Some market prognosticators would argue that, as Nvidia (NASDAQ: NVDA) stock goes, so goes the artificial intelligence (AI) bull market. Wall Street rallied around Nvidia, thanks to its dominance in the AI chip market. It’s the flagship company representing the emergence of large language models and other AI technology, which is arguably the largest technological leap forward since the internet started developing in the late 1990s.

After soaring for most of the past two years, Nvidia’s stock price has reversed course. The stock is down about 22% from its June 2024 high. Buying the dip on winning stocks has been a successful investing strategy for years. And to be honest, it’s hard to imagine an AI future without Nvidia playing a significant role.

However, you may want to consider these risks before buying the stock today.

Nvidia looks cheap, but perhaps it’s for a reason

Nvidia’s AI-friendly GPU chips have become the go-to choice for technology companies building large data centers to run powerful AI models. Approximately $26.3 billion of Nvidia’s overall $30 billion in Q2 revenue was from its data center segment, so Nvidia has effectively become a pure play on AI chips. The good news is that data center revenue grew 154% year over year in Q2 and 16% from the prior quarter, a sign that chip demand remains strong.

Analysts now estimate Nvidia will earn $2.84 per share this year and $4 per share next year. Using next year’s estimates, that prices Nvidia at a forward price-to-earnings ratio (P/E) of 26. If Nvidia grows earnings by 40% annually over the long term, as analysts believe it will, it’s arguably a bargain now.

However, there’s an argument that Nvidia’s revenue, as impressive as it could wind up being, is risky enough that investors may want a tremendous margin of safety to buy the stock. A small handful of companies are propping up Nvidia’s sales. Specifically, four companies make up 40% of Nvidia’s total revenue. To make matters worse, all four of them — Microsoft, Meta Platforms, Alphabet, and Amazon — have worked on developing their own custom AI chips.

Margins could become a problem

These companies will not necessarily discontinue using Nvidia’s chips entirely (though anything is possible). But Nvidia has enjoyed remarkable pricing power since the AI rush began early last year. AI became a race where speed to market became the priority.

There are signs that the AI market is slowly evolving. Investors have openly questioned whether big technology companies see the returns needed to justify all this data center spending.

Market research has indicated that traffic to ChatGPT, once the fastest-growing app in history, has dropped in recent months. Amazon’s management noted in the company’s Q2 earnings call that its AI customers want better value.

Price didn’t matter when AI was new, but it’s starting to become a conversation. That could spell pricing pressure for Nvidia moving forward. The company may have to choose between sacrificing market share to competition or accepting lower margins to retain share.

This year, Nvidia is guiding to gross margins in the mid-70s, so this is something to watch in 2025 and beyond. You can see that margins this high are well beyond anything before the pandemic:

NVDA Gross Profit Margin data by YCharts.

It’s tempting to ignore such a long-term concern, but remember that Nvidia only looks cheap because everyone expects stellar sales and profits years into the future. Margins reverting to long-term averages would be disastrous for investors.

Is Nvidia stock a buy today?

These concerns aren’t to dissuade you from owning Nvidia. They are raised to keep you aware of the risks. As impressive as Nvidia’s financials are today, they’ve been propped up by a few deep-pocketed customers throwing money at being the early AI winner. Nvidia could be the leading AI chip company 20 years from now, but sales and/or profit margins could also fizzle out and collapse the stock.

The tricky part is that both things could be true.

Long-term investors who would like to buy the stock on this dip should do so responsibly. Consider a dollar-cost averaging strategy to accumulate shares slowly. That way, volatility is more of an opportunity than a reason to stress. Nvidia could be a bumpy ride for the foreseeable future, even if it makes investors money in the long run.

The post Is Nvidia Stock a Buy Now? appeared first on The Motley Fool Canada.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Fool contributor Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet, Amazon, Meta Platforms, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

E-commerce and technology giant Amazon (NASDAQ: AMZN) recently reported its second-quarter earnings. The company’s results exceeded Wall Street’s expectations in some areas while missing in others. Overall, it’s probably fair to call it a mixed bag. Additionally, the earnings news came during the U.S. stock market’s worst two-day sell-off in recent memory. As a result, shares went from an all-time high to dropping more than15% in short order.

So, the question is: What now?

Amazon didn’t give investors the perfect quarter, but there is enough business momentum to make the stock a table-pounding buy after this abrupt sell-off. Here are three reasons to buy the stock right now:

1. AWS’ momentum is better than expected

Most consumers associate Amazon with its e-commerce business, but Amazon Web Services (AWS), the company’s cloud platform, is Amazon’s most profitable business by a wide margin. Not only is cloud computing a multidecade growth trend, but artificial intelligence (AI) applications run through the cloud, making the company’s cloud performance arguably Wall Street’s most significant focus when looking at Amazon.

Amazon’s year-over-year cloud revenue growth rate accelerated from 17.2% in Q1 to 18.8% in Q2, driven by AI demand. Analysts had expected 17.6% growth, so AWS performed over a percentage point better than expected. Amazon needs to compete in AI. It’s fighting competition from Microsoft and Alphabet to maintain its leading global market share, estimated at 31%.

CEO Andy Jassy spoke about AI efforts on the call, pegging its AI revenue at a multibillion-dollar run rate. Jassy also discussed a shift in customer needs. Initially, Amazon and other companies jumped headfirst into AI and relied on Nvidia‘s chips to build the computing power needed to train and operate AI models. However, consumers are looking for more cost-competitive services, which Amazon is responding to with custom in-house AI chips to save money.

