We're upgrading our rating on Nvidia shares. Here's why

CNBC Finance

5 min read

We've seen enough: The market is giving investors a gift of an entry point in Nvidia . Accordingly, we're upgrading Nvidia back to our buy-equivalent 1 rating, in line with Jim Cramer's commentary from Monday's Morning Meeting . Nvidia reported a strong quarter with an even stronger guide on Wednesday night. And yet, the stock fell just over 9% over Thursday and Friday â a move that in no way reflects what we saw in the numbers and heard on the conference call about current and future demand for Nvidia's best-in-class AI computing platform. Shares are erasing some of those two-day losses on Monday, but our overarching point about the befuddling post-earnings market reaction holds true. You can say the same thing about the way the stock has traded for many months. Despite a mountain of evidence that AI spending is going higher, Nvidia shares are trading at roughly the same price now as they were in August. That's a seven-month consolidation. The upshot: The stock is much cheaper now because earnings estimates have priced in that firehose of AI spending. In August, the stock traded in the mid-30s on a forward price-to-earnings basis. Now it's at 22 times forward earnings, the lowest level seen since last April's tariff announcement. That's already attractive. But, in our view, the stock could prove much cheaper in hindsight, as we believe many aren't fully appreciating the magnitude of investments going into the "Fourth Industrial Revolution." NVDA .SPX mountain 2025-07-31 Nvidia's stock performance versus the S & P 500 since the start of August 2025. We're not the only ones using the stretch of stagnation to get more positive on Nvidia's stock. Semiconductor analysts at Morgan Stanley renamed Nvidia their top pick, replacing Micron after that stock caught fire due to an AI-related surge in memory prices. "For the last two quarters NVIDIA has not moved while business has continued to strengthen - a function of concerns about the durability of current growth. Those concerns should turn to 2027 enthusiasm in the coming months," analysts wrote. Morgan Stanley's comments on the AI spending environment were encouraging, addressing a key debate in the marketplace. Some investors are worried about the sustainability of the AI data center buildout â essentially, the question is how long the likes of Amazon and Meta Platforms can strain their cash flows while maintaining massive capital expenditure budgets. Nvidia and the other chipmakers are direct beneficiaries of the hyperscalers' spend, so the concern about the scale of spending matters to both shareholder bases. "We are seeing hyperscalers place 3 year orders on memory suppliers, in some cases with full prepayment - literally receiving 100% of 2028 revenue this quarter, with volumes at multiples of current levels. Are they doing that with the intent of slowing spending next year? That's just one of dozens of indications that spending will continue to increase for multiple years," Morgan Stanley wrote. Another concern that's held by Nvidia shares in recent months is competition. But the world's most valuable company isn't sitting idly by. Late Friday, The Wall Street Journal reported that Nvidia is designing a new chip specifically to address demand for day-to-day AI model usage, a process known as inference. Nvidia's powerful graphics processing units (GPUs) are best known for their capabilities in training, the process of preparing AI models to handle real-world tasks. In designing this inference-focused chip, Nvidia is reportedly leveraging technology from Groq, the AI startup with which it signed a $20 billion non-exclusive licensing agreement late last year. Nvidia CEO Jensen Huang appeared to tease the product on its earnings call last week, making reference to its highly successful Mellanox acquisition, which is a key part to its networking business. "As we did with Mellanox, we will extend Nvidia's architecture with Groq's innovations to enable new levels of AI infrastructure performance and value. We look forward to sharing more at GTC next month," Jensen said. Based on what we know now, we like the plan for Groq's technology and believe it will serve to combat pressure from the custom solutions that many larger data center operators are investing in. (Jim Cramer's Charitable Trust is long NVDA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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We're upgrading our rating on Nvidia shares. Here's why

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