Business is great at Nvidia (NASDAQ:NVDA), but NVDA stock is looking just a bit ragged. For the first time in years, a move up didn’t hit the old high.
The August peak of $493/share was followed by an October peak of $469. But even that looks far off from the $429/share it was trading at early on October 17. The long-term trend remains bullish. But is it time to bail?
Why Sell NVDA Stock?
The short-term reason for the latest sell-off is China. Tightening China’s access to high-end AI chips means cutting sales to Nvidia.
Beyond that, Nvidia depends on the Cloud Czars for its profits. Some $6.2 billion of the July quarter’s $13.5 billion in revenue became net income. That’s 46 cents, on every dollar, hitting the bottom line. I can’t remember any company ever doing so well.
Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT) and Amazon.Com (NASDAQ:AMZN) all will reduce their dependence on Nvidia with their own chips. That won’t be great for NVDA stock.
Providers using the cheapest possible hardware and free software marked the first decade of the cloud era. High-priced Nvidia hardware defines this decade.
That’s why growth in the number of data centers has leveled off, according to Synergy Research, while growth in computing capacity keeps exploding, thanks to AI.
This means there’s a big incentive to reduce Nvidia’s control of the cloud market, and there’s lots of cash available with which to do it. That may be why “tech whisperer” Cathie Wood recently cut her funds’ stake in NVDA stock, selling at $458 per share.
Why Not Sell NVDA Stock?
The Czars’ bigger problem is the software stack Nvidia has laid over its chips. The company’s isn’t just the Intel (NASDAQ:INTC) of the AI age. It’s also the Microsoft of the AI age. Control of the software that lies under applications gives you control over the application space. Right now, Nvidia has it.
Advanced Micro Devices (NASDAQ:AMD) hopes the open source approach used in the last decade by the Czars’ themselves can help cut that advantage. It wants to buy Noda.AI, an open source AI software firm.
But a software lead is harder to break than a hardware lead. Once people are trained on a software stack, they stick with it.
Infosys (NYSE:INFY) alone is training 50,000 people on the Nvidia software stack. Other Indian outsourcers are making similar moves, and even Alphabet is having to expand its partnership with Nvidia.
What’s This Worth?
The question for investors remains, what is all this worth?
The average analyst estimates Nvidia’s earnings for the 2024 fiscal year, which ends in January, at $10.79 per share. The average for fiscal 2025, which ends just over 15 months from now, is $17.06. At $430 per share, you’re still paying 25 times those earnings.
But software control tends to abide. The AI era is just getting started. Apple (NASDAQ:AAPL) and Microsoft, which defined the PC era from its earliest days, still control that business 40 years later.
The Bottom Line
Right now, investors are buying NVDA stock on every dip. I started writing this with Nvidia below $430. A few hours later the shares were at $443 and headed higher. They trade today closer to $420.
There’s just very little to buy these days except the “magnificent seven,” which is what you get what you add Nvidia to the Cloud Czars, along with Tesla (NASDAQ:TSLA).
But I can see selling NVDA stock on its next upswing. With bonds paying 5%, there’s a roof on stock prices, and it’s something below 25 times forward earnings. Even for Nvidia.
As of this writing, Dana Blankenhorn held LONG positions in GOOGL, NVDA, MSFT, AAPL, INTC, AMD and AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.