It’s encouraging (though not surprising) to see Amazon invest in adapting to its customers’ computing needs. According to estimates from Grand View Research, the global cloud computing opportunity could grow to over $2.3 trillion by 2030. AWS is pacing for just over $100 billion in revenue this year as the top global platform. A lot of growth is up for grabs, so it’s great to see AWS performing better than expected and positioning itself to provide better services at lower prices.

2. Amazon is gushing cash flow

Amazon’s revenue guidance for next quarter fell short of analysts’ expectations, which may have contributed to the stock’s sell-off. This probably shouldn’t concern long-term investors. Consumer-facing companies across Wall Street have rung the alarm that consumers are pulling back more than expected, so why wouldn’t it be the same for online shopping?

Amazon’s financial performance is far more critical for long-term investors. As you can see, Amazon’s cash profits from day-to-day operations and free cash flow have soared to all-time highs:

AMZN Cash from Operations (TTM) data by YCharts

Remember, free cash flow accounts for capital investments into the business, so this is after accounting for any money Amazon is pumping into AWS to support AI growth.

3. Shares are a bona fide bargain

Amazon’s cash-flow explosion makes the stock a juicy bargain, even after the stock ran to all-time highs just a week ago.

It becomes glaringly obvious when you compare Amazon’s cash flow to its stock price:

AMZN Price to CFO Per Share (TTM) data by YCharts

On a free-cash-flow basis, arguably the primary driver of a stock’s intrinsic value, Amazon is nearly the cheapest it’s been in a decade despite massive investments in AI. Go by operating cash flow, and it’s a firm decade-low. Amazon is even cheaper than during the COVID-19 market crash in 2020.

Simply put, Amazon was a no-brainer before market volatility gave it a quick haircut from its recent high. Don’t let Amazon’s recent run to all-time highs trick you; the stock remains a bargain.

The post Should Investors Buy Amazon After Its Post-Earnings Plunge? appeared first on The Motley Fool Canada.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Alphabet, Amazon, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.

Advertising is a pillar of the economy. Ad money is slowly shifting from old-fashioned mediums like print, radio, and broadcast television to digital ones, like the internet and streaming. This trend positions The Trade Desk (NASDAQ: TTD) as a big winner over the coming decades. The stock has already outperformed the market since going public, but there’s plenty more upside ahead.

The Trade Desk is worth nearly $42 billion today, so it’s not exactly flying under the radar anymore.

Still, the stock has enough growth opportunities to help make millionaires out of long-term investors, as long as it’s part of a diversified portfolio.

Here is why.

Tearing down the walled gardens

Google (owned by Alphabet), Amazon, and Meta Platforms dominate today’s digital advertising landscape. In 2022, the three combined for approximately three-quarters of all digital ad spending. These companies are enormous and have billions of customers. That gives them leverage to operate controlled advertising ecosystems, often called walled gardens. The problem with walled gardens is that there is little transparency or control for advertisers. Your ads use the system’s customer data, which stays there. You play by their rules.

The Trade Desk represents an alternative. It’s an independent programmatic digital advertising platform. Simply put, it’s an automated system that matches ads with an ideal place and audience. These places could be websites, videos, or streaming platforms. The Trade Desk uses first- and third-party data to match ads with an audience based on their demographics or behaviors. Most importantly, it offers transparency and control to ad-buying customers.

Years of steady growth ahead

Advertising can be somewhat cyclical because companies pull back ad budgets during recessions. You can see that The Trade Desk felt a minor hit in 2020 during the height of the COVID-19 pandemic. But overall, the growth of digital has fueled a smooth trajectory to over $2 billion in annual revenue. Notably, the business is very profitable. The Trade Desk generates generally accepted accounting principles (GAAP) earnings, and the business converts over a quarter of its revenue into cash flow.

Management began repurchasing stock last year; it caused the company’s share count to peak (stock-based compensation) and slightly decline.

Investors could be looking at a future “cannibal,” a profitable company that continually spends on repurchases to lower its share count and drive higher earnings growth (and share prices).

TTD Revenue (TTM) data by YCharts

The share repurchases signal that The Trade Desk generates more profits than it needs to invest in the business. But its growth days are nowhere near over. Spending on The Trade Desk’s platform grew 24% in 2023 to $9.6 billion. That’s a fraction of the $135 billion spent worldwide on digital ads (excluding search and social media). It’s 1% of the global ad market with $900 billion of annual sales in total.

So, The Trade Desk enjoys multiple growth tailwinds:

• The ad market itself should grow with the global economy.
• More ad dollars should shift to digital formats over time.
• The Trade Desk can take market share from walled garden competitors.

Long story short, The Trade Desk story is still in its early chapters.

Get rich slowly

It’s hard to look at the stock today and call it a bargain. Shares trade at nearly 60 times its estimated 2024 earnings. On the other hand, analysts believe The Trade Desk will grow earnings by 23% annually over the next three to five years. At that growth, the stock isn’t so expensive that shares will take long to grow into their valuation.

Overall, the ingredients are there for enough years of double-digit earnings growth to create vast wealth over the coming decade and beyond. The industry tailwinds of digital advertising are blowing strong, and The Trade Desk could amplify investor returns by unleashing more significant share repurchases as its cash flow grows. Remember, investors should be playing the long-term game. The Trade Desk is a $42 billion company already.

That said, The Trade Desk is a top-notch technology company with the fundamentals to make the stock a great get-rich-slowly addition to any long-term portfolio.

The post Could The Trade Desk Stock Help You Become a Millionaire? appeared first on The Motley Fool Canada.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Fool contributor Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends The Trade Desk. The Motley Fool recommends Alphabet, Amazon, and Meta Platforms. The Motley Fool has a disclosure policy.