Nvidia's Stock Correction Will Lead to Outsized Gains in the Second Half of 2024

Beginning in January 2023, it seemed like Nvidia (NASDAQ: NVDA) stock went straight up for almost 18 months. There was good reason for that as investors piled in to the company that has become the face of a dramatically increasing artificial intelligence (AI) sector.

But no stock goes straight up forever, and valuation still matters. A correction in the stock was inevitable and finally occurred over the last month. Nvidia shares recently traded as much as 13% below the closing record high set on June 18. And buying quality stocks in periods of corrections or bear markets is one of the best ways to generate market-beating returns.

The recent pullback isn’t the first time Nvidia investors dragged the stock lower by taking profits. In the second half of 2022, Nvidia’s sales plunged nearly 20% compared to the prior-year period as chip demand from gaming and cryptocurrency-mining users crashed. That helped lead to a sell-off that knocked Nvidia shares down by more than half in 2022.

Those sellers missed out on what would become an epic stock price run with gains of nearly 750% since the start of 2023. That’s because Nvidia kept innovating. Sales to its data-center customers exploded as generative AI gained prominence, and the company’s gaming sales rebounded.

A more recent hiccup for Nvidia’s sales has been government restrictions applied to advanced chips being sold to China. But recent reports say that Nvidia is getting ready to offer a new chip for sale to China that conforms to current trading rules.

A new AI chip for the Chinese market that adheres to U.S. export controls would be just one more catalyst for Nvidia’s sales, and potentially share price, to rise. That’s why it’s a good idea to take advantage of the recent price drop. As Warren Buffett famously said of his investing philosophy, “we simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” The recent correction shows that some Nvidia investors are fearful right now.

In addition to the anticipated rebound in Nvidia’s China sales, its domestic data center sales should also provide future catalysts. The main driver to boost sales will be its next-generation Blackwell platform for the growing data center market. Nvidia has said it will introduce new chips on an annual cadence. But the newest technology chips should actually be incremental income, rather than a replacement of existing income.

One bit of evidence was the recent second-quarter report from Taiwan Semiconductor. The manufacturer of high-end AI chips for Nvidia said that demand remains strong and supply continues to be tight. That bodes well for continued growth in Nvidia’s sales.

Nvidia AI training servers. Image source: Nvidia.

Nvidia’s business plan is also helping to increase demand. The company has already built a dominant position supplying chips to train AI models. It has also begun an annual cadence of new, higher-perfomance offerings beginning with next year’s Blackwell graphics processing units (GPUs) and AI server-infrastructure systems. Its biggest customers will likely continue to upgrade with Nvidia’s newest products.

But don’t forget that smaller companies still struggling to obtain Nvidia’s existing H100 GPUs remain in the queue. KeyBanc Capital Markets analyst John Vinh summed it up well in a recent research note, stating: “Despite the impending launch of Blackwell in 2H24 [second half of 2024], we are not seeing any signs of a demand pause as demand for H100 remains robust, as we continue to see rush orders.”

Nvidia is expected to update investors with its next quarterly financial report on Aug. 28. If it confirms the continued strong-demand picture by outpacing expectations yet again, it would likely boost the share price.

But Nvidia’s stellar results have continued to build investor expectations, some of which are already priced into the stock. Nvidia’s forward price-to-earnings (P/E) ratio is hovering above an already high five-year average. That high valuation will likely continue if the company’s sales continue to soar. But investors should be prepared for another correction if the company reports any stumbles to that growth.

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Howard Smith has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.

Prediction: Nvidia’s Stock Correction Will Lead to Outsized Gains in the Second Half of 2024 was originally published by The Motley Fool

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