Morningstar says Nvidia's recent market woes put it in an unfamiliar spot: an 'undervalued' high-upside stock play

If there’s one stock investors have consistently been willing to pay top dollar for over the past several years, it’s Nvidia.

But with the stock struggling since mid-May, down 17% amid fears of a decline in hyperscaler spending, Morningstar says it finds itself in an unfamiliar role: an undervalued bargain.

In a July 30 report, Morningstar said the stock’s fair value estimate is $280 per share, well below its current level of around $194 per share. Morningstar’s estimate implies 44% upside.

The firm’s view on Nvidia is driven by a couple of things:

• Its wide economic moat, as its GPUs, CUDA software, and other products remain superior to others on the market.
• A bullish outlook for revenue growth as hyperscalers continue to spend. Morningstar sees Nvidia posting 80% revenue growth in 2027.

Morningstar’s fair value estimates have mostly moved alongside Nvidia’s share price since the start of 2023. But the two have begun to diverge since last October.

While Morningstar sees Nvidia as undervalued, it also assigns it a “very high” uncertainty rating.

One concern is that hyperscalers — its top customers — will eventually produce their own AI hardware in-house, Morningstar said. But their products are unlikely to compete with or fully replace Nvidia’s.

Another major risk is that hyperscalers pull back on spending to please investors.

Earlier this week, the market seemed to punish Meta for increasing its spending projections and reward Microsoft for staying put on its spending plans (though Meta underperformed earnings estimates and Microsoft beat earnings also played into their respective share price movements).

But Morningtar said it doesn’t see a decline in AI infrastructure spending anytime soon.

“Given the high likelihood of strong AI capital expenditures in the near term and medium term (and likely the long term too), we believe Nvidia’s growth prospects are underrated,” Brian Colello, a senior equity analyst for Morningstar, said in the report.

“The stock looks like a bargain,” he added.