One share I have been eyeing as for possible inclusion my ISA for some time is chipmaker Nvidia (NASDAQ: NVDA), but the high price of the stock has put me off.
However, the share price has now come down by 24% since the start of the year.
So, is this the sort of opportunity I have been waiting for to add Nvidia to my portfolio?
Here’s why it’s been falling
A share does not lose almost a quarter of its value in three months for no good reason – and so it is with Nvidia.
Some investors were already concerned about the valuation of the company, which even now commands a $2.5trn market capitalisation.
The prospect of damaging trade conflicts between the US and other countries has brought a risk to both the top line and bottom line for the company. On the top line, tariffs and trade disputes could see clients delay orders, hurting revenues. At the bottom line, the additional costs of such tariffs could eat into profitability if they cannot fully be passed on to customers.
That is on top of longer-term concerns about Nvidia, after the stock grew 1,569% in the past five years.
Key among those is what the future demand landscape for AI chips may look like. Are recent strong sales indicative of what to expect in future? Or are they a temporary blip as companies scramble to make AI a bigger part of their business?
Another risk is one that the launch of the DeepSeek AI model brought into sharp focus. It is that it may be possible for firms to develop sophisticated AI solutions without necessarily using the sort of computing power most observers had previously assumed would be necessary. That could be bad news for Nvidia’s future sales volumes.
I’m increasingly tempted to buy
No shortage of risks there then!
Nonetheless, fast-growing Nvidia has proved itself to be both resilient and remarkable in recent years. Its proprietary technology means that many clients have no effective substitute for some of the chips they source from Nvidia.
Its pricing power is also impressive. Last year, revenues reached $131bn and net income was $73bn. That net profit margin of 56% is something a lot of companies could only dream about.
Currently, the stock is selling for around 35 times earnings. The prospective valuation is even cheaper given the potential for it to grow its earnings, which last year it did strongly.
I still do not think the valuation looks cheap. But does it look attractive relative to what I see as the long-term potential of the business? Increasingly I believe it does, but not yet to the point where I am ready to buy.
While Nvidia has got cheaper, the risks also now look higher than they did to me just a matter of weeks ago. So, I still feel the Nvidia stock price offers me insufficient margin of safety for comfort.
I will keep watching it to see if further falls bring it to a level where I would be comfortable buying.
