Why now is the time to buy the Nvidia sell-off
Nvidia’s (NVDA) “relief rally” on Wednesday was short-lived. The stock hit its lowest level since May, falling as much as 7% on Friday and wiping out its gains from earlier in the week amid a broader unraveling across the tech sector.
The Nasdaq (^IXIC) entered correction territory, driven not only by signs of a slowing economy but also by fears that a handful of tech’s biggest players are overspending on AI.
But that latter factor — a pledge to invest more in AI — should be viewed as a “catalyst” for Nvidia and other AI chipmakers.
Wall Street pros were quick to tell Yahoo Finance this week that the AI trade is far from over, and the recent pullback should be viewed as a chance to scoop up shares. While the Big Tech companies are struggling to show the fruits of their AI labor, they’re still committed to spending on chips for the long term.
“It’s a good buying opportunity given the prospects of the broader market,” Winthrop Capital Management’s Luke Stone told me following Nvidia competitor AMD’s (AMD) strong revenue forecast.
“You’re seeing this delineation between the chip manufacturers and their customers, who have to invest more and more into the product and are really struggling,” Winthrop added.
Just this past quarter, Meta (META), Alphabet (GOOG, GOOGL), and Microsoft (MSFT) posted more than $40 billion in expenditures. Amazon (AMZN) totaled $30 billion in spending during the first six months of the year and plans to spend even more in the second half. All have said the majority of that money is going toward AI.
That’s not what the market wanted to hear. Shares of Amazon and Microsoft closed the week lower, similar to the drop in Alphabet shares last week, as investors made it clear the AI trade has turned into a show-me story.
But what’s worrisome for hyperscalers is good news for Nvidia and its peers.
“We’ve continued to see the [capital expenditures] guides actually go up materially and that’s really what’s important,” Bernstein managing director Stacy Rasgon told me. “People worry about sustainability but it looks like that spend, at least for now, is sustaining.”
And that’s set to boost Nvidia’s top line, as Meta, Amazon, Google, and Microsoft account for more than 40% of the chipmaker’s revenue.
“Fear that the revenue trajectory won’t be there over the next 12 months or so is now starting to ease,” CFRA’s Angelo Zino explained to me. “We think Nvidia is going to post some great results, and that is going to be a catalyst for the space.”
In a note to clients earlier this week, Morgan Stanley’s Joseph Moore argued the sell-off in Nvidia presents a “good entry point” and moved the chipmaker back to its “Top Pick.”
“Our perception is that the market is taking a very glass half-empty view of some of the hyperscale comments, where there is a clear desire on the part of customers to continue to commit resources to developing multi modal generative AI,” Moore wrote.
Synovus Trust portfolio manager Dan Morgan likened the opportunity to invest in Nvidia and other AI infrastructure stocks to suppliers who thrived during the gold rush. “Would you rather be the person who’s digging gold or would you rather be the person that’s selling the equipment to dig for gold?” he said.
Nvidia closed the week off 5% and down roughly 26% from its record closing high. Despite the pullback, shares are still up 116% year to date.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email [email protected].
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