Why Nvidia Is the Best Magnificent Seven Stock
Market action was ugly on Thursday morning, as many of the recent winners see profit-taking. Tesla (TSLA) has dropped about $40 from its post-election highs, and there is some softness in the Bitcoin sector after a frantic rally. The space sector is also weaker following some euphoric moves.
I’ve recently raised my cash levels and am patiently waiting for some support levels to form in names that I like. That may take some time, so I’m fighting my urge to jump back in too quickly.
One name in my portfolio that I’ve been contemplating is Nvidia (NVDA) . It is the only Magnificent Seven name that I currently own, and I believe it will remain a good play into its earnings report on November 20.
Nvidia is often lumped in with all the other AI plays, but there is a significant difference. Nvidia provides the tools that are used in the development of AI.
Companies such as Microsoft (MSFT) , Meta (META) , and Alphabet (GOOGL) are trying to turn profits from selling AI services, and for many AI companies, it is slow going. They have to continue to invest more money into chips to support their training models, and ultimately, that is beneficial for Nvidia. Ironically, the harder it becomes for Microsoft and others to gain a clear competitive advantage, the more Nvidia benefits.
Another big difference between Nvidia and other AI plays is valuation. All other Mag 7 names trade at large premiums to their growth rate. Apple AAPL, for example, has EPS and revenue growth of around 10% or so but trades at a P/E of 33. Microsoft has expected an EPS growth of around 15% and a P/E of 35.
Nvidia is a semiconductor company, a sector that tends to be very cyclical. Cyclical stocks generally trade with low P/E ratios when they are close to peak earnings. Nvidia is expected to earn $2.86 in the fiscal year ending January 31, 2025, which gives it a P/E ratio of around 52, but it is expected to grow EPS 46% to $4.18 in the 2026 fiscal year. In addition, Nvidia has consistently beat their earnings estimates by significant amounts, so the valuation is even lower.
The big risk for Nvidia and chip stocks in general is an economic slowdown. However, it is likely that AI investment in infrastructure will remain for quite a while. It is unlikely that Nvidia will hit top cyclical earnings anytime soon.
Technically, Nvidia also looks quite healthy, as it is trading in a range just under the $150 breakout level.
At the time of publication, Rev Shark was long NVDA.