NVIDIA Stock: Why I Wouldn’t Buy All at Once

NVIDIA stock at $205: cheapest in 5 years?

0:00 Nvidia stock, ticker symbol NVDA, closed Friday at about $205, which is roughly 17 times the profit Wall Street expects over the next year. The cheapest it's been in about 5 years. If you have been waiting for an Nvidia discount, this could be it. That's a company that more than doubled its revenue in a year, priced at under half its own 5-year average. But if the AI boom is running out of gas, cheap is exactly what the top looks like right before the profit shrink.

0:24 Nvidia didn't even report anything.

Intel's worst day since 1974 drags NVDA down

0:26 It got shoved down the stairs Friday by Intel, which fell nearly 29%. It's worst day since 1974. My name is Blake. I dig up stocks before the bull stampede, so you're not buying at the top like Wojak. And today on 9 to 5 Investing, we're figuring out if Nvidia at $205 is a real discount or a trap that only looks cheap. Quick disclosure, I own Nvidia shares and some Amazon stock as well. So, I'm going to be extra careful to give you the bear case straight.

0:51 So, why did Intel's bad night hit Nvidia this hard?

Why AI spending scared the market (Alphabet, Amazon)

0:53 Because it landed at the end of a rough week for AI spending. On Wednesday night, Alphabet, Google's parent company, said it spent over $51 billion on capital spending in a single quarter, which basically just means money for buildings and equipment like AI data centers. That pushed its free cash flow, the cash left over after paying for everything, including those data centers, negative for the second quarter in a row, and the stock fell about 11% the next morning.

1:16 Amazon made it worse on Thursday night. Its cloud business grew nearly 40%, but its free cash flow over the last 12 months swung to an outflow of about 42 billion, mostly from what it's pouring in AI. So, the whole market is stuck on one question right now.

Who's paying for AI? The roofer analogy

1:31 Who is actually paying for all of this AI? Think about it like the only roofer in town after a big hail storm. Here in Texas, when hail rolls through, which is pretty rare, but every roof on the street needs replacing at once, and one roofer with crews and shingles has a wait list out the door. Nvidia is that roofer. The homeowners are giant tech companies like Microsoft, Amazon, and Alphabet, plus newer AI cloud companies, and every one of them wants his data centers built before the neighbors.

2:00 So, this week Wall Street peeked at the homeowners' bank statements and got a little nervous. But, the roofers' own books look incredible. So, Positive Pete gets the mic here first today. In the quarter that ended in July, Nvidia brought in just over 96 billion in revenue, up 106% from a year earlier.

Bull case: $96B revenue, data center up 117%

2:16 About 89 billion of that came from its data center business, which basically just means the chips, networking gear, and full server racks the big AI companies buy. And that piece grew 117%. The next generation is already rolling out, too. Nvidia says its Vera Rubin systems are in full production, with Microsoft, Google Cloud, and Oracle among the partners ramping racks. Nvidia kept about 75 cents of gross profit on every dollar of sales, and it handed roughly 26 billion dollars back to shareholders through buybacks and dividends in that quarter alone.

2:44 That's not high money, however. For the quarter that just ended in October, Nvidia guided to about 108 billion in revenue. And that forecast assumes zero data center chip sales to China. That zero is worth a second look, because China used to be a meaningful market for Nvidia. Jensen told CNBC in late October that no market is closed forever. So, if sales there restart, that's upside nobody's really counting on. But, the bigger surprise came on the earnings call, when CFO Colette Kress gave a preliminary outlook for the fiscal year that starts in February, revenue growth of about 70%.

A 70% growth outlook, and Jensen on Mad Money

3:13 She called that outlook supply constrained, which basically just means Nvidia could sell more if it could build more. The roofer is out of shingles, not customers. Jensen Huang, Nvidia's CEO, went on CNBC's Mad Money that same night and put it like this. AI is now useful. It's doing productive work. And the tokens that are being generated by these AI labs are now profitable. Tokens are just the chunks of text an AI reads and writes. So, he's saying the AI companies are finally making money on the work, not just spending on it.

3:43 That's the bull case in one sentence. Here's the part the sell-off skipped over.

What the selloff skipped: AI budgets keep rising

3:47 The same companies that scared everyone this week didn't cut their AI budgets. Alphabet, which is the parent company for Google, kept its plan to spend up to 205 billion this year and signaled a significant increase next year. Meta narrowed put range to as much as 145 billion. And Microsoft said it expects to spend more than 50 billion next quarter alone. So, the homeowners are nervous about their bank statements, but they're still booking the roofer.

4:11 Wall Street is worried about the bill, not the demand. But, here's what Friday's drop wasn't. According to Ticker, analyst profit forecast for Nvidia have been flat or slightly up since the end of September. So, the stock fell while the forecast held still. That means that investors are simply paying less for the same expected profits. So, how cheap is Nvidia really?

How cheap is NVIDIA? The P/E ratio explained

4:30 They bought a roofing business for 17 times its yearly profit, you'd be paying $17 for every $1 it earns in a year. That's the price to earnings ratio, or PE. On last 12 months of reported profit, Nvidia's PE is about 26. On the profit analysts expect over the next 12 months, it's about 17. Over the last 5 years, that forward PE averaged more than twice that, according to Ticker, which is why you're hearing people call Nvidia cheap. Now, I'm a former financial accountant, and before that, an auditor, so I just can't help myself here.

