Is it advisable for investors to acquire Nvidia stocks following a 3% dip after earnings report?
Nvidia, the world's most valuable public company with a market cap of over $4.4 trillion, recently released its second-quarter earnings results. However, the tech giant's stock dropped by 3% after hours following the announcement.
The company's overall revenue for the quarter was a robust $46.7 billion, marking a 56% increase year over year. Nvidia's data center revenue, a crucial segment for the company, also saw a significant surge, reaching $41.1 billion, a 56% increase from a year ago. Despite these impressive figures, the company's stock valuation remains high, trading at around 41.5 times its projected earnings for the next 12 months.
Nvidia's success is largely attributed to the graphics processing units (GPUs) it produces. These GPUs are a key component in data centers, enabling companies to train, deploy, and scale AI at the levels we've been witnessing. However, the one hiccup in Nvidia's way revolves around its and America's volatile relationship with China.
The Trump administration set a ban on H20 chip, Nvidia's China-compliant AI chip, sales to China in April before reversing the decision in July after Nvidia agreed to pay the government a 15% tax on AI-chip revenue made in China. China encouraged its companies to avoid buying the H20 chip, causing Nvidia to stop its production of them. This back-and-forth between Nvidia and the US government has created uncertainty for the company, especially considering the enormous potential market in China.
Looking forward, Nvidia's future remains promising. Nvidia CEO Jensen Huang expects the largest AI companies to spend between $3 trillion and $4 trillion on AI-related capital expenditures over the next five years, with Nvidia potentially capturing around 70% of that spend. However, the ongoing tensions with China are something to keep an eye on.
For long-term investors, a recommended approach is to dollar-cost average their way into a stake or to increase the stake they currently have. However, the stock pullback could be a sign to proceed with caution before going all-in due to high valuations leaving room for sharp pullbacks if Nvidia doesn't meet the lofty expectations that seem priced into the stock.
Nvidia has also predicted its Q3 revenue will be $54 billion, a 51% increase from last year. The company disclosed that while the deal with the government is in place, it has not yet been finalized. As the situation unfolds, investors will be watching closely to see how Nvidia navigates these challenges and continues to capitalize on the growing AI market.
