Tech behemoth Nvidia (NASDAQ:NVDA) stock has been taking a breather lately. After a stellar run-up in value this year, Nvidia stock has dipped a considerable 11%. Moreover, following the correction, the stock is now trading 22.5% behind its 52-week high price of $140.76. The steep drop is linked to geopolitical, economic and company-specific factors, which are largely temporary setbacks. Given NVIDIA’s critical role as the backbone of artificial intelligence (AI), the current lull offers an excellent time to load up on the stock before it starts firing again.
Nvidia’s monumental jump over the past couple of years, driven by its dominance in the AI chip market, took its valuation to unprecedented levels. The breathtaking demand for AI applications, particularly in data centers, propelled Nvidia to the pinnacle of the tech world. Moreover, with the AI wave unlikely to slow down anytime soon, NVIDIA remains at the forefront. It is perfectly positioned to pounce on its cutting-edge AI chip innovations for sustained growth ahead. With that in mind, let’s unpack Nvidia’s bullish stance. And, let’s explore the reason it’s a strong buy ahead of its upcoming earnings release. That is expected to be another barn burner.
Temporary Turbulence on a Steady Climb
The past few months have been tricky for tech giants, particularly AI bellwethers like Nvidia. Its stock has been remarkably choppy, having recently shed billions in market value.
Perhaps one of the biggest factors in Nvidia’s recent pullback could be the rising fears of a U.S. recession. This is further sparked by a surprisingly hotter-than-expected unemployment report. Additionally, global markets were recently shaken by the Bank of Japan’s interest rate hike. Its increase significantly impacts carry trades involving U.S. stocks like Nvidia. Also, concerns brew that the Biden administration will impose more restrictions on semiconductor equipment exports to China. If that wasn’t enough, Nvidia announced a potential three-month delay or more in the launch of NVIDIA’s new Blackwell architecture chips due to a design flaw.
While these obstacles triggered a sizeable drop in NVIDIA’s value, as previously discussed, they are mostly temporary. For starters, the concerns about a U.S. recession were alleviated somewhat by the recently released lower-than-expected weekly jobless claims report. Moreover, JPMorgan Chase (NYSE:JPM) Chief Executive Officer Jamie Dimon dismissed concerns over a full-scale recession following the recent stock market volatility. He talked about the erratic nature of market reactions which serve as a reminder to focus on long-term fundamentals.
Regarding additional export restrictions by the U.S. on China, it’s uncertain if any potential changes would affect Nvidia stock. Also, JP Morgan analysts remarked that the worst of the carry trade unwinding is behind us.
That leaves us with a delay in the Blackwell chip shipment. Though it is perhaps the most noteworthy headwind for Nvidia, the delay’s effect is likely temporary. The short-term impact on sales growth is minimal, and a firm date might arrive in the coming weeks.
Strong Projections Promise Greater Gains Ahead
Nvidia has arguably been the hottest stock over the past couple of years, with its meteoric rise sparking debates among analysts about its overbought status. However, given its robust growth trajectory, plenty of evidence exist for more upside ahead.
The chart above shows that Nvidia stock is trading roughly 60.57 times forward earnings, which shows strong confidence in its future expansion. However, if we look at forward projections (FY1 at 40.09, FY2 at 29.00, and FY3 at 25.32), the stock becomes much more affordable. Moreover, it also points to the firm’s ability to capitalize on the booming AI market, which should lead to robust earnings and cash flow growth.
Talking about earnings, the company’s profitability is exceptional. Its net margin of 49%, the highest in its 10-year history, dwarfs the industry median of 4.6%. Moreover, according to GuruFocus, its consistently growing margin ranks better than 99.09% of the 988 companies in the semiconductor industry. Such numbers indicate its ability to run operations efficiently, strong pricing power and successful execution of growth strategies. Furthermore, its forward earnings projections are highly promising. Its EPS is expected to jump from $1.73 last year to $2.72 in January 2025 and to $3.76 in January 2026. The upward trend underscores Nvidia’s growing market share, especially in AI and data centers.
On top of that, Nvidia’s unlevered free cash flows have grown superbly, rising from $3.22 billion in January 2020 to $29.18 billion on a trailing twelve-month (TTM) basis. This substantial jump points to the firm’s robust financial health and ability to generate cash from operations, despite shelling out billions in its AI-led endeavors.
Bottom-Line on Nvidia Stock
Nvidia remains a highly compelling investment opportunity, with the recent temporary setbacks offering an attractive entry point. The company’s unmatched dominance in AI, with exceptional profitability numbers expected ahead, underscores its powerful long-term potential. As the AI revolution continues, Nvidia will likely capitalize on innovative technologies, driving substantial gains for investors. Hence, with solid financial health and a promising outlook, now is an ideal time to consider adding Nvidia to your portfolio before it runs higher.
On the date of publication, Muslim Farooque did not have (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.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
