing.
Bottom Line on NVDA Stock
NVDA stock is trading at 44-times next year’s consensus earnings estimate. That isn’t exactly a value multiple.
But this is a company with more than 27% annual earnings growth potential over the next several years. A 44-times fiscal 2018 multiple on 27% growth implies a price-to-earnings/growth (PEG) ratio of about 1.6. Considering NVDA has a healthy habit of smashing earnings estimate, that 27% long-term growth estimate is likely low. It’s probably more like 30-35%, implying a PEG of about 1.4.
The S&P 500, meanwhile, is trading at 17-times 2018 earnings estimates for long-term earnings growth of about 10%. That is a PEG of 1.7.
Thus, if you believe that NVDA can actually grow earnings anywhere from 27% to 35% per year over the next 5 years, then Nvidia stock is currently far more attractively valued than the market.
I think that growth rate is achievable, considering robust growth potential in all-things-AI. That is why I’m buying NVDA stock on this dip.
As of this writing, Luke Lango was long NVDA, BABA, and BIDU.