Shares have decreased by 14% from the peak value of $136 reached two months ago. Nvidia ‘s ( NVDA 4.05% ) The rocketship rally appears to be losing momentum, despite achieving new highs in revenue and earnings. Although the chipmaker remains one of the top companies globally, there is a waning enthusiasm in the market for the artificial intelligence (AI) sector as a whole.
We will examine the advantages and disadvantages of the current scenario to determine whether investors should take advantage of the low price or steer clear of this falling stock.
What are the reasons behind Nvidia’s decrease in performance?
It is a fact that no stock can sustain an exponential increase indefinitely. Following a surge of more than 600% since the beginning of 2023, Nvidia was expected to experience a decline. That said, Certain new macroeconomic challenges may lead to significant problems for the successful company in the future.
According to analysts at J.P. Morgan, there is a 35% possibility of the U.S. economy falling into a recession by the conclusion of the year. This economic decline could significantly impact Nvidia’s business structure, especially due to its focus on high-end AI technology. units for processing graphics GPUs are considered high-end, luxury items in the technology sector.
For starters, The chips from Nvidia, specifically the H100, are priced at a range of $30,000 to $40,000 per individual unit, making them quite costly. A large quantity of these units is required for training and operations. massive language models LLMs are known for being challenging to make money from due to intense competition, limited competitive advantages, and technical constraints. Companies are likely to reduce their spending in this risky area during an economic downturn.
Nvidia is encountering more difficult comparisons.
Nvidia is known for its impressive growth rate, with revenue in the first quarter increasing by 262%. year over year The company’s revenue reached $26 billion due to strong sales of its latest data center chips such as the H100. These products are particularly profitable, leading to a nearly 700% rise in Nvidia’s operating profit to $16.9 billion.
Nevertheless, the performance of a stock usually depends on Focus on what is expected in the future, rather than what has been achieved in the past. t’ It is uncertain how Nvidia will be able to surpass these impressive results, especially without a significant advancement. on The software that is directly accessible to consumers within the artificial intelligence sector.
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The company’s exceptionally high gross margin of 78.4% indicates that it may be pricing its products significantly above the production costs, which could be unsustainable in the long run. This situation is likely to attract scrutiny from suppliers. TSMC Nvidia recently revealed its intention to increase its production costs by 2025. Despite Nvidia’s ability to stay ahead of the competition with frequent updates, there is uncertainty about the company’s ability to sustain its dominance. economic moat forever.
The assessment could be considered as not able to be maintained.
Using a forward price-to-earnings ratio (P/E) Nvidia’s current valuation does not appear to be high when considering its exceptional growth rate. For comparison, a competitor chipmaker AMD trades for the same Despite only increasing its sales by 9% in the latest quarter, the company experienced a significant growth compared to Nvidia, which grew by 262%.
However, Nvidia’s business model has become highly reliant on the demand for AI hardware, which has made it closely linked to a speculative industry. isn’t backed Based on its history of generating revenue and profits, the company may find it challenging to maintain its current growth rates in the future due to increasingly tough comparisons.
Overall, Nvidia’s stock is not too bad, and it is possible that most of the expected decrease in value in the short term has already been taken into account. Nevertheless, I would prefer to observe further advancements in the consumer segment of the artificial intelligence sector before considering purchasing during this decline.
