Many investors have been waiting for opportunities to buy into popular artificial intelligence (AI) stocks at a discount, and in recent years, those chances have been rare. But right now, perhaps the highest-quality AI stock globally is on sale.
From a business perspective, everything is going right for Nvidia (NASDAQ:NVDA). As the largest seller of graphics processing units (GPUs) in the world, the company has direct exposure to rising AI adoption because that technology relies heavily on GPUs and similar accelerators to function.
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And by most accounts, Nvidia designs the best GPUs on the market. That’s especially true when considering the strength of the company’s CUDA developer platform, which allows end users to program its chips to function exactly as needed. These strengths have helped Nvidia win an estimated 80% share of the market for GPUs in AI applications.
Few publicly traded companies, if any, are as levered to the AI economy as Nvidia. That has at times resulted in the shares trading at a premium. But even blue chip stocks occasionally experience corrections.
When AI stocks broadly pulled back last month, Nvidia lost more than 10% of its value. Then, late in October, it was revealed that CEO Jensen Huang had been having an affair with a woman who was allegedly a foreign intelligence operative. In all, these headwinds have sent shares down by about 30% from the all-time high they reached in October.
If you’ve been wanting to invest in blue chip AI stocks at a discount, this could be your chance. The underlying numbers look compelling.
A stock now too cheap to ignore
The first headwind Nvidia has faced recently has been a pullback in AI stock valuations across the board. But that correction had little to do with end-user demand.
“AI demand remains strong,” reads a research report from Barclays. “What the market is questioning is funding, as hyperscalers keep lifting [capital expenditures] while free cash flow evaporates.”
AI companies cannot meet surging demand for their services without building more data centers and buying more GPUs. Cash flow timing may stretch those capital outlays further than investors initially anticipated. But make no mistake: Hyperscalers will still spend tremendously on data center construction in the years to come.
Image source: Getty Images.
Nvidia’s cheap valuation more than compensates for this elongated spending timeline. Shares trade at just 21 times trailing earnings. That’s nearly 20% cheaper than the S&P 500 as a whole.
According to analysts, its sales are expected to grow by 91% this year, with growth of another 68% projected for 2027. Earnings are expected to grow similarly, giving the stock a 1-year forward price-to-earnings ratio of just 11.
The major uncertainty today relates to the fallout of Huang’s affair with that alleged Chinese spy. The company’s board has initiated an internal review, but larger regulatory fallout remains a threat.
Stephen Witt, who wrote a book about Nvidia, said:
I think the board will keep him around because it’s in the best interest of Nvidia shareholders. Getting rid of Huang would create a leaderless organization with no clear replacement at all. They have no real succession plan. I think the board will keep him, though the congressional grilling will put them in a really tough spot.
Barring any criminal charges, I also expect Huang to remain at the helm of Nvidia. Does the situation create uncertainty that is difficult to quantify? Absolutely. But that is typically what is required to secure an attractive valuation on a blue chip stock with rosy long-term growth prospects.
Should you buy stock in Nvidia right now?
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
