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Is Nvidia Still a Strong Investment Option? Morgan Stanley's View on the Recent Share Dip and Potential for Buying Opportunity

$NVIDIA Corp(NVDA)$ 's share price fell to a six-week low, marking a decline of approximately 20% since it achieved an all-time high last month. Despite this slump in the stock price, Morgan Stanley regards the dip as another opportunity to buy shares. According to the bank, the concerns about demand sustainability for Nvidia's chips used in AI computing are anticipated to subside soon due to management comments or financial results.

September slump: What caused Nvidia's decline?

The chip industry is susceptible to cyclical changes. Nvidia may face short to medium-term headwinds due to macroeconomic conditions that could lead to lower-than-expected revenue growth or margins.

The Federal Reserve's indication of maintaining high-interest rates to combat inflation has resulted in a surge in bond yields, weighing heavily on technology stocks. The 10-year Treasury bond yield has climbed to a 16-year high. Seeking Alpha's analysis suggests that the deeply inverted yield curve and nearly depleted excess savings of consumers indicate an impending recession in the next 12 months.

Under this pressure, Nvidia's stock price has declined by over 14% this month compared to the Nasdaq 100 Stock Index ($IUXX) (QQQ) decline of 5%.

Nvidia's high valuation was another concern, with the company's stock surging over 188% this year. Several analysts have raised questions about its pricing. Research Affiliates LLC argues that Nvidia is too expensive to fulfill investor expectations. Cathie Wood of Ark Investment Management also believes that Nvidia is overpriced and that there are better investment opportunities to tap into the exponential growth in AI.

Is it time to buy the dip?

Morgan Stanley's analyst Joseph Moore suggests that the decline in Nvidia shares presents an opportunity for investors to buy. Despite rumors about order cuts, Moore claims that his firm's recent channel checks indicate that demand for Nvidia H100s continues to be high, surpassing current supply levels despite some improvements.

Despite the consecutive blows to Nvidia's shares this month, its valuation has dropped to 29 times the profits expected over the next 12 months. This decreased value marks the company's lowest valuation in nearly a year. According to Bloomberg data, the current valuation is also less than Nvidia's average of 32 times over the past ten years. Despite these declines, earnings estimates for the company have risen, with average analyst projections for earnings per share in Nvidia's fiscal 2025 surging threefold in the past six months.

Nvidia's role as the most profitable AI stock globally is another crucial factor to consider. The company produces the most powerful GPUs, which allows it to perform essential tasks within the rapidly growing field of AI. Additionally, Nvidia's data center segment is experiencing rapid expansion, and this trend should continue, resulting in increased market share and revenue.

Furthermore, Nvidia's dominance in the AI market is significant, with its data center sales growth outpacing that of rivals like Advanced Micro Devices, Inc. $Advanced Micro Devices(AMD)$  and $Intel(INTC)$ .

Nvidia's financial performance shows notable improvement, with the company approving a $25 billion buyback program and introducing a dividend. The profitability of Nvidia has also increased considerably, with an EPS of $2.70 provided last quarter, far surpassing the expected $2.07 per share.

Maybe, just like Morgan said last month: "The message (buyback) seems to be that  $NVIDIA Corp(NVDA)$ management believes that their stock is undervalued."

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