On Jan. 28, Nvidia Corporation (NASDAQ:NVDA) issued a stark earnings warning, spooking the broader indices that have rallied after the market selloff. NVDA stock — which had risen from the low of $124.46 it reached on Dec. 26 to $160.88, which it hit on Jan. 25 — is now back around $135.
Despite the stock’s decline this week, it might still be too early to early to get back into Nvidia stock, given its short-term risks that make it a highly volatile investment.
Doubts over Nvidia’s Growth Outlook
A darling among investors over the past few years, Nvidia stock gets a lot of attention, compared with other chip stocks. Its graphics processing units (GPUs) have earned a superior reputation compared to competing GPUs, especially within the gaming industry. GPUs accelerate central processing units (CPUs), boosting the performance of video and graphics and improving computers’ overall performance.
Gaming accounts for almost 60% of Nvidia’s total revenue. Over the past year, Nvidia stock is down over 40%. Clearly, investors are taking another look at the company’s fundamental growth outlook, which is based on its GPUs for gaming and artificial-intelligence servers.
When Nvidia last reported its earnings on Nov. 15, its balance sheet was strong, while its revenue and margins had both increased. Its revenue was $3.18 billion, up 21% from a year earlier. However, its results fell short of consensus expectations, and NVDA stock fell over 20% in after-hours trading and the next day.
Analysts highlighted that the crypto craze, which waned in 2018, cannot be entirely relied upon to further boost Nvidia’s GPU business. But Nvidia’s founder and CEO, Jensen Huang, in November optimistically noted that the excess channel inventory that NVDA had accumulated in the wake of the crypto-currency boom would soon ease.
Since the beginning of the stock-market selloff in Oct. 2018, Wall Street has also been debating whether the semiconductor industry, which is highly competitive and cyclical, has entered a prolonged downturn. The shares of Nvidia’s competitors, such as Micron Technology (NASDAQ:MU) and Advanced Micro Devices (NASDAQ:AMD), have also had wide price swings, falling considerably without any substantial news. Could it be that these chip stocks have reached the peak of their valuations in the eyes of value investors? Or is another tech bubble about to burst?
Worries About the Global Economy are Mounting
The owners of NVDA stock need to pay attention to other factors besides fading crypto demand; specifically, the increased volatility of the broader markets might well be pointing to an approaching global slowdown. The U.S.-China trade war brought dark clouds over the markets in 2018. Then later in the year, investors began wondering if the Chinese economy was cooling down, partly because of the impact of the trade wars and partly because of the changing internal dynamics of the Chinese economy as the nation becomes more consumer-oriented.Recent Chinese official data has confirmed those fears
Then on Jan. 28, Nvidia issued an earnings warning, mostly due to deteriorating macroeconomic conditions in China. And many on Wall Street warned that if China catches a cold, many other stocks and the rest of the world will not be left unscathed.
Furthermore, many analysts are recommending that investors add defensive stocks to their portfolios to hedge against the U.K. leaving the EU without a deal on Mar. 29, another factor that weighs on highly volatile names such as Nvidia stock.
Finally, since the 2008-09 financial crisis, China has become the largest trading partner of most other Asian countries. Therefore, as China slows down, so will the Asia-Pacific region. In other words, the risks facing the global financial markets are skewed to the downside.
When Should Long-Term Investors Consider Buying Nvidia Stock?
Later in 2019, when the broader markets stabilize and we have a better idea about the state of the Chinese economy, Wall Street is likely to again become bullish on Nvidia’s growth outlook.
Despite the industry’s headwinds, there is very strong demand for Nvidia’s graphics processors, for use not only in video games but also in data centers and workstations. Industry experts regard NVDA as the top player in the AI chip space, and its graphics chips are highly sought after for use in deep-learning applications.
The company has shifted its focus from processors to providing the full tech backbone for AI ecosystems. As artificial intelligence and machine learning continue to rapidly grow, NVDA should grow its AI business exponentially.
I would suggest that long-term investors wait until Nvidia stock builds a base between the recent low of $125 and the psychologically important level of $100.
The Bottom Line on Nvidia Stock
Although NVDA stock will continue to reward long-term investors, tech stocks may continue to be volatile over the next few weeks. In the coming days, many tech heavyweights will report their quarterly results. Any weakness in their earnings or guidance is likely to hurt most tech stocks, including NVDA stock. Thus, Nvidia stock might fall further, providing long-term investors with a better entry point.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
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