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For years, stock market analysts and investors have been saying that as goes the global economy, so goes the semiconductor industry. It should be no surprise, then, that as the coronavirus from China has brought the global economy to a screeching halt, semiconductor stocks have fallen off a cliff. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is down 35% over the past month. Arguably the most well-known stock in that group — Nvidia (NASDAQ:NVDA) stock — has also shed 35% over the past month.
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The bleak reality is that COVID-19 is a big deal, and it’s not going away anytime soon. It’s here to stay for the next few weeks. So long as it sticks around, the global economy will be halted. So long as the global economy is halted, semiconductor demand will flat-line, and NVDA stock will remain weak.
But, here’s the silver lining: this too shall pass.
My modeling suggests that “peak coronavirus” will hit globally around late April to early May, before the virus (and related consumer hysteria) fade thereafter.
To be sure, we may not hit “peak coronavirus” until much later. Maybe not until the end of 2020. Still, the bigger picture idea is that regardless if it’s two months or ten months, COVID-19 is a temporary headwind. When it does eventually and inevitably pass, the secular growth themes that made Nvidia one of the hottest stocks on the market over the past decade will emerge once again, and power the stock significantly higher.
Wait for coronavirus clouds to clear. Buy the dip in NVDA stock once they do.
Secular Growth Themes Will Re-Emerge
At present, all the market cares about is the coronavirus pandemic — and with good reason.
This pandemic has quite literally brought the global economy to a screeching halt. There really isn’t anything to talk about besides COVID-19.
This is not permanent. We know that the virus can be stopped with social distancing. We have seen “peak coronavirus” play out in South Korea and China, where the spread of the virus is rapidly approaching near-zero (and, in China’s case, actually hit zero in terms of local infections). And, we know that once we do hit near-zero new cases, life can get back to normal. Just look at China, a country where daily life is gradually returning to normal.
Broadly, we know that this too shall pass. Probably within a few months. Certainly by the end of the year.
When it does, the secular growth themes that made Nvidia a winner will re-emerge.
I’m talking 5G. I’m talking cloud data centers, self-driving and automation. Enterprises will re-accelerate investment into all of these categories once the coronavirus storm blows over, because they are mega-trends that represent the future of our economy and society. If companies don’t re-accelerate