Don’t be fooled: Nvidia’s stock sell-off is a great buying opportunity

Nvidia (NVDA 3.54%) ChatGPT stock has led the AI ​​stock boom since the company’s launch, but there are now legitimate questions about whether the rally still has momentum.

After the company reported earnings on Aug. 28, shares fell despite beating analyst expectations, perhaps a sign that Nvidia’s valuation has outpaced its business growth. Shares fell again last week, first on a report that Nvidia later denied that the company had been subpoenaed by the Justice Department. Then, shares fell another 4% on Friday in response to a weak jobs report.

As a result, the stock is down more than 18% from the period before it reports its second-quarter fiscal 2025 earnings. Sentiment may be down, but the selloff is starting to look like a great buying opportunity. Here’s why.

Nvidia is cheaper than it looks

Nvidia’s stock price is significantly lower than it was a few weeks ago, but by traditional metrics the stock is still expensive, with a price-to-earnings ratio of 49.5.

However, Nvidia continues to grow at a rapid pace, with adjusted earnings per share more than doubling in the second quarter and expected to double in the third quarter.

The current analyst consensus is for the company to post adjusted earnings per share of $2.84 this year, which equates to a P/E ratio of 36, comparable to its “Magnificent Seven” peers such as Apple AND Microsoft.

Analysts have consistently underestimated Nvidia’s earnings growth, so there is a high probability that the company will beat that forecast.

Looking ahead, Nvidia also appears well-positioned for further growth as it plans to expand its Blackwell platform in the fourth quarter and expects that growth to continue into 2025.

The sale seems unjustified

Nvidia shares are down 18% in just six sessions, but if you look closely at the news from that period, there’s nothing really to suggest the decline was that steep.

Nvidia shares fell 6.4% after the report, apparently because the outlook wasn’t as strong as some investors had expected, and gross margin fell sequentially. However, the quarter was still strong and beat analyst estimates.

The following week, the stock fell 9% on Tuesday. There was no real news about the stock during the day, but after hours Bloomberg reported that Nvidia had been subpoenaed by the Department of Justice. Rumors of the report apparently sparked the sell-off. However, Nvidia later said it had not received any communication from the DOJ.

Finally, Friday’s slide also seems misunderstood. Nvidia is in a cyclical sector, but the momentum in generative AI is much stronger than in a simple cyclical expansion, and even with weak job growth in August, the unemployment rate is still low at 4.2%. Panic over the disappointing jobs report that caused Nasdaq Composite Friday’s 2.6% decline seems exaggerated.

Business is more resilient than it seems

Finally, Friday’s sell-off and overall stock volatility on macroeconomic news suggest investors believe the stock’s momentum could be easily dashed.

But Nvidia dominates the market for data center GPUs, the components used to run generative AI models, and demand for these chips is not easily squandered.

Large technology companies such as Microsoft, Alphabet, Meta PlatformsAND Tesla all emphasized the importance of expanding AI infrastructure, calling it a top priority and arguing that the consequences of underinvesting in new technology are much more serious than overinvesting in it.

These “Magnificent Seven” have tens of billions of dollars to invest in AI infrastructure, and minor economic headwinds won’t deter them. Even a minor recession is unlikely to halt the trajectory of AI spending.

This should reassure investors that Nvidia will maintain its high growth rate even if the economy begins to slow.

Considering the fact that the stock price has fallen for mostly unjustified reasons, this is yet another reason to take advantage of the sell-off and buy Nvidia stock when prices drop.

Randi Zuckerberg, former chief market development officer and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Meta Platforms. The Motley Fool has positions in and recommends Apple, Meta Platforms, Microsoft, Nvidia, and Tesla. The Motley Fool recommends the following options: long January 2026 $395 call options on Microsoft and short January 2026 $405 call options on Microsoft. The Motley Fool has a disclosure policy.