NVIDIA Corp. (NASDAQ: NVDA) continues to be one of the most hotly debated technology stocks. Your decision to buy or sell NVDA stock may follow the principles you would use to make any decision. In this article, we’ve used the methodology of an old-fashioned “Franklin list” with weighted pros and cons. In the case of NVIDIA, there are points to be made on both sides, and understanding how much weight to assign to them is important to your understanding of what opportunity exists in NVDA stock.
Bearish Point: NVIDIA Stock Is Overvalued and Priced for Perfection
NVIDIA is an expensive stock, according to most tried-and-true fundamental measures. It's trading at 44x forward earnings and a price-to-sales of around 29x. For reference, the sector median for P/E is around 23x. There are other back-of-the-envelope metrics that can be used, but suffice it to say that investors are paying a premium to own NVDA stock at its current price.
A more compelling argument may come when you look at NVIDIA’s market cap of $2.84 trillion. That’s about equal to the amount of what the entire cloud computing and generative AI market will be worth by around 2030.
Bullish Counterpoint: Did You See Those Margins?
Arguing against the fundamentals of NVIDIA stock means arguing against math. I don’t like to do that in sports debates, and I don’t like to do it with stocks. For NVIDIA bears, this is the strongest argument against starting a new position in NVDA stock.
However, there is the matter of margin strength. In the company’s most recent quarter, its gross margin was 75.1% on a GAAP basis, and its profit margin was 55%. That’s not going to be going down anytime soon, and that means that the company’s bottom line is well protected.
Bearish Point: Blackwell Delays Will Open the Door for Competitors
Even before NVIDIA announced there would be delays in rolling out its newest high-performance Blackwell GPU, investors were already concerned that competitors would develop their own chips which would eat into NVIDIA’s market share.
Bullish Counterpoint: The Best House in a Great Neighborhood
The fundamental problem with that argument in the short term is that NVIDIA already has about 85% of the existing market. And while Blackwell is delayed by a quarter or so, competitors like Advanced Micro Devices Inc. (NASDAQ: AMD) simply aren’t ready to capture that market share at scale. Artificial intelligence is still in the picks and shovels stage, and right now, that means NVIDIA has a long runway.
Bearish Point: Growth Will Slow as Companies Cut Back on CapEx Spending
As of this writing, analysts are forecasting NVIDIA earnings to grow at around 32% in the next 12 months. That’s a reasonable estimate, given that the easy comparisons to 2023 are now over.
However, many analysts believe this outlook is far too optimistic considering the uncertainty in the economy. And a recent study by PYMNTS Intelligence from March 2024 shows that 75% of the companies that spent more than $5 million in Generative AI plan on scaling back their spending.
Also, with NVDA stock up more than 135% in 2024, the feeling is that much of the growth is priced in.
Bullish Counterpoint: Interest Rates Are Coming Down
The Federal Reserve is expected to start lowering interest rates at the close of their meeting on September 18. Even if the Fed “only” gives the market a 25-basis point cut, Fed Chair Jerome Powell has strongly hinted that this will be the first of a longer cycle of looser monetary policy.
That’s a fancy way of saying the cost of money is getting cheaper which is good news for the companies that need to buy NVIDIA GPUs to fulfill their AI ambitions. And it’s important to note that the same PYMNTS study noted above also said that 55% of the companies that spent between $1 and $5 million planned to hold their investment spending steady.
Bearish Point: Lots of Recent Insider Selling
On at least five separate occasions since NVIDIA reported earnings in August, Chief Executive Officer (CEO) Jen Hsun Huang has sold shares. Looking at Insider Trades for NVIDIA on MarketBeat, it appears that Huang has sold more than $66.5 million of NVDA stock since August 28. This leads some investors to speculate that Huang knows something about future revenue and earnings that investors do not.
Bullish Counterpoint: Insider Trading Concerns Are Not Valid
Like many executives, most of Huang’s net worth (and even his salary) is made up of NVDA stock. Still, $66 million would finance a lot of life events. But that’s where you have to look at the nature of the transactions. These are all part of a Rule 10b5-1 trading plan that Huang adopted in March 2024. In other words, this isn’t insider trading. In fact, investors may want to put more weight on the amount of NVDA stock being purchased by Members of Congress in the last 90 days.
