He Nvidia The share price of (NASDAQ:NVDA) fell by 9.5% on Tuesday (3 September) as US stocks suffered a widespread sell-off. As a result, it is “only” up 124% since the beginning of the year.
By any reasonable standard, that's a lot. But with the company's revenue growing 122% annually and earnings per share up 154%, could the latest dip be a buying opportunity?
Why is the stock falling?
The obvious first question investors should ask is whether Nvidia is 9.5% worse off as a company than it was before the crash. I don't think it is.
Weak economic data sent US stocks lower. For the second month in a row, the purchasing managers' index (PMI) indicated a contraction in the manufacturing sector.
Nvidia – and semiconductor stocks in general – were hit the hardest. Expectations in the industry have been high and weak economic activity is a threat to this.
Is this a big deal? I doubt it: PMI data indicate the sector has been in contraction for 21 of the past 22 months and Nvidia's growth has been spectacular.
I suspect Nvidia is more resilient than most American companies. Its customers have deep pockets, and it is seen as the only way to participate in the AI revolution.
So I don't think the company is 9.5% lower than it was a couple of days ago. But if the stock was significantly overvalued then, it's possible it's still that way now.
Is it undervalued?
The next question for investors is the most important one: is Nvidia stock now undervalued after its latest drop? In my view, this is a much more complicated question.
I think a lot depends on the company's competitive position. And I have two big questions here that are difficult to answer.
Nvidia GPUs are necessary for training (configuring) large language models (LLMs), but I'm not so sure they are necessary for inference (making predictions) once the LLMs are configured.
I've seen it suggested that CPUs (which are cheaper and produced by companies like Intel) might be enough for this. If that's true, extreme GPU demand could decrease.
The other big question is how long the company can maintain its lead in accelerated computing. Things look positive in the short term, but the outlook for the future is less clear.
With the launch of Blackwell, Nvidia appears to have successfully maintained its lead for now, but the pace of innovation in this industry is rapid and that makes the future uncertain.
Is this my buying opportunity?
I don't think parameters like the price-to-earnings (P/E) ratio are very useful in valuing Nvidia stock at the moment. The stock has been trading at a high multiple for some time.
However, the strong performance of the underlying business has been enough to push the price higher. So the question is: how long can this last?
I find this question a bit difficult to assess with certainty. The issues raised here are technical and complicated, and without these skills, investors are taking a huge risk.
I've stayed away from Nvidia so far and it's outperformed every other stock in my portfolio, which is a shame for me. But it's important to stick to the things I know best, so I'll keep an eye on it.