The American markets, particularly the Nasdaq, experienced an invigorating month of September, a refreshing change after the slump in the two previous months. One catalyst for this growth was the rate cut announced by the Fed. A rate cut, unless it happens during extreme economic distress events like the pandemic or a recession, tends to stimulate growth in the market.
The growth happens on two fronts. Businesses are encouraged to seek funding for new ventures and projects (internal growth). They also experience a slight jump in demand as their customers take advantage of the same rate cut. This effect can be seen in a variety of businesses, from small-caps to blue-chip stocks like Nvidia (NASDAQ: NVDA).
Nvidia stock surge
Nvidia stock grew about 12% in the month of September, about twice the growth of the underlying market (the NASDAQ, which grew about 6% over the same period). One catalyst for this growth was the fed rate cut, but its implications for Nvidia might be more pronounced than other stocks, primarily because of the “artificial intelligence” hype.
Nvidia has evolved from merely a semiconductor company to an AI giant that’s making the critical infrastructure for AI. Graphics Processing Units (GPUs) are at the heart of this infrastructure, but the company has been expanding its range to make complete AI-related hardware — i.e., systems optimally configured and tuned to train AI models. Nvidia is also making waves in AI-related software.
Now that the Fed has already cut the rates and plans on doing it again soon, a wide range of businesses might invest in AI and a substantial part of that collective “investment” might be funnelled to Nvidia, one way or another. Even if companies go for cloud-based options, those cloud service providers might have to scale up their hardware with Nvidia systems.
Should you buy Nvidia?
That’s tricky to answer. Nvidia has gone through its golden growth phase, and if you expect the same level of performance or even a sizable fraction of it, you will most likely be disappointed. But if you have reasonable growth expectations, Nvidia can be a decent buy right now.
Its price-to-earnings ratio is relatively high, making it a bit overvalued, but that’s not very unusual for tech stocks of its magnitude, even on the other side of the border.
And that won’t be much of a hindrance if the push for AI adoption and the demand for Nvidia’s hardware and software products and services gain enough traction. The company’s solutions now include a comprehensive AI platform, which covers a wide range of individual AI solutions and features businesses might need.
Foolish takeaway
Nvidia stock might experience another surge as a second phase of rate cuts happen. That and the growing demand for Nvidia’s hardware, AI platform, and other AI solutions might keep the stock bullish for a while. So, even if the returns aren’t as great as they would have been if you had bought Nvidia before it rose to the stars, you might still see decent profits.
