I think I might finally be ready to buy some Nvidia (NVDA 3.30%) stock. (I know, what took me so long, right?) Yet, the thing that's kept me from buying Nvidia for so long has finally changed. That's the reason I'm now considering making my first buy in years.
And once I own it, I have no intention of selling.
Image source: Getty Images.
What changed: Sentiment on Nvidia stock
For the longest time, investors thought Nvidia stock could only go one direction: Up. They were largely right.
The last five years have seen Nvidia shares rise roughly 1,300% in value as the company went from strength to strength. It started using its graphics processing units (GPUs) -- which were originally designed to run video game graphics -- to power Bitcoin mining, and more recently, for artificial intelligence.
Nvidia stock hit its all-time high in October, but worries that AI enthusiasm has gotten out of hand recently caused the stock to slump. Over a little more than a month, shares of the leader in AI semiconductor chips have shed 12% of their value as investors began wondering how much longer the hype can last, and whether the AI revolution might actually be just a bubble.
This fast decline caught the eye of The Wall Street Journal last week. On Thursday, the paper warned: "Nvidia's fat margins are rivals' opening." WSJ pointed out that Nvidia's 59% operating profit margins are more than twice those of other semiconductor companies. Its 70% gross margin could tempt rivals from Advanced Micro Devices (AMD 4.81%), to Marvell (MRVL 5.60%), to Qualcomm (QCOM 1.64%), which generally earn gross profits "in the low 50% range" -- and now Amazon.com (AMZN 1.80%) and Alphabet (GOOG 1.03%) (GOOGL 1.03%) -- to put their own AI chips on the market at significantly lower prices.
If this happens, warns WSJ, a price war could erupt that would break Nvidia's near-monopoly in AI chips, and force it to accept lower margins and smaller profits.
NASDAQ: NVDA
Key Data Points
Nvidia is going to be just fine
Let me be clear: WSJ is right -- in part. Other semiconductor companies are introducing alternative chips to the market, offering them at lower prices than Nvidia charges for its GPUs. Yet, WSJ admits that even as Meta (META 1.34%), for example, begins using "TPUs" from Alphabet, Alphabet itself is spending $20 billion a year on GPUs from Nvidia!
That's a big vote of confidence from a company that's supposed to now be a big rival to Nvidia. It tells me that demand for Nvidia's chips -- even at premium prices -- isn't going away anytime soon. To the contrary, analysts polled by S&P Global Market Intelligence forecast that over the next five years, Nvidia's $99.2 billion in annual profit will grow nearly 44% per year, and will roughly quadruple between now and 2030.
I think Nvidia's current valuation of 45 times trailing earnings is more than fair for a still-dominant company growing earnings at 44% per year. The resulting PEG ratio of 1.0, in fact, is almost the textbook definition of a fair price to pay for a growth stock.
So is Nvidia stock cheap enough to buy and hold now? Yes, I believe it is.
