Image Source: Pixabay

NVIDIA (Nasdaq: NVDA) stock is coming off an uncharacteristically bad month, as its stock price fell about 6% in July — and it would have been a lot worse if it didn’t rally 12% on July 31.

The semiconductor behemoth that is synonymous with AI is now trading at about $110 per share, after falling 6% on Thursday, losing some of the ground it gained the previous day. Since its 10-for-one stock split on June 10, NVIDIA stock is down around 10%.

A 10% drop is technically a correction, which was not unforeseen as the stock had become wildly overvalued, as we wrote about back in June.

With the valuation down a bit from there, is this the right time to consider NVIDIA stock?

Good news on AI spending

NVIDIA stock has been volatile for the past few days, up and down, based largely on the movements of the markets. On Wednesday, it was buoyed by the Federal Open Market Committee (FOMC) meeting, when the Fed said it was getting closer to lowering the federal funds rate.

NVIDIA also got good news from Microsoft (Nasdaq: MSFT), as the company reported Wednesday that it is increasing its investments in AI infrastructure. As NVIDIA is a major supplier of AI chips for Microsoft, the news was another catalyst for NVIDIA stock.

Another major NVIDIA client, Meta Platforms (Nasdaq: META), also said it planned to boost its spending on AI, not just this year, but in 2025, too.

However, the good news on AI from Meta on Wednesday afternoon was overshadowed by some disappointing economic news. Jobless claims came in higher than expected this week, while the manufacturing index, a gauge of manufacturing in the U.S., fell short of estimates. These signs of perhaps a slowing economy brought down most stocks Thursday, including NVIDIA, as all of the major indexes were in the red.

It’s all about valuation

NVIDIA doesn’t report earnings until Aug. 28, so we won’t have growth data until then. But growth has not been the issue for NVIDIA — its earnings have shown no signs of slowing down. In the first quarter, revenue rose 262% to a record $26 billion and earnings per share skyrocketed 629% to $5.98 per share.

In the second quarter, NVIDIA estimated revenue to come in at $28 billion, which would be another record. Analysts are calling for $28.4 billion in revenue.

With its semiconductor rival AMD (Nasdaq: AMD) posting strong Q2 numbers already, and the projections from Microsoft and Meta to increase its AI spending, NVIDIA should have another huge quarter.

But with NVIDIA, one of the fastest-growing stocks over the past two years, the concern isn’t growth — it is its valuation.

Is it time to buy NVIDIA stock?

Even though NVIDIA stock has undergone a correction of 10%, it is still overvalued with a price-to-earnings ratio of 68, down from 72 in April, and its forward P/E is up to 44, from 36 in April.

Now, for a company with the unparalleled earnings power of NVIDIA, a higher P/E ratio is expected; however, it still looks a bit too high. With a month left before earnings, in a somewhat volatile market, I would not be shocked to see the price drop a bit more, based on the still high valuation.

NVIDIA is a phenomenal company and, long term, it is a stock you should have in your portfolio, whether through a direct investment or an ETF.

But if it is a question of when to buy, it might be wise to monitor that valuation and see if there is another dip before earnings.

More By This Author:

Fed Keeps Rates Unchanged, But September Cuts “On The Table”
Is Microsoft Stock A Buy After Earnings Beat?
Ford Stock Retreats To $11 After Earnings Rout: Buy The Dip?