The Nvidia (NASDAQ: NVDA) share price has come off the boil. It’s now dropped around 22% in just over a month!
To be fair, the stock was due a breather, having risen over 30 times in value in 60 months. But could this be the start of an even bigger crash to come? Here are my thoughts.
Doubts are creeping in
Nvidia’s programmable chips are at the centre of the artificial intelligence (AI) revolution. And the firm’s growth over the last two years has been truly stunning. I’ve never seen anything like it.
To go from $27bn in revenue in FY23 to an expected $120bn in FY25 is mind boggling. And a rise in net income from $8.4bn to a forecast $67.6bn over this period tells its own story.
Lately though, some Wall Street analysts are starting to worry that tech giants like Microsoft, Alphabet and Meta Platforms, as well as smaller firms, might be massively overinvesting in AI.
For example, reports say that OpenAI, the firm behind ChatGPT, is on course to lose at least $5bn for the year. Google-backed Anthropic has said it would burn through more than $2.7bn this year.
Meanwhile, Meta recently unveiled Llama 3.1, an open-source AI model. This prompted Gary Marcus, a bearish AI researcher, to comment: “Investors should ask: What is [OpenAI’s] moat? Unique tech? What is their route in profitability when Meta is giving away similar tech for free? Do they have a killer app?”
The AI arms race goes on
If companies don’t start seeing a return on investment from AI, then they’ll inevitably come under pressure to cut expenditure in that area. But nobody knows whether that’ll happen this year or next, and that’s fuelling a lot of uncertainty.
Meta CEO Mark Zuckerberg recently said this on a podcast: “I think that there’s a meaningful chance that a lot of the companies are overbuilding now.”
On the flip side, Zuckerberg admitted that firms are petrified of losing market share to rivals. He said that “the downside of being behind is that you’re out of position for like the most important technology for the next 10 to 15 years.”
Therefore, a strange situation is unfolding where some firms are spending vast amounts of money on a technology that lacks a clear business model.
Still, this dynamic bodes well for Nvidia’s upcoming quarters. So I don’t think the stock’s on the cusp of a complete meltdown yet.
Valuation looks better
One consequence of this sell-off is that Nvidia’s valuation now looks more palatable. We’re looking at a forward price-to-earnings (P/E) multiple of around 39, potentially dropping to 29 for FY26.
That actually looks quite attractive, assuming forecasts are met, which isn’t guaranteed.
Will I invest then? Well, I sold my Nvidia shares earlier this year because I was worried that the amount of spending on AI was unsustainable. Meanwhile, competition in AI chips is mounting, which could ultimately reduce Nvidia’s pricing power.
However, I’d repurchase shares at the right price. CEO Jensen Huang’s a true visionary and the firm has many avenues of growth outside generative AI, including the metaverse and self-driving cars.
So I’ll keep watching Nvidia. But as things stand, I’d rather buy other stocks where I see less uncertainty.
