The stock has fallen 14% from an all-time high of $136 hit two months ago. NVIDIAof (NASDAQ: NVDA) Even as sales and profits continue to hit new records, the rally appears to be faltering: The chipmaker remains one of the best companies in the world, but the market may be losing enthusiasm for the artificial intelligence (AI) industry in general.
Let’s consider the pros and cons of the current situation to determine whether investors should buy on the dip or avoid this falling stock.
Why is Nvidia in decline?
The truth is, no stock can continue to rise parabolically forever, and after rising more than 600% since the start of 2023, Nvidia was bound to pull back. That being said, New macroeconomic challenges could ultimately cause fundamental problems for this fast-growing company.
JP Morgan analysts believe there is a 35% chance that the U.S. economy will fall into recession by the end of the year, which could deal a major blow to Nvidia’s business model that relies on high-performance AI. Graphics Processing Unit (GPUs) are essentially a luxury item in the technology sector.
first, These chips are expensive, with Nvidia’s H100 costing between $30,000 and $40,000 each. Thousands of units are needed for training and operation. Large-scale language models (LLM). This industry is notoriously difficult to monetize due to intense competition, weak competitive advantages, and technological limitations. In times of economic downturn, companies are more likely to significantly reduce their investments in this speculative sector.
Nvidia faces increasingly tough comparisons
If Nvidia is anything to brag about, it’s its astounding growth rates: First-quarter revenue up 262% Year-on-year change Sales of the company’s latest data center chip, the H100, boosted revenue to $26 billion. Most importantly, these products have high margins, helping Nvidia increase its operating profits by nearly 700% to $16.9 billion.
But stock performance Usually Based on future expectations, not past performance‘t’It’s unclear how Nvidia can top its already breathtaking results absent a particularly major breakthrough. On The consumer software side of the AI industry.
The company’s astonishingly high gross margin of 78.4% suggests that it is selling its products at an unsustainable markup above its manufacturing costs — a move sure to catch the attention of suppliers such as: TSMCThe company has announced plans to raise production prices in 2025. Nvidia is keeping competitors at bay with its rapid update cycles, but there’s no guarantee the company will be able to maintain its deep market share. Economic Moat Forever.
The story continues
The evaluation is Unsustainable
At 40 times forward earnings, Nvidia doesn’t look expensive compared to its phenomenal growth rate. For comparison, rival chip makers Advanced Micro Devices Transactions same The multiple increased despite revenue increasing just 9% in the most recent quarter (Nvidia’s was up 262%).
That said, Nvidia’s business model is too dependent on demand for AI hardware and is tied to a highly speculative industry. Not substantiated With its track record of revenue and profits, the company will find it difficult to maintain its current growth levels over the next few years.
Overall, Nvidia stock isn’t doing too badly and most of the short-term decline is likely already priced into the price, but I’d like to see more progress on the consumer side of the AI industry before buying on this dip.
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Will Ebefung has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.
Should You Buy Nvidia Stock When It Dips? was originally published by The Motley Fool.
