Nvidia (NASDAQ:NVDA) dramatically declined in the past week as several negative catalysts overlapped and investors got spooked. The stock tumbled below $120 and now trades at around $117. Investors are now split on where NVDA could go and are probably waiting on further news surrounding the AI industry. In the meantime, should you buy or sell NVDA below $120?
Bulls would definitely say yes. Nvidia is arguably a “cheap” stock compared to other AI plays. It trades at 26 times forward earnings with some of the best fundamentals. In comparison, most other AI stocks are trading at much steeper levels.
The question is whether or not margins will stick around. You are still paying 14 times forward sales here. The stock could tumble if margins don’t keep up as earnings decline.
This scenario seemed unlikely since Nvidia has no competitors on the horizon. However, it looks increasingly likely if you factor in a broader AI market slowdown.
If demand for AI chips slows, Nvidia cannot hold on to its 56.2% net margin. This, in turn, will drag down earnings, and investors will pay much less.
This largely depends on whether or not you think chip demand is going to stick around. If the AI narrative succeeds, so will Nvidia. Its competitors seem years behind, so you’ll enjoy plenty of gains.
Here’s what it looks like if Wall Street holds up the current premium and Nvidia achieves the high end of EPS estimates through 2030.
If the AI narrative fails, NVDA stock will see a cyclical decline like it did in 2022. The AI industry is very unprofitable and growth is mainly why investors have been excited. But if its growth starts to dissipate, NVDA stock could fall well over 50%. This could happen if we see a broader market correction simultaneously.
The consensus price target of $169.62 implies 45.9% upside potential. If NVDA stock falls to its lowest price target of $87, this will likely trigger a market-wide rout and pull most other tech stocks down with it.
Right now, NVDA is a buy in my book. The worst-case scenario is still speculative, whereas the numbers coming out of Nvidia are proven.
