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soft Bank CEO masayoshi son recently told investors that he thinks Nvidia stock is undervalued masayoshi Sun is one of the most celebrated investors in modern history as CEO of Japanese holding company soft Bank sun has a rich history of architecting Savvy Investments across a host of different industry sectors sure there have been some Clunkers in soft Banks portfolio I'm looking at you Wei work but for the most part sun seems to have a act for identifying transformative Technologies before they take off take semiconductor business arm Holdings as an example back in 2016 soft Bank acquired arm for roughly $32 billion today arm is a public company and boasts a market capitalization of nearly $150 billion that's a pretty solid return on investment speaking of semiconductors Sun recently made an eyebrow raising remark regarding the world's most valuable chip business in nvda 2.68% during a recent interview with CNN's Richard Quest Sun put forth the idea that Nvidia is undervalued how can a stock that's gained 8 80% in 2 years possibly be considered undervalued below I'm going to dig into why Nvidia stock may look undervalued but explain why I'm not completely aligned with Suns call before we begin this video is not an investment advice and must do your own diligence however with my experience investing for years the content from this video has a solid Research Foundation check our Patron on the description below for an inside members only access on what are the best buys now we will also update you on what to sell for gains or to avoid losses subscribe to our channel so you will never miss out why Nvidia looks undervalued for many years nvidia's primary focus was on the gaming industry specifically enhancing visuals and graphics on computer screens for gamers however over the last couple of years Nvidia has found ways to Parlay its breakthroughs in gaming to other applications namely the company's compute and networking Services have witnessed tremendous growth in recent years thanks to an increased appetite for artificial intelligence AI products you see Nvidia creates Advanced chipsets called Graphics processing units gpus gpus are an important piece of Hardware as it relates to generative AI yet in addition to its gpus Nvidia also makes software that layers on top of these chipsets in essence businesses using nvidia's gpus wind up relying on the company for the majority of their AI backbone using both its hardware and software this business model has been incredibly lucrative for NVIDIA just check out the chart below to get a glimpse of the company's growth with revenue and profits increasing at such a steep Pace nvidia's momentum looks unbeatable and it's these trends that may suggest Nvidia stock is undervalued as depicted in the chart below Nvidia stock is trading below its 5-year average on both a price to earnings PE and price to free cash flow P FCF basis on the surface this Dynamic looks highly convoluted just think about how much nvidia's business has transformed over the last couple of years thanks to a die how can the stock be cheaper today than it was 5 years ago the literal explanation is that nvidia's profit growth is rising at faster rates than the stock price so even though the company's share price seems to kick into a new gear every other day net income and cash flow are actually accelerating even faster although looking at Nvidia stock through this lens may suggest that shares are undervalued I'm going to detail why I see the discussion around valuation to be a little more nuanced why I'm not totally buying this idea during Sun's interview he explained that Nvidia is undervalued because the total addressable Market Tam for generative AI is expected to get bigger translation demand for gpus should remain robust for the next several years a Tailwind that bodess well for NVIDIA while I agree with Sun's idea of an expanding Tam for AI infrastructure I have questions surrounding how much of a catalyst that will be for NVIDIA big tech companies such as Microsoft met met platforms Amazon and alphabet are all developing their own custom chip architecture to train future AI models considering each of these companies are believed to be nvidia's largest customers I see the introduction of new gpus to the marketplace as a major headwind to be upfront I don't think any of these customers will cut ties with Nvidia completely rather as more chips enter the landscape I think nvidia's most direct way of competing is through price red uctions should this be the case nvidia's Revenue will likely normalize while its margin profile begins to tighten the combination of decelerating Revenue and deteriorating margins will subsequently take a toll on nvidia's profitability generally speaking when a company's sales and profits begin to shrink so does its valuation is NVIDIA a good stock to buy right now on the surface nvidia's valuation multiples might suggest the stock is trading at a reasonable price right now however given the rising threat of competition I actually think Nvidia stock is trading at a premium relative to many other opportunities in the AI realm and while this premium is welld deserved for now I question how much longer the stock can sustain its current run only time will tell if Suns takes on Nvidia holds up as I expressed in a prior piece I think Nvidia is more of a trade right now than an investment in other words I don't necessarily see the stock as a Buy and Hold to me timing your buys and sells with Nvidia is going to be pretty important over the next several years these ideas don't exactly make the case for an undervalued stock and for those reasons I think Sun may be off on this one give us a like if you like our video subscribe and ring the bell to never miss out check our Patron for an inside look on what of the Best Buy and Sell stocks every week
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