Nvidia (NASDAQ: NVDA) stock has led the AI stock boom since the launch of ChatGPT, but there are now legitimate questions about whether that rally still has steam.
After the company reported earnings on Aug. 28, the stock fell even though it beat analyst expectations, a sign perhaps that Nvidia's valuation had outrun the growth in its business. Last week, the stock tumbled again, first on a report that Nvidia later denied that the company was being subpoenaed by the Department of Justice. Then, the stock fell another 4% on Friday in response to a weak employment report.
As a result, the stock was down more than 18% from before it released its fiscal 2025 second-quarter earnings report. Sentiment on the stock might be down, but the sell-off is starting to look like an excellent buying opportunity. Here's why.
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Nvidia is cheaper than it looks
Nvidia is significantly cheaper than it was a couple of weeks ago, but the stock is still expensive according to traditional metrics, trading at a trailing price-to-earnings ratio of 49.5.
However, Nvidia is still growing at a blistering pace with adjusted earnings per share more than doubling in the second quarter and expected to double again in the third quarter.
The analyst consensus currently calls for the company to generate adjusted EPS of $2.84 this year, equal to a forward P/E of 36, on par with its "Magnificent Seven" peers like Apple and Microsoft .
Analysts have also consistently underestimated Nvidia's earnings growth so it seems likely that the company will top that forecast.
Looking ahead to next year, Nvidia also seems well positioned for continued growth as it's planning to ramp up its Blackwell platform in the fourth quarter and expects that growth to continue into 2025.
The sell-off seems unjustified
Nvidia stock is down 18% in just six sessions, but if you take a closer look at the news during that period, nothing really seems to warrant that kind of decline.
Nvidia stock fell 6.4% after the report, seemingly because guidance wasn't as strong as some investors hoped and its gross margin fell sequentially. However, the quarter was still strong overall and beat analyst estimates.
The following week, the stock fell 9% on Tuesday. There was no real news out on the stock during the day, but after hours Bloomberg reported that Nvidia was being subpoenaed by the Department of Justice. Rumors of that report seemed to have triggered the sell-off. However, Nvidia later said it hadn't received any communication from the DOJ.
Finally, the slide on Friday also seems misunderstood. Nvidia operates in a cyclical sector, but the momentum in generative AI is much stronger than an ordinarily cyclical expansion, and even with weak job growth in August, the unemployment rate is still low at 4.2%. The panic over a disappointing jobs report, which pushed the Nasdaq Composite down 2.6% on Friday, seems overdone.
The business is more resilient than it looks
Finally, Friday's sell-off and the stock's more general volatility on macro news indicate that investors think its momentum could be easily undone.
However, Nvidia dominates the market for data center GPUs, the components used to run generative AI models, and demand for those chips won't be easily undone.
Big tech companies like Microsoft , Alphabet , Meta Platforms , and Tesla have all asserted the importance of building their AI infrastructure, calling it a top priority, and insisting that the consequences of underinvesting in the new technology are much greater than overinvesting in it.
These "Magnificent Seven" companies have tens of billions of dollars to put to use in AI infrastructure, and minor economic headwinds aren't going to dissuade them from doing so. Even a minor recession seems unlikely to deter the trajectory of AI spending.
That should reassure investors that Nvidia can maintain its strong growth rate even if the economy slows.
With the stock price down for mostly unjustified reasons, that's yet another reason to take advantage of the sell-off and buy the dip in Nvidia.
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