Nvidia Slumps Despite Positive AI Data Points: Stock Gets Too Stretched
AI Stocks Experience Market Downturn
The stock market faced challenges last week, with AI-related stocks suffering significant losses. Nvidia Corporation (NASDAQ: NVDA) witnessed a noteworthy drop, declining over 10% on Friday and losing more than 200 points from its peak last month, despite the absence of negative data points pertaining to AI.
Neutral Investment Thesis Remains
My investment thesis for Nvidia remains Neutral, maintaining the view that the stock’s valuation became excessive during its substantial rally to $974.
Positive AI Data Points
It is essential to acknowledge that AI-related data points released last week were not negative, despite the market’s interpretation. Taiwan Semiconductor Manufacturing Company Limited (NYSE: TSM) projected robust growth rates exceeding 20% in 2024, attributed to strong AI demand. While the foundry acknowledged a slowdown in overall chip demand, TSMC indicated that traditional server CPU chip demand influenced this trend, favoring chip production for Nvidia over those manufactured by Intel (INTC).
Super Micro Computer’s Announcement
Super Micro Computer (SMCI) announced its FQ3 ’24 earnings call without providing guidance updates. However, this announcement does not necessarily imply a negative signal for AI GPU demand as the company has not consistently provided such updates in the past.
Paying the Right Price
As previously highlighted in my research, Nvidia was already aggressively priced over $600, prompting recommendations for investors to consider exiting their positions in anticipation of a further rally. The stock’s subsequent surge to $974 reflected an irrational appetite for AI investments that is now fading, at least in the short term.
Normalized Sales Growth Rates
Nvidia’s projected sales for FY25 (2024) are $112 billion, expected to surpass $160 billion by FY27. While the company’s sales growth rates are anticipated to normalize, the FQ1 ’26 sales growth forecast is estimated to dip below 30%.
Margin Pressures and Operating Expenses
Nvidia confronts the potential for margin compression in the future. The company’s FQ1 ’25 gross margins were projected at 76.3% to 77.0%, accompanied by limited quarterly operating expenses of $2.5 billion. Over time, Nvidia will likely need to invest more to maintain its high profitability. The operating expense base below 10% of revenues also appears unsustainable. During FY23, prior to the surge in AI GPU chip sales, Nvidia incurred nearly $7 billion in opex, representing over 25% of revenues. If this trend persists, Nvidia’s opex will increase significantly.
Takeaway
The recent market decline does not signal an end to the AI boom. The market is taking profits on Nvidia, and further declines are possible during the digestion period. Investors are advised to let the stock slip further, potentially back to the $600 range, to mitigate the risk of inevitable margin pressures.
