Investors always want to buy stocks on pullbacks. They want a pullback that enables them to buy many shares at meaningfully lower levels But once that pullback comes, they’re too scared to buy the stock! That’s what’s happening to Nvidia (NASDAQ:NVDA) right now, after Nvidia stock dropped around 35% from peak to trough this month.
Forget a correction, that’s a downright crash. It may not have happened in one day like a flash crash, but make no mistake: this behavior is uncommon and irrational.
Ask yourself: what has changed between Oct. 1 when Nvidia stock was over $290 and Oct.26 when NVDA fell below $200. Nothing has changed except that the semiconductor stocks, tech stocks and the overall market have been pummeled.
I’m not a blind optimistic. I understand that the plunge of these three groups is bad news for Nvidia. The crash has driven Nvidia stock down from its high of about $293 to its recent low of $193. However, I think that the pullback of Nvidia stock has created a buying opportunity, giving investors who scoop up the shares now the ability to reap serious rewards in the long-term.
Nvidia’s Business Is Too Strong
Advanced Micro Devices (NASDAQ:AMD) is a good company, but it was hurt by the demise of its crypto business last quarter, and its margins are too thin. Intel (NASDAQ:INTC) may trade at just over ten times its earnings, but its margins are below those of Nvidia, and it is expected to generate minimal growth after this year. Furthermore, Nvidia’s leadership team is solid, while there are major questions about Intel’s top executives.
Nvidia is led by its founder and CEO, Jensen Huang, who has correctly positioned his company ahead of multiple secular trends, beating the competition to the punch.
Last quarter, Nvidia’s GAAP earnings soared 91% and its sales jumped 40%, as the revenue of its automotive business hit a new record of $161 million. Although $161 million may not seem like very much, Nvidia’s deals with Audi, Mercedes and many other auto makers will drive significant growth over the next five to ten years.
Nvidia’s datacenter revenue grew 83% year-over-year, while its gaming sales jumped 52% and the revenue generated by its professional graphics business climbed 20%. Anyone who calls Nvidia stock a bubble must believe that autonomous cars will not come to fruition, datacenters will dissipate, gaming is a fad and professional graphics will no longer be necessary.
That’s like saying the internet is going to disappear.
Lastly, artificial intelligence is going to make NVDA a huge winner. AI creates more data than most people can comprehend. To handle all that data, companies need some serious horsepower. Ranging from onboard computing power to datacenter capacity, Nvidia’s GPU solutions make advanced AI a reality.
After having just returned from Nvidia’s GTC conference in Washington DC, I can tell you that AI is here, it’s coming and there’s no stopping it.
As these technologies go from image recognition to image construction, from Alexa-answered questions to AI chatbots, and from music suggestions to virus identification, AI is going to play a vital role. And AI won’t just be on the internet; it will be everywhere. From agriculture to transportation to healthcare (the largest opportunity), AI is on the cusp of becoming pervasive.
Most won’t watch this video because it’s an hour long, but it will show you exactly what I’m talking about.
We’re halfway through Nvidia’s fiscal year. Analysts’ average estimate calls for 34% sales growth and 52% earnings growth during the current fiscal year. Those estimates slow to 14% revenue growth and 10% earnings growth next year, which is admittedly a notable decline.
But how can we call NVDA stock a bubble when the company makes best-in-class products and trades at 25 times forward profit estimates? That’s not an extreme valuation, and at these levels NVDA stock is far from a bubble.
Trading Nvidia Stock
All that said, the price action of Nvidia stock has been horrid. I don’t know when or if NVDA stock has bottomed. I do know that the stock’s 50-week moving average sits near $190 and that the $210 -$215 level could be resistance. But if NVDA stock climbs beyond that level, the $250 mark and 200-day moving average is back in play.
We have to respect the price of Nvidia stock. But we also have to recognize when the market is giving long-term investors an opportunity.