Chip stocks fell sharply last week, and Nvidia (NASDAQ:NVDA) dropped nearly 2% with them. Yahoo Finance reported that investors were worried about heavily indebted AI companies facing higher borrowing costs, after bond yields jumped for CoreWeave, a cloud company that Nvidia backs. CoreWeave’s shares had fallen more than 15% the day before.
But Nvidia’s own numbers show no sign of that stress. It sold $96.2 billion of chips and systems in the quarter that ended in July, up 106% from a year earlier. The question is whether customers can keep paying for chips at this pace, and why the stock is priced as if they might not.
Nvidia designs the chips and server racks that cloud companies and AI labs use to train and run AI models. That data center business made up most of last quarter’s sales and grew faster than the company as a whole. Its newest Vera Rubin racks are already running at Google Cloud, Microsoft Azure, and CoreWeave. If you’re interested in AI investing, we recently compiled a report on 10 Undervalued AI Stocks to Buy Now. The business looks stronger than its price suggests, but only while customers can keep finding money to spend.
Growth Is Beating Its Five-Year Pace
Sales have grown about 66.9% a year, on average, over the past five years. The 106% jump last quarter shows growth speeding up from that pace rather than settling down.
Very little of that revenue gets eaten by costs. Nvidia kept 63.66% of its sales as net profit over the past 12 months, which points to strong pricing power. Investors who want more profitable growth can see our ranking of 10 Most Profitable Growth Stocks to Buy. Management also expects $108.0 billion in revenue next quarter, and that forecast assumes no data center sales to China.
Customers Rely on Borrowed Money
The risk sits with the buyers’ ability to pay for those chips. Yahoo Finance reported that hot inflation data, with wholesale prices rising at their fastest pace since 2022, raised fears that interest rates stay high. A customer that borrows at higher rates can afford fewer chips, and that is how a debt scare could turn into lower sales.
To widen the pool of money, the company announced partnerships with Apollo, BlackRock, Blackstone, Brookfield, Goldman Sachs, and KKR. They are meant to bring more than $500 billion of outside capital into AI infrastructure. The company says those deals still need definitive agreements, so the money isn’t committed yet. For investors looking to follow the AI build-out, our list of 15 Best Data Center Stocks to Buy and Hold for the Next Decade is worth a look.
That makes customer financing a bigger risk to the stock than demand is. Nothing in the latest results shows the funding worry hurting sales, but last week showed how quickly the shares react when one customer’s credit comes into question.
What the Stock Price Already Assumes
Nvidia trades at about 23 times adjusted earnings estimated for the fiscal year ending in January. That is only about 9% above the sector median and about 45% below its own five-year average. Consensus estimates call for earnings per share to grow about 95% in that fiscal year. If you’re looking for cheaper AI names, check out 10 Undervalued AI Stocks to Buy Now.
A multiple that close to the sector’s, next to growth that fast, means the price already assumes the funding worries are at least partly right. For anyone who owns the shares, the price reflects the funding worry more than the growth the business is reporting.
For now, customers can keep paying, since they are still buying and the price allows for some doubt. What would change that is a customer like CoreWeave losing access to affordable credit. Nvidia’s next report will show whether revenue lands near the $108.0 billion forecast while the funding scare plays out.
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This article is originally published at Insider Monkey.
