It’s no secret that Artificial intelligence (AI) stocks have dominated the market in recent years. With companies like PwC – one of the ‘big four’ accounting firms – claiming that AI could add $15.7 trillion to the global economy by 2030, the hype makes sense.
The poster child of the revolution, Nvidia (NASDAQ: NVDA)saw its stock skyrocket nearly 1,000% from the end of 2022 to today, but the past few months haven’t been all that kind. After reaching its highest peak in June, Nvidia shares are down about 10%. Greater market fears combined with slower growth have caused some stocks to cool. So, where to go from here?
Nvidia’s AI Summit is a big day for the company and the industry
As the de facto leader of the entire industry, Nvidia must continue to do just that: lead. The AI Summit 2024, which kicks off on October 7, is an opportunity for the company to bring together some of the biggest faces and brightest minds in the industry to advance AI, while putting itself first. It’s an opportunity to convey Nvidia’s vision not only to other industry leaders, but to the general public.
One of the top questions investors have for the company – and it’s a very legitimate question – is: are the real applications of AI That impactful? Is the incredible cost of AI hardware worth the investment? The summit will be an opportunity for Nvidia to showcase the myriad ways AI can be used to return real value. It’s a chance to justify the enormous cost of its chips and ultimately the price of its stock.
The event itself is unlikely to bring about any major change, but it could allay some fears and get investors thinking about the possibilities and power of AI. Fortunately, the event does not occur in a vacuum. Here are a few reasons why Nvidia is in a prime position to capitalize on the event.
1. Nvidia’s Blackwell chips are coming
Nvidia’s only major hiccup since the AI boom took off was when the company announced that its latest line of chips, called Blackwell, had been delayed. Problems with production prevented them from shipping on time. Nvidia assured that shipments would only be delayed by a quarter. Despite these reassurances, some investors were concerned that the problems were more fundamental and that the delay would take longer.
It appears those fears were unfounded. According to a recent report from Tom’s Hardware, the company is set to ship the first batch as early as December, only about six weeks behind the original schedule, although these reports have yet to be confirmed by Nvidia. If true, this would do a lot to allay investors’ fears and show that the company has gone to great lengths in correcting its mistake.
But even if they don’t ship until later in the quarter, the rollout will be huge for the company regardless. Their impact will be felt immediately, with sales expected to reach billions before the end of the fourth quarter.
2. Nvidia’s vision is its greatest asset
It’s easy to get lost in the numbers and fixate on balance sheets and profit and loss statements, and while these are extremely important when evaluating a company, it’s often certain intangibles that make a company great, such as vision. Nvidia has it in abundance. Under the leadership of CEO Jensen Huang, the company has been at the forefront of several macro movements in the technology sector. Huang saw in the early 1990s that computer graphics would be huge. The company’s GPUs — graphics processing units – are a big part of what has allowed the video game industry to evolve to where it is today.
This vision is why the company controls approximately 90% of the current AI chip market. Nvidia saw that its GPUs could do much more than push the boundaries of computer graphics; they could drive a new technological revolution. That’s why the company caught its competition sleeping. Since the current AI boom took off in late 2022, Nvidia’s chips have consistently had a big lead. Other chipmakers have been catching up since then.
There was a relative parity between Nvidia and its old rival AMD for decades. Not anymore; last year, Nvidia made more profit than AMD in total revenue. The difference is huge right now, but remember: if Nvidia benefits much more than its rival, it can afford to spend more on research and marketing to broaden its position and fend off competitors.
3. Considering its prospects, Nvidia is reasonably priced
I know I just said we shouldn’t get bogged down in the numbers, but they are still important. How does the market currently value Nvidia? With a price-to-earnings (P/E) ratio of 56, Nvidia isn’t cheap, but given its current growth rate, a trailing P/E isn’t really the best metric for us. The forward price-to-earnings ratio (that is, a price-to-earnings ratio that takes into account expected earnings in the next twelve months rather than the past twelve months) is just above 30. That’s not bad in the tech world. It’s just a matter of where Apple And Amazon to sit.
Another useful valuation is the PEG ratio, which you get by dividing a company’s price-to-earnings ratio by its expected earnings growth rate. This is an excellent benchmark for companies with high growth potential. As a general rule, we look for a PEG below 1. Nvidia’s is 0.94.
Nvidia has plenty of room to achieve the kind of growth that can justify its current valuation. To be honest, statistics are not the most important thing. They are imperfect instruments, and of course measures that depend on expected profits are extremely imperfect; the future is anything but guaranteed. I think Nvidia will continue to outperform the market for a while.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Johnny Rice has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices, Amazon, Apple, and Nvidia. The Motley Fool has one disclosure policy.
3 reasons to buy Nvidia stock before October 7 was originally published by The Motley Fool