Official vs adjusted profit

5:02 The reported profit has a little extra in it. Last quarter, Nvidia's official profit was $2.46 a share, but its own adjusted number was $2.22 because the official one included billions of dollars of gains on stakes Nvidia owns in other companies. Gains like that can flip to losses when markets fall. So, the adjusted number is the one I'd lean on, and it's the one analysts build their forecasts on. So, what does Wall Street actually expect Nvidia to earn?

What Wall Street expects NVIDIA to earn

5:22 A little over $9 a share in adjusted profit for this fiscal year, and close to 16 for next year. That's about 70% growth on top of a year where profit roughly doubled. At 205, that's about 22 times this year's estimate. A low PE only ends up being cheap if that E, those earnings, actually end up showing up. Back to the roofer. A roofing business at 17 times profit is a bargain if the hail keeps coming. If storm season ends, that same price turns out to be expensive because the profit you paid for goes away.

5:50 So, the market is by no means saying that Nvidia is a bad business. It's saying it doesn't fully believe the forecast. Now, Negative Nelly is to Mike, and she's been waiting all video.

Bear case: who's paying the bill?

6:02 It's all you, baby. Her biggest point is the one that sank the stock this week. Some of Nvidia's biggest customers are now spending more than their businesses bring in. Alphabet and Meta had negative free cash flow last quarter and Amazon over the last 12 months. But, here's the part of the roofer story that I have not told you yet.

Is NVIDIA co-signing its customers' loans?

6:19 What if the roofer started co-signing his customers loans so they could afford to hire him? That's roughly what The Information reported in late October. By its count from Nvidia's filings, Nvidia has up to about 165 billion in guarantees and other commitments backing new data centers like promising to pay a landlord if a tenant can't. Nvidia's own balance sheet shows it from another angle. The money customers owe Nvidia climbed to more than 60 billion at the end of July, up from under 40 billion in January.

6:42 And according to Ticker, five customers owned about 70% of it. That customer list has a twist, too. Last quarter, about 40 billion of data center sales, nearly half came from newer AI clouds, governments and regular businesses in that group grew 25% in a single quarter. That's great for spreading out the risk, but those newer AI clouds are exactly the customers that need help getting financed. Jensen's answer is that this is smart business, not desperation.

7:07 Here's what he told CNBC in Berlin on October 22nd. The demand for the new clouds is off the charts. Their capabilities are extraordinary. And so, what is missing in the middle is the working capital to fuel that growth, to fund that growth. New clouds are the newer AI cloud companies that run on Nvidia chips. So, the customers are lining up, but they're short on money to build with and Nvidia is helping. That works great right up until the customer can't pay.

7:38 I used to work as a financial accountant at a solar developer that went bankrupt. So, I take the financing side of a building boom seriously. Nelly's next point is the shingles.

Memory chip costs and NVIDIA's margins

7:46 Memory chips, one of the key parts inside Nvidia's systems, have gotten a lot more expensive this year. So, Nvidia guided its gross margin down from 75% last quarter to about 74% this quarter and said it expects a low of around 71 to 72% in the January quarter before price increases kick in next year. The roofer is eating part of the shingle bill. A few points of margin sound small, but on a business this size, that's billions of dollars of profit a year.

Custom AI chips: the new roofers

8:11 Her last point is new roofers. Alphabet now sells its own AI chips, and other big customers are designing chips of their own. So, they don't have to pay Nvidia's prices forever. Jim Cramer's take on Mad Money was that plenty of these chip projects get started and plenty get canceled. Maybe so, but every homeowner who learns to fix his own roof is a customer the roofer might lose. But the biggest risk is the one that the analogy already told you.

The biggest risk: hailstorms end

8:34 Hailstorms end. Once the data centers that need building are built, orders don't vanish, but they can slow down. And a stock price for 70% growth doesn't need a collapse to fall, it just needs a slowdown.

Analyst price targets: 57% upside?

8:47 So, what does Wall Street think Nvidia is worth? As of Friday, MarketWatch average price target was roughly 57% above the close from 55 analysts, and 54 of them rate it as a buy. But not everyone's that excited. Daiwa cut its largest target to 245 back in September, which is still about 20% above where Nvidia closed Friday. A price target is just an analyst guess at where a stock could trade in about a year. It's a guess, not a promise.

What to watch on November 17

9:12 So, here's how I would have think about it. Nvidia reports again on November 17th, and that's the real test because it's the first look at whether the hailstone is still going. Number one is revenue against that $108 billion forecast, and more importantly, what they guide for the January quarter. Number two is gross margin. If it holds near 74% and the January low still looks like 71 to 72% the shingle problem is under control. The one I care about the most is customers.

9:35 Listen for what Nvidia says about next year's spending plans, and watch whether those guarantees and the money customers owe keep growing faster than sales. If you're buying here, the honest case isn't that Nvidia can't fall further, it's that you're paying a lot less for the same expected growth than people paid at the start of October, and accepting that the growth could be slow.

How I'd buy NVIDIA here

9:54 A simple way to handle that is to buy in pieces. Some before November 17th and some after, so one earnings report doesn't decide your whole entry. Jim Cramer wants to go all in tonight. Chad and Tradwife are splitting it into two purchases. Before any of that, check what you already own. If you hold an S&P 500 or a Nasdaq fund, you already own a decent chunk of Nvidia, whether you meant to or not. Is the hail storm just getting started, or are we already sweeping up shingles?

10:17 Pete or Nellie, tell me in the comments. Your next video is already picked out, and unlike Nvidia's customers, no one had to co-sign for it.