Nvidia (NASDAQ:NVDA | NVDA Price Prediction) stock is down almost 10% since hitting $153 a share last month. Most recently the stock dropped some 2.6% after China announced its was investigating the artificial intelligence chipmaker for violating the country’s anti-monopoly laws.
According to the Associated Press, the investigation surrounds Nvidia’s acquisition of network and data transmission company Mellanox five years ago. It comes as the U.S. Justice Dept. is also looking into the semiconductor stock for antitrust violations following complaints by rivals it is abusing its position atop the chip market.
Coupled with concern that Nvidia may not be able to meet the “staggering” demand for its latest AI chip, Blackwell; that it is expecting its slowest quarter of growth in almost two years; and that it is priced for perfection, shareholders might be wondering whether they should take profits now.
In contrast, some investors who have been standing on the sidelines as NVDA stock tripled in value over the past year may be wondering whether this weakness is time to finally get in.
24/7 Wall St. Insights:
- Nvidia (NVDA) is suddenly confronted with a number of headwinds, including probes into its sales practices, slowing sales growth, and a stock valuation in the nosebleed section.
- Many of the concerns can be readily explained away or excused, but not all the worries are so easily dismissed.
- If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.
Pricey stock with headwinds
Nvidia CEO Jensen Huang calls demand for its Blackwell AI chip “staggering”
There is no question Nvidia has been on a tear. Ever since OpenAI‘s ChatGPT chatbot burst on the scene two years ago, the chipmaker’s stock is up nearly 1,000% compared to just 57% by the S&P 500. Its market cap exploded from just $334 billion in late 2022 to $3.4 trillion today.
NVDA shares go for 55 times trailing earnings and 31 times next year’s estimates. That means for Nvidia’s current earnings, it is trading at a valuation that will require 31 years to earn back an investment at current prices. It is also trading at a whopping 30 times sales.
It is easy to understand why many believe Nvidia cannot afford to do anything wrong. The slightest hiccup that causes it to undershoot the tremendous growth trajectory the stock has been on could have its shares crumble.
On the other hand stands FOMO, or the fear of missing out. Having waited so long to get in on the rocket ride, some investors are willing to get on board now even though it is possible all the easy money has already been made. There could be far greater downside risks at these elevated valuations than there is additional upside potential.
Saber-rattling shakes Nvidia
Souring relations between the U.S. and China over tariffs may be behind Beijing’s investigation into Nvidia
That’s why the latest salvo from China has the market worried. Despite Beijing signing off on the Mellanox purchase at the time, the country has a history of using its anti-monopoly laws against big companies for reasons that have little to do with actually being a monopoly.
In 2020, Alibaba (NYSE:BABA) founder Jack Ma severely criticized Chinese regulators for stifling competition, comments that resulted in Ma’s financial arm, Ant Group, having its giant IPO squelched. Ma, himself, went into hiding for months and Alibaba was fined $2.8 billion for anti-monopoly practices in 2021.
So, it can’t be said that China’s sudden investigation into Nvidia is nothing. The country represents 15% of the chipmaker’s total revenue, or $5.4 billion. And the Justice Dept. is taking seriously allegations Nvidia is trying to corner the AI chip market and pressuring customers not to use chips from peers such as Advanced Micro Devices (NASDAQ:AMD).
A different market today
Slowing growth is a concern as well. Nvidia forecast fourth-quarter revenue would rise only 69% compared to 94% in the third. While that’s still blister hot, it wasn’t too long ago Nvidia was seeing triple-digit growth.
Of course, no one expects such growth rates to last, and since the chipmaker was essentially starting from nothing, it will naturally experience initial revenue hypergrowth, especially in an area like AI.
But there is also a lot more competition now. Although the Blackwell chip remains a generation or two ahead of its rivals, not everyone needs the massive computing power the accelerator chip offers. Lesser and cheaper alternatives will suffice, and that could cut into Nvidia’s sales and growth.
Key takeaway
While I’m not especially worried about the probes into Nvidia’s business practices, or even its so-called slowing growth, valuation is always a concern. It’s why I have trouble recommending NVDA stock at these levels even though I think it remains a good company and an excellent long-term stock to own.
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