Nvidia (NASDAQ:NVDA) set the world on fire in terms of stock performance between January and July. Since then, though, NVDA stock has delivered far less stellar returns.
Shares in the chip giant, which currently has a massive first mover advantage in generative AI chips, have pulled back since the summer. A big reason for this is market-related, but a company-specific factor has also had an impact.
However, no matter the root cause of NVDA’s drop from over $500 per share to around $411 per share today, the question now is whether a shift back to an upward trajectory is just around the corner, or if a further reversal is in store.
With this in mind, let’s dive in and see what may lie ahead for this stock. If you’ve bought into recent doom and gloom, the answer may surprise you.
Big Factors Weighing on NVDA Stock
If you’ve been following Nvidia extensively, chances are you are well aware of the two issues weighing it down. However, for those unaware, let’s review both.
First, NVDA stock, like the broad market, has been negatively affected by the prospect of “higher for longer” interest rates. The market has, and continues to, de-rate stocks accordingly, especially growth stocks (which are more sensitive to interest rates).
Second, the U.S. Federal Government’s recent tightening of restrictions on exports of AI chips to China. In response to this news, several sell-side analysts have reduced their price targets for NVDA, with one analyst (KeyBanc’s John Vinh) walking back his forecasts for the fiscal year ending January 2025.
These issues notwithstanding, however, you may not want to jump to the conclusion that, after sliding back in recent months, a continued slide is likely in the months ahead. Looking at other factors, it’s possible shares could perform far better over the next twelve months than those bearish on the stock today believe.
Generative AI Remains Key
If elevated interest rates persist in 2024, I would not expect NVDA stock to experience any sort of multiple expansion in the near-term. In fact, a further drop in NVDA forward valuation (38.4 times this year’s estimated earnings) is possible.
However, there is a silver lining to this, given that the generative AI mega-trend shows little signs of slowing down.
For one, with the high growth resulting from this trend, while NVDA may de-rate a slightly-lower valuation, it may not drop to a forward multiple in line with other big tech stocks (between 20 and 30). A forward multiple in the low-to-mid 30s could be sustainable.
High overall demand for AI chips could more than counter the impact of the China export restrictions. Although the sell-side analyst reduced his earnings forecast for FY2025 (from $25.62 to $20.84 per share), this forecast is above that of sell-side consensus for that same period ($17.06 per share).
Even if the stock experiences some multiple compression, and earnings merely meet expectations in the coming year, this may be enough to get the stock back to above the $500 per share price level over the next twelve months.
Bottom Line: A Buy, Now and on Weakness
There is great potential for substantial increases in productivity and efficiency from using AI technology. As new AI applications (not just generative AI) emerge, demand for these types of chips will keep rising.
Even as other chip makers like Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) make up for lost time and try to catch up with their own AI chip offerings, Nvidia’s competitive moat could be deep enough to minimize the impact of this rising competition on market share.
In terms of non-AI catalysts, Nvidia has these on tap as well. Non-AI catalysts include a recovery in demand for gaming chips, as well as the potential for this company to become a serious competitive threat to Intel in the PC chips space.
Taking into account these many positives, if you’ve yet to buy NVDA stock, consider now, or any further weakness, a solid opportunity to do so.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
