In the wake of the recent, large drop in Nvidia (NASDAQ:NVDA) stock, positive comments about the company by a top analyst who specializes in the chips space, strong quarterly financial results by the firm’s main supplier, and Chinese entities’ purchase of Nvidia’s chips, I’ve become significantly more bullish on Nvidia stock.
That’s because I now believe that Nvidia’s AI chips business is strong enough to thrive despite the increased competition that the firm is encountering, while the shares’ valuation provides a sufficient cushion against both this stepped-up competition and the likely, future downturn of cryptocurrencies.
As a result, I recommend that investors looking for exposure to a large, well-established firm at the heart of the AI revolution buy relatively small amounts of Nvidia stock.
An Improved Valuation and Upbeat Comments by a Top Analyst
Nvidia stock declined 14% in the month that ended on April 21, and the shares were nearly 18% off their all-time high as of pre-market trading on April 23. As a result, the name now has a forward price-earnings ratio of 33.11 times. With analysts, on a average, expecting the firm’s earnings per share to jump to $24.76 this year from $12.96 last year, the stock’s P/E ratio is fairly low, given the chip maker’s growth outlook.
Meanwhile, Stacy Rasgon, a well-respected chip analyst at investment bank Bernstein, recently said that NVDA is still benefiting from “good … demand,” while the firm does not appear to have experienced any “order cancellations.” Moreover, the sales of its recently increased products are growing, and its business is unlikely to experience a correction anytime soon, Rasgon said.
Powerful Results by Nvidia’s Main Supplier and Chinese Purchases
Nvidia’s main supplier, Taiwan Semi (NYSE:TSM), reported strong first-quarter results earlier this month as its revenue climbed 13% year over year and its net income jumped 9% versus the same period a year earlier.
And more importantly, TSM expects its sales to surge 20% to 25% for the full year. Unsurprisingly, TSM noted that “insatiable AI-related demand for energy efficient computing power,” had driven its strong financial results and impressive guidance. Since Nvidia is the leading supplier of AI chips, it should benefit from the “insatiable” demand that TSM described.
On April 23, Reuters reported that “Chinese research institutes” had purchased Nvidia’s top chips, despite restrictions that Washington had placed on the export of such chips. As a result, I believe that Nvidia’s revenue from China will be higher than expected, increasing the likelihood that its Q1 results will meet or exceed Wall Street’s average estimates.
Also noteworthy is that the “biggest cloud providers” in America are reportedly poised to spend very large amounts of money on NVDA’s chips.
Nvidia Is Still Facing Major Threats
As I noted in a previous column, Nvidia is facing major, competitive threats from a multitude of companies, including the major cloud providers themselves, Qualcomm (NASDAQ:QCOM), Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD). And there have been signs that the inventories of a number of its customers are starting to build.
Over time, I believe that these factors are likely to put significant, downward pressure on the firm’s average selling prices and margins.
Meanwhile, with Congress looking likely to pass a bill that would force crypto sellers to follow bank secrecy laws, I expect Nvidia’s crypto business to come under significant pressure in the not-too-distant future.
The Bottom Line on Nvidia Stock
Nvidia’s business still appears strong despite the increased threats that it’s facing, while its valuation has dropped a great deal and appears to be attractive. Given these points, I have become more bullish on the shares but continue to view them as a cautious buy.
On the date of publication, Larry Ramer held a long position in INTC. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
