NVIDIA Corporation NVDA has shattered bubble concerns and has grown exponentially in recent years with the advent of artificial intelligence (AI).
However, CEO Jensen Huang believes that NVIDIA’s growth story is just beginning, and the Federal Reserve’s recent massive interest rate cuts should allow the company to raise cheaper capital. So is now the best time to invest in the company’s stock? Let’s take a closer look.
Why interest rate cuts could boost NVIDIA stock
At its policy meeting that ended on Wednesday, the Fed cut interest rates by half a percentage point in an effort to support economic growth and stabilize the labor market. The Fed eased monetary policy for the first time in four years, leaving interest rates unchanged at 4.75% to 5%.
The Economic Outlook Summary further showed that most Fed officials expect another 50 basis points of rate cuts by the end of the year, followed by 100 and 50 basis points of cuts in 2025 and 2026, respectively.
The low interest rate environment bodes well for NVIDIA as it doesn’t impact the semiconductor giant’s cash flows, which are crucial to its growth plans. At the same time, it reduces the company’s borrowing costs, ultimately boosting earnings on its stock price (Read more: NVIDIA and 2 other AI stocks to benefit from low interest rates).
Post-Rate Cut: NVIDIA Stock Outperforms S&P 500 Return
Nvidia shares have always performed well following the announcement of interest rate cuts, leading to the company’s shares rising about 4% on Thursday.
According to Dow Jones Market Data, NVIDIA’s shares rose an average of 6.9%, 16.6%, 16.7% and 20.7% in the one-, three-, six- and 12-month periods following the rate cut.
Meanwhile, going back to the 1990s, the S&P 500 index has risen an average of just 2.9% in the 12 months following a rate cut, suggesting NVIDIA shares have more upside potential than most publicly traded stocks in the broader index.
Another reason NVIDIA stock soared yesterday
The long-awaited Fed’s big interest rate cut was not the only factor that caused NVIDIA’s stock price to rise yesterday. Investors also rushed into NVIDIA’s stock after CEO Jensen Huang made positive comments about AI trends at Dreamforce, a technology conference hosted by Salesforce, Inc. CRM.
Huang said the AI industry is changing from one of tools to one of skills, and there is a huge opportunity in AI that NVIDIA can capitalize on. This gives investors even more reason to believe that NVIDIA’s phenomenal growth is not over yet. Although NVIDIA’s stock price has fallen from its all-time high, the company’s shares have outperformed the overall semiconductor industry this year (+138.1% vs. +89%).
The story continues
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NVIDIA’s advanced chips are needed to train large language models like ChatGPT and Gemini and power AI interfaces. The AI industry is expected to grow from about $184 billion this year to $826 billion by 2030, according to Statista, and NVIDIA’s stock price is expected to rise.
Moreover, unlike the dot-com era, when companies were in the speculative business, AI is based on practical applications and will likely stick around (Read more: What is the AI bubble? NVIDIA and two other chip stocks expected to rise in price).
3 Main Reasons to Be Bullish on NVIDIA Stock
Blackwell’s strong developments in chip production, its dominance in the graphics processing unit (GPU) market and its ability to generate continued profits are also boosting NVIDIA shares.
Huang confirmed that NVIDIA has ramped up production of its cutting-edge Blackwell chips due to surging demand from companies such as Meta Platforms, Inc. (META), Alphabet Inc. (GOOGL) and Microsoft Corporation (MSFT). After all, the Blackwell B200 chip has higher AI throughput than the current Hopper H100 chip.
Meanwhile, NVIDIA holds the lion’s share of the GPU market because more developers are using its CUDA software platform, as opposed to Advanced Micro Devices’ (AMD) less efficient ROCm software platform. Therefore, NVIDIA is well-positioned to take full advantage of the growing GPU market, which is expected to grow from $75.77 billion this year to $1,414.39 billion by 2034, according to Precedence Research.
Fundamentally, NVIDIA stock is healthy. This is because the company’s ROE (return on equity) is around 120% compared to the industry’s 73.2%. An ROE of over 100% indicates that the company’s net income is greater than its equity or it is performing well.
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NVIDIA Stock is High – Here’s How to Trade It
Considering these positive factors, the picture looks brighter for NVIDIA stock. Leading brokers have increased their average short-term target price for NVDA by 31.3% from the stock’s most recent closing price of $113.37. The highest target price is $200, which represents an upside of 76.4%.
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However, NVDA’s stock remains expensive. Based on price-to-earnings ratio, NVDA’s stock is currently trading at 42.0 times forward earnings, compared to 16.4 times forward earnings for NVDA’s rivals and industry peers.
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Therefore, investors should wait for the right entry point to buy shares and avoid getting into a situation that hurts their wallets by doing so. Those who have invested in NVIDIA should hold onto their shares as the stock has a lot of upside potential. The company currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
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