"Buying the Nvidia Dip" Is On the Table as Valuation Nears Historic Lows

TradingKey - Nvidia's stock appears to have fallen from grace in Q4 amid tech valuation fears and rival advancements, despite robust fundamentals and near-historic low valuation levels. Nvidia, the world's highest market capitalization company, faces such concerns head-on.

Optimistically, Nvidia's valuation has approached historical lows after the recent dip. While strong fundamentals support "buying the dip" in Nvidia, it's also crucial to understand that Google's gains are not necessarily Nvidia's losses.

Nvidia's stock dropped over 11% in a turbulent November, significantly underperforming the Nasdaq's less than 2% decline. Beyond liquidity pressures in the financial system and broader tech valuation questions, the AI chip giant, which commands 80%-90% of the market, now faces intense competition from tech companies like Google and Amazon developing their own chips.

According to a Bank of America report released on Monday (December 1), concerns over Nvidia's leadership have driven its valuation near historical lows. Its current forward price-to-earnings (P/E) ratio of 25 times is comparable to the troughs seen in October 2023 and July 2022.

However, history shows that when Nvidia's valuation reaches these low levels, its forward P/E ratio typically rebounds to 30-40 times within the next three to six months, underscoring the stock's robust valuation recovery capability. BofA noted that Nvidia's average forward P/E ratio over the past five years has been 37.

The adage holds true: even a starved camel is larger than a horse. Furthermore, Nvidia still possesses a scale and growth rate that its AI chip peers struggle to match. Some analysts believe that despite covetous competitors like Google, Nvidia retains a solid moat in the medium to short term.

With exploding demand for chips, supply issues may be even more critical. Whoever can ship products faster will capture more market share and client mindshare. TSMC, which accounts for 70% of the chip foundry market, currently provides manufacturing services for companies like Nvidia and Broadcom. Broadcom, notably, has collaborated with Google for over a decade to develop TPUs.

Bank of America highlighted that tight chip supply and Nvidia's preferential capacity allocation at TSMC could make it harder for clients to switch suppliers over the next year. Furthermore, Google's self-developed chips have so far only been validated within Google's own data centers (with future external sales planned), while Nvidia's chip application ecosystem is far more extensive.

Morgan Stanley stated that Nvidia will continue to dominate market share, adding that recent concerns about the impact of ASIC chips on Nvidia's GPUs are exaggerated. Over the next 12 months, clients' primary anxiety remains how to secure enough Nvidia products, particularly the upcoming Rubin platform.

"Breaking free from Nvidia dependence" is no longer just a slogan, as companies like Meta and OpenAI are actively taking steps. However, as the saying "one's gain is not another's loss" implies, some clients choosing to purchase Google and Amazon's self-developed chips do not necessarily abandon Nvidia products.

Some analysts contend that news of Meta's proposed procurement of Google TPUs will not be a fatal blow to Nvidia. Their reasoning includes the absence of a final agreement, the fact that any potential deal wouldn't materialize until after 2027, Google's continued reliance on Nvidia (as its own demand cannot be self-satisfied), and Nvidia's ability to deliver explosive quarterly results despite ongoing competition.

Amazon executives, whose company recently launched the Trainium 3 chip, also stated they do not foresee replacing Nvidia. Ultimately, the Trainium chip's main advantage lies in its cost-effectiveness, aiming primarily to offer clients more diverse choices for computing workloads.

Nvidia underwent a painful market reassessment in November, yet Wall Street not only maintained its bullish stance but saw some analysts even raising their stock target prices.

TradingKey's stock scoring tool indicates an average analyst target price for Nvidia of $250.84, implying an upside of 38% from its latest closing price. Morgan Stanley raised its Nvidia target price from $235 to $250, while Citi increased its target price from $220 to $270.