Nvidia's Decline and the Persistent Appeal: Why Nvidia Remains a Buy Despite Recent Setbacks

Nvidia's (NASDAQ: NVDA) stock has recently experienced a significant decline, falling approximately 25% from its peak just a few weeks ago.

21:36 12 August 2024

Nvidia's (NASDAQ: NVDA) stock has recently experienced a significant decline, falling approximately 25% from its peak just a few weeks ago. This sharp drop has led to a notable shift in sentiment among Wall Street analysts, with about one-third of those surveyed by LSEG in August now advising against purchasing Nvidia shares—a marked contrast to the more optimistic recommendations from July. For some investors, this may suggest it’s time to look elsewhere. However, despite the recent sell-off, Nvidia's prospects may still be robust. Here's why Nvidia remains a compelling investment, particularly in light of recent commentary from leading technology companies. What is trading? Trading involves buying and selling financial assets, such as stocks, bonds, or currencies, with the goal of making a profit. Traders engage in various strategies based on market analysis, trends, and economic factors to capitalize on price fluctuations. They may operate in different time frames, from seconds to months, and use tools like technical analysis and charts to guide their decisions. Trading can occur on exchanges or over-the-counter (OTC) markets. It requires a keen understanding of market dynamics, risk management, and often involves leveraging financial instruments to amplify potential returns or losses.

The AI Titans' Perspective

Four major players in the artificial intelligence (AI) space—Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL), Microsoft (NASDAQ: MSFT), and Meta Platforms (NASDAQ: META)—have recently underscored their commitment to investing heavily in AI infrastructure. Their plans are significant for Nvidia, given that the company's graphics processing units (GPUs) are crucial for powering AI applications. 

Alphabet: In its second-quarter results released on July 23, Alphabet's CFO Ruth Porat highlighted that the company’s capital expenditures were "driven overwhelmingly by investment in our technical infrastructure," with servers and data centers being the primary components. She indicated that capital expenditures in the following quarters would match or exceed the $12 billion spent in Q1. CEO Sundar Pichai emphasized the critical nature of these investments, noting that "the risk of under-investing is dramatically greater than the risk of over-investing."

Microsoft: On July 30, Microsoft reported its fiscal 2024 Q4 results. CFO Amy Hood stated that to meet the increasing demand for AI and cloud projects, Microsoft plans to scale its infrastructure investments significantly, with capital expenditures for FY '25 expected to surpass those of FY '24. A substantial portion of this spending will be allocated to servers supporting cloud and AI models.

Meta Platforms: Meta’s Q2 update, delivered the day after Microsoft’s announcement, reiterated similar sentiments. CFO Susan Li projected "significant capex growth in 2025" to support AI research and product development efforts, reflecting the company’s commitment to expanding its AI capabilities.

Amazon: Finally, Amazon’s Q2 results, released on August 1, reinforced the trend. CFO Brian Olsavsky forecasted higher capital investments in the second half of the year, with a focus on expanding AWS infrastructure to support growing demand in both generative and non-generative AI workloads.

Implications for Nvidia

The collective commitment from these tech giants to invest heavily in AI infrastructure is promising news for Nvidia. The company's GPUs are essential components for many AI and machine learning applications, and increased spending on AI-related infrastructure by these major players is likely to drive higher sales for Nvidia. Despite the current dip in Nvidia’s stock price, the ongoing and anticipated investments by Alphabet, Microsoft, Meta, and Amazon in AI infrastructure suggest a strong future demand for Nvidia’s products.

Conclusion

Nvidia’s recent stock decline may appear troubling, but the broader context of increasing investment in AI infrastructure by major tech companies provides a compelling argument for why Nvidia could still be a strong buy. The substantial and sustained spending plans from industry leaders underscore the continuing importance of Nvidia's GPUs in the AI ecosystem. As these companies expand their AI capabilities, Nvidia stands to benefit significantly from their investment, making the current dip in its stock price potentially an opportunity for long-term gains.