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August 6, 2024

Nvidia Stock: Should Investors Buy or Sell?

In the past month, Nvidia stock prices have plummeted by more than 20% from their peak. This drastic decline has left many investors pondering the potential impact on their portfolios and whether it's a time to seize a buying opportunity or brace for further decline in Nvidia's stock.

 

Today, we delve into the reasons behind Nvidia's stock price decline and conduct a thorough evaluation. This analysis will help you determine whether it's prime time to buy or sell.

 

The global stock markets experienced a significant decline, with the S&P 500 dropping by 3%, the Dow Jones Industrial Average falling by 2.6%, and the Nasdaq Composite experiencing a 3.4% decrease. This marked a significant decline for the S&P 500 and Dow, the largest single-day percentage drop since 2022. As a result, not only has the Nvidia stock price experienced a decrease, but numerous other stocks have also suffered more significant losses, highlighting the gravity of the situation.

 

Understanding the entire supply and distribution chain of companies is crucial when evaluating stock price declines. Let's now focus on Nvidia's primary customer base and its stock status. It is public knowledge that Nvidia's dominance in the AI chips market, offering cutting-edge GPU solutions for AI applications, is a critical factor in the tech world. Amazon, Meta Platforms, Microsoft, and Alphabet, as Nvidia's top clients, contribute to about 40% of its revenue. These tech giants play a significant role in driving Nvidia's financial success. OpenAI and Tesla, among others, also rely on Nvidia's revolutionary chips for their groundbreaking advancements. It's important to note that Nvidia's advancements in AI chip technology have not just fuelled growth but also fostered significant innovation within the technology industry.

 



Here is a chart displaying the stock performance of Nvidia's primary customers.

Customer Name Stock Price (USD) Current Decline
Amazon.com Inc (AMZN) $ 161.02 -16.20%
Meta Platforms Inc (META) $ 475.73 -9.59%
Alphabet Inc (GOOG) $ 160.64 -12.58%
Microsoft Corp (MSFT) $ 395.15 -12.65%



These customers are significant players in the tech industry, and Nvidia's GPUs play a crucial role in their operations, enabling them to construct data centres that can handle real-time AI processing with exceptional precision. Unfortunately, the stock of Nvidia's major customers has experienced a decline in recent weeks, as indicated above. This situation is unfavourable and concerning for Nvidia, a company that holds a significant role in the tech industry. Major players, including the four tech giants, are dedicated to enhancing their AI capabilities through substantial investments. However, if their stock prices continue to decline due to these investments, they may reconsider their plans to develop AI, which could have a direct impact on Nvidia.

 

Consequently, there is a potential risk if the investors or shareholders of Amazon, Meta, Alphabet, and Microsoft opt to alter their investment approach. This could involve swiftly selling their shares, thereby compelling the tech giants' decision-makers to pay heed to the investing community's demands for a reduction in their investments in Nvidia's GPUs. The shareholders of the four tech giants mentioned above have expressed a new perspective regarding the investment in AI space. They now seek concrete evidence that such investments will yield revenue growth and profitability, a departure from their previous stance over the past six months. The potential risk is significant, as it could lead to a substantial decline in Nvidia's revenue growth and profitability, leading to the overall decrease of Nvidia's stock value, underscoring the urgency of the situation.

 

Despite the pressure from investors, the tech giant's key decision-makers remain steadfast in their investment strategy and have unwavering belief in the AI industry and its potential for profit. This belief is not just a strategy but a vision for the future. It is backed by the recently published projected Earnings Per Share (EPS) of Nvidia for the next five years. EPS is a metric used to gauge a company's profitability by showing the amount of profit earned per outstanding share of common stock. Profitability is directly linked to a company's EPS, with higher EPS indicating higher profitability. Simply put, EPS is a crucial metric used to assess a company's profitability in absolute terms. It is just one of the various indicators that can be utilised to select good stocks.



Time Current Year (2025) Next Year (2026)
Current Estimate 2.72 3.74
7 Days Ago 2.72 3.74
30 Days Ago 2.52 3.39
60 Days Ago 26.99 35.66
90 Days Ago 23.14 29.05

 



The table above indicates that Nvidia has recently raised their projected EPS, a promising sign for potential investors. For instance, within the last 30 days, they initially projected the EPS to be 2.52, but it has now been increased to 2.72. Similarly, the projected EPS for the upcoming year is 3.74. This upward trend in EPS undermines the previously mentioned investment risk, although it does not eliminate it. However, it does present an opportunity for potential gains.

 

At this stage, it is crucial for every investor to carefully assess their risk tolerance. This self-awareness will help them determine whether they are comfortable with taking on risk in Nvidia or any other related stock, empowering them to make informed investment decisions.

 



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Notably, Nvidia's stock has seen a significant surge, with a remarkable increase of nearly 140% in the past year and an astonishing 471% over the past three years. We believe this growth trajectory will continue, especially after the recent stock split, which has made the stock more accessible to shareholders.

 

Moreover, Nvidia is gearing up for a highly anticipated announcement about the company's upcoming earnings on August 28th. This presents an exciting opportunity for the stock to potentially rally.

 

The recent decline in Nvidia stock presents an excellent chance for long-term investors who align with the risk profile of this stock. It is important to note that there has been an increase in risk associated with the Nvidia stock, but the potential return makes it a justifiable investment.

 

This article is intended for informational purposes only. We strongly recommend that all investors conduct comprehensive research before considering any investment opportunity.

 

Lastly, here are the summarized five core strengths of Nvidia:

 

1.    Leading the way in the AI data centre market

2.    Leading the way in technology

3.    Growing the market potential

4.    Enhancing financial performance

5.    Maximising returns for shareholders and assessing valuation

 

Check out our other articles that provide insights into the key factors that have made Nvidia a compelling choice for many investors.

 

Written by

 

Nelson Mandela

Chief Investment Officer

Innovest Global Wealth

 


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