NVIDIA Corporation NVDA has crushed bubble fears and has seen a meteoric rise in the past few years amid the advent of artificial intelligence (AI).
CEO Jensen Huang, however, believes NVIDIA’s growth story is just beginning, while the Federal Reserve’s recent jumbo interest rate cuts should help the company access cheaper capital. So, is this the most opportune moment to place bets on the stock? Let’s take a closer look.
Why a Rate Cut Will Boost NVIDIA Stock
In Wednesday’s concluded policy meeting, the Fed trimmed interest rates by half a point to support economic growth and stabilize the labor market. For the first time in four years, the Fed eased its monetary policy and kept the interest rates at 4.75% to 5%.
The Summary of Economic Projections further showed that most Fed officials expect another 50-basis point rate cut by the end of the year, followed by 100 and 50-basis point rate cuts in 2025 and 2026, respectively.
A lower interest rate environment bodes well for NVIDIA since the semiconductor behemoth’s cash flows essential for growth initiatives aren’t affected. At the same time the company’s cost of borrowings gets reduced, eventually boosting the profit margins vis-à-vis the share price (read more: NVIDIA & 2 Other AI Stocks to Gain From Lower Interest Rates).
Post-Rate Cut: NVIDIA Stock Beats the S&P 500’s Return
NVIDIA stock has always performed well after interest rate cut announcements. As a result, the company’s share price increased nearly 4% on Thursday.
According to Dow Jones Market Data, the NVIDIA stock gained, on average, 6.9%, 16.6%, 16.7%, and 20.7% in the month, three months, six months and 12 months following a rate cut.
On the other hand, going back to the 1990s, the S&P 500 Index, on average, gained only 2.9% in the 12 months after a rate cut, indicating NVIDIA stock has more upside than most of the listed stocks in the broader index.
Another Reason Why NVIDIA Stock Popped Yesterday
It’s not just the long-awaited big Fed rate cut that pushed the NVIDIA stock higher yesterday. CEO Jensen Huang’s encouraging comments on the AI movement at the Dreamforce technological gathering hosted by Salesforce, Inc. CRM also had investors pouring into NVDA stock.
Huang said the AI industry is transforming from tools to an industry of skills, and there is a huge opportunity in the field of AI that NVIDIA can exploit. This has given investors all the more reason to believe that NVIDIA’s stunning growth isn’t over yet. Even though NVIDIA stock has fallen off its record highs, its shares have outpaced the Semiconductor – General industry this year (+138.1% vs +89%).
Image Source: Zacks Investment Research
NVIDIA’s advanced chips are needed to train large language models like ChatGPT and Gemini and function AI interfaces. NVIDIA stock, thus, is expected to gain as the AI industry is projected to grow from around $184 billion this year to $826 billion by 2030, according to Statista.
Moreover, AI is here to stay as its foundation is based on practical applications, unlike the dot com era when companies were involved in speculative businesses (read more: What AI Bubble? NVIDIA & 2 Other Chip Stocks With Strong Price Upside).
3 Key Reasons to be Bullish on NVIDIA Stock
Encouraging developments on Blackwell chip production, dominance in the graphic processing units (GPU) market and capability to generate profits consistently also act as tailwinds for the NVIDIA stock.
Huang confirmed that NVIDIA has ramped up the production of cutting-edge Blackwell chips as demand has soared among the likes of Meta Platforms, Inc. META, Alphabet Inc. GOOGL, and Microsoft Corporation MSFT. After all, the Blackwell B200 chip has more AI throughput than the current Hopper H100 chip.
Meanwhile, NVIDIA accounts for the bulk of the share in the GPU market as more developers depend on the CUDA software platform, unlike Advanced Micro Devices, Inc.’s (AMD) not-so-efficient ROCm software platform. NVIDIA, thus, is well-poised to make the most of the rise in the GPU market, which is likely to expand to $1,414.39 billion by 2034 from $75.77 billion this year, per Precedence Research.
Fundamentally, the NVIDIA stock is sound. This is because its return on equity (ROE) is around 120% compared with the industry’s 73.2%. An ROE above 100% indicates that the company’s net income is more than the equity or that it has given a strong performance.
Image Source: Zacks Investment Research
NVIDIA Stock is Expensive – Here’s How to Trade it
Given the positives, things are looking brighter for the NVIDIA stock. Prominent brokers have increased NVDA’s average short-term price target by 31.3% from the stock’s last closing price of $113.37. The highest price target is $200, an upside of 76.4%.
Image Source: Zacks Investment Research
However, the NVDA stock is still pricey. Per the price/earnings, the NVDA stock, presently, trades at 42.0X forward earnings. However, NVDA’s rivals or the peer group’s forward earnings multiple is 16.4X.
Image Source: Zacks Investment Research
Therefore, investors should wait for the right entry point to buy the stock so it doesn’t burn a hole in your pocket. Those who have invested in NVIDIA should stick to it since the stock has a strong upside. The company currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.
Should You Invest in Microsoft Corporation (MSFT)?
Before you invest in Microsoft Corporation (MSFT), want to know the best stocks to buy for the next 30 days? Check out Zacks Investment Research for our free report on the 7 Best Stocks to buy.
Zacks Investment Research has been committed to providing investors with tools and independent research since 1978. For more than a quarter century, the Zacks Rank stock-rating system has more than doubled the S&P 500 with an average gain of +24.08% per year. (These returns cover a period from January 1, 1988 through May 6, 2024.)
Want the latest recommendations from Zacks Investment Research? Today, you can download 5 Stocks Set to Double. Click to get this free report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Salesforce Inc. (CRM) : Free Stock Analysis Report
NVIDIA Corporation (NVDA) : Free Stock Analysis Report
Alphabet Inc. (GOOGL) : Free Stock Analysis Report
Meta Platforms, Inc. (META) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
