Should You Buy the Dip in Nvidia Stock?

Nvidia stock has dropped below $200 per share as of this recording, while many other semiconductor stocks are soaring. Investors are asking me, is it too late for Nvidia stock? Is it better to go into some of the other more exciting semiconductor companies? And is Nvidia even an undervalued semiconductor stock right now? So, I'll answer those questions in this video, provide an update for Nvidia, share with you my fair value calculation, and compare Nvidia to maybe some of the other semiconductor companies that are flying high right now. I want to thank The Motley Fool for sponsoring this video. Visit fool.com/parKev for the 10 best stocks to buy now. So, you can see the price action here for Nvidia in 2026. While it is up from where it started in the beginning of the year, from around $185 a share up to about $200 per share, those returns are mediocre and pedestrian when compared to some of these other semiconductor companies that have seen their share prices rise by hundreds of percentage points, and those include companies like Micron and SanDisk and some of the others that have seen their share prices soar. It's making Nvidia stock investors feel left out. I should know, I'm an Nvidia shareholder myself, and I'm a bit disappointed to see Nvidia share price lingering while some of these lesser semiconductor companies are seeing their share prices soar. Now, that lack of stock price performance is not for lack of fundamental performance on Nvidia's part. The company has done everything and then some and has generated significant revenue, profit, and cash flow growth. Just looking at their trailing 12-month revenue, which totaled $253 billion in the most recent trailing 12-month period, that's up from around $30 in 2023. So, their revenue on a trailing 12-month basis has nearly 10x in about 3 years. That's phenomenal growth, phenomenal expansion, and that's one of the reasons why I've been bullish on Nvidia stock is the company's share price has increased to be sure since 2023, but most of that growth, in fact, all of that growth is coming on the back of profit and cash flow growth. It's not coming on the back of expanding forward PE multiples or expanding market multiples based on hope or enthusiasm about something in the future. Nvidia share price growth has been based on the profit and cash flow it's already delivered for investors and likely to continue delivering for investors for at least another 2 years. And then, to make the profits, or I should say to make the sales look even more impressive, is that it's coming with premium prices. Nvidia's not offering discounts, promotions, and incentives to get customers to buy their products. Customers are paying full price to purchase Nvidia's products, and Nvidia's products are still selling out. Its operating profit margin over a trailing 12-month period has soared to over 64%. That's roughly four times where it was in 2017, where it was closer to 16%. So, Nvidia's margins are improving, its sales are improving, and yet the share price is lingering. And some of that has to do with where the company goes from here. The upside is relatively limited. I agree. The company's already a multi-trillion-dollar market capitalization business, already generating hundreds of billions of dollars in trailing 12-month period, and trailing 12-month revenue. So, it's unlikely to grow very much further from here, at least in the near term. Uh sales to the data center will likely peak over the next 12 to 24 months. And then from that point forward, Nvidia needs to find the next catalyst that could propel growth from there. I suspect that that catalyst is most likely to come from physical AI, from things like driverless car technology and robotics and manufacturing. But it could come from other categories like health care. That remains to be seen. And it remains to be seen if those categories, the next leg of growth, will approach anywhere near the data center expansion and the hundreds of billions of dollars in revenue that the data center expansion has led to for Nvidia and others in the semiconductor industry. That's the concern with Nvidia stock is that next leg of growth. What comes after data centers? Is there a that catalyst that can propel Nvidia forward? And at the same time, Nvidia's seeing competitors come in and chip away at its opportunities. The hyperscalers, Alphabet Microsoft Amazon Meta they're investing in their own proprietary chips to decrease their dependence on Nvidia. It's not because they don't like Nvidia's products or they don't see a great value in Nvidia's products, a great ROI in Nvidia's products. But what they are noticing is Nvidia's growing dominance in that industry, and they're uncomfortable with that dominance. They want to have a backup. They want to have an option to go to in case Nvidia faces maybe they face supply chain difficulties, maybe the shortages intensify, maybe Nvidia gets greedy and starts asking for much higher prices. And so these companies don't want to depend on Nvidia for that large for that much of an importance in their products in their supply chain. So they want to have an alternative. They want to have their own home-grown chip that they can invest in and increase. And that way when it comes time to maybe let's say these Nvidia chips become obsolete 3 years from now, 5 years from now, 7 years from now, however long it takes, however long these chips last in the data centers that they built, they can maybe have a proprietary chip that they can slip in there and upgrade or replace older technology from Nvidia if Nvidia plays hardball, if Nvidia asks for super premium prices that they no longer feel justified the cost. They want to have that backup. And if for no other reason, it gives them negotiating power when they sit down at the table with Nvidia. They can say, "We're willing to pay this price and if you ask too much, we're just going to invest in buying our own chips, creating our own chips, and putting those into the data centers, and relying on our ability to research and develop and continue making progress on our chips, even though we understand they're not anywhere [clears throat] near the level of your technology, we're still more interested in developing our own chips because it gives us a longer-term, more sustainable competitive advantage. It's under our own control. It's our own intellectual property, and that gives us better intellectual and competitive advantage vis-a-vis our competition because where's the advantage if we're all just buying Nvidia chips? How are we differentiating ourselves versus our competition? So there's been significant investment in proprietary chips from hyperscalers, but that hasn't slowed the purchasing of Nvidia chips. It's been in addition to, not instead of, Nvidia chips, and there's still very high demand for the cutting-edge technology that Nvidia is offering. Furthermore, Nvidia stock price is trading at ridiculously cheap valuations, especially when you compare to some of these other semiconductor companies that have seen their share prices soar. For instance, AMD is trading at a forward price to earnings of 69, while Nvidia is trading at a forward price to earnings of 22. That means you're paying three times the price for Nvidia stock that you're paying for Nvidia. Nvidia, another way to look at it is Nvidia is trading at 1/3 the valuation of Nvidia when measuring on the forward price to earnings ratio. And similarly with Intel, which trading at a forward price to earnings of 97, compared to Nvidia, which is trading at a forward price to earnings of 22, so roughly 1/5 the valuation of Intel. Now, admittedly, Intel and AMD are likely to grow their earnings much faster over the next 3 to 5 years compared with Nvidia because they were starting from such a backward position or such a position of deficiency. They were so far behind Nvidia in these markets that coming from their smaller position, from their less competitive position, they're making a lot more headway. They're making a lot more growth. But, that's not going to persist into the future. It's not like Intel and AMD have come up with all of a sudden competitive advantages against Nvidia, and that's allowing them to close the gap against Nvidia. That's not the case. For AMD and Intel, their biggest development has been agentic AI and it didn't come from AMD or Intel, it came from outside the industry, it came from a shift in how large language models are utilized in how companies and enterprises are utilizing AI more in favor of investing in these agentic workflows, which favors CPUs, which is a category where Intel and AMD have a better competitive position against Nvidia and that's what's causing so much enthusiasm for AMD and Intel shares. Now, I shared with you valuation measuring on a market multiple, but the valuation difference is similar if we look at discounted cash flow models and I'm just going to share with you my discounted cash flow model for Nvidia, not for AMD and Intel. Uh you can see those in other videos where I devote more time to Intel and AMD, but for Nvidia, I calculated a fair value at $312 a share, whereas the market price is a little over $202 now given today's price change. So, Nvidia stock looks significantly undervalued whether you just look at Nvidia by itself, but especially if you compare Nvidia to some of these other semiconductor companies. I shared with you AMD and Intel as comparisons. I could have shared with you three or four other uh semiconductor companies that are trading at premium super premium valuations well above where I feel they deserve, especially when compared to Nvidia. So, I own Nvidia stock in my portfolio. I've ranked Nvidia as one of the best 12 stocks you can buy and I'm interested in adding more Nvidia stock. I really like the value this provides to long-term investors. In fact, Nvidia is the largest position in my portfolio.