When it comes to buying shares, I aim to be greedy when others are fearful. And I don’t recall investors being as fearful about certain artificial intelligence (AI) stocks as they are right now.
Nvidia (NASDAQ:NVDA) is one example. The company’s position as the world’s leading GPU firm is under no obvious threat, so the stock falling almost 17% in a day is catching my eye.
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What’s the problem?
Identifying the big winners in the AI revolution isn’t straightforward – especially for those of us who aren’t tech engineers. But Nvidia has been an obvious candidate even for the likes of me.
The idea is that large language models (LLMs) need the best chips in order to compete. And that has meant Nvidia’s GPUs, which has resulted in the firm’s sales growing 420% over the last five years.
The issue isn’t that another company has managed to start generating more powerful chips. It’s that LLMs might not actually need the latest and greatest hardware to reach the top.
DeepSeek – an AI lab in China – just launched its own model that outperforms OpenAI from Microsoft and Gemini from Alphabet. And its AI Assistant is the most popular download on Apple’s App Store.
The details are complicated, but the bottom line is DeepSeek has found a way to achieve this without the most powerful GPUs. That could be trouble for Nvidia – and the stock is responding accordingly.
If the most powerful hardware isn’t necessary for the best AI models, Nvidia’s pricing power is likely to be limited. And in that situation, the stock looks badly overpriced.
Fearful… but not that worried?
It’s worth keeping the falling share price in context. A drop of nearly 17% puts the Nvidia share price within 89% of where it was a week ago – and 95% above its 52-week low.
In other words, the latest news might have made investors more fearful about the stock than they have been in a long time. But I don’t think the market is in panic mode by any means.
Based on estimates for 2025, the stock is trading at a forward price-to-earnings (P/E) ratio of 28. That’s not only its lowest level since 2020, it’s in line with the S&P 500 average.
There is, however, a catch. Earnings estimates for the next 12 months aren’t yet pricing in weaker demand based on the idea that LLMs might not need Nvidia’s most advanced GPUs.
I’m therefore viewing that P/E ratio with suspicion right now. If profit forecasts get cut, analyst price targets could come down, causing the Nvidia share price to fall further.
So I’m not in a rush to buy Nvidia shares for my portfolio at the moment. Despite the sudden drop, I think the current share price still represents positive expectations from investors.
What’s next?
My suspicion is the US views AI as a matter of national security. So I’m very alert to the possibility the next development is going to come sooner, rather than later.
Nvidia’s GPUs might be a key part of this, but DeepSeek’s revelation means nothing is guaranteed. So despite falling almost 17% in a day, the share price doesn’t yet offer me enough of a margin of safety.
