Shares in Nvidia Corporation (NASDAQ:NVDA) have fallen 8% over the last five trading days as speculation rose that the cryptocurrency “arms race” may be ending.
Time to buy the dip?
Analysts now predict a slowdown in sales to cryptocurrency “miners,” who use fast graphics cards to find decryption keys for things like Bitcoin. This hit NVDA shares hard in the most recent trading week.
The fall was possible because the valuation of Nvidia had become almost as divorced from gravity as Bitcoin itself. The stock is up 85% in the last year, and opened for trade on Dec. 4 at a price to earnings ratio of 49.4, against 15.6 for rival Intel Corporation (NASDAQ:INTC).
When values are stretched, stocks become like balloons, rising and falling with the wind rather than fundamentals. The question for investors becomes, do the fundamentals of the stock make it worth buying?
Into the Fog
When I last wrote about Nvidia, on Nov. 7, I described those fundamentals as being related to a new buzzword called “fog computing.”
Fog computing is important for Artificial Intelligence (AI) applications, like self-driving cars, requiring fast chips on both the client and server end of the information transaction. When you tell your Amazon.com, Inc. (NASDAQ:AMZN) Alexa device to play Jason Isbell’s If We Were Vampires from your music collection, the device in your home must find out whether you own the song, then access a stream of it, within a few seconds.
Future applications of AI will require even more speed and coordination. That means faster clouds as well as more speed on clients. Nvidia GeForce chips, originally designed for graphics processing on video games, are perfect for this task. Thus, the bullish case states, expect huge orders from cloud providers upgrading to support these applications, and from client device makers delivering them.
Seeking Alternatives in Nvidia
The bull case for Nvidia is clear. What about the bear case?
The bear case hinges on companies that control the new market arbitraging Nvidia against other suppliers to keep down costs, as Tesla Inc (NASDAQ:TSLA) is doing on its car infotainment systems, despite Nvidia having named one of its chip boards Tesla, after the inventor.
Nvidia is trying to make itself indispensable to the AI push through venture capital investments in small companies developing the applications, but the cloud czars are notoriously cheap when it comes to chips. This was the whole idea of clouds, to cut server processing costs with cheap hardware and open source software, delivering huge amounts of it using parallel processing techniques, and making it universally available with virtual operating systems on top of applications.
So far, the cloud czars are making nice with Nvidia. Alphabet Inc. (NASDAQ:GOOGL) is offering access to Tesla chip sets despite having its own cloud AI hardware, the Tensor Processing Unit. Microsoft Corp. (NASDAQ:MSFT) is also touting its use of Tesla chips, and Amazon offers Nvidia hardware for AI “instances.”
The Bottom Line
Assuming Nvidia delivers $3 billion in revenue for its current quarter, to be reported February 8, you will be paying 12 times sales for the company at its December 4 market cap of $120 billion. Stocks at these levels make for great trades, both bullish and bearish, because there’s action and rumors can send it down.
For investors, the question is whether Nvidia will grow into its present valuation, whether sales might double or triple from here over the next five years.
Indications right now are that they will. That is the kind of analysis that leads to buying the dip.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at [email protected] or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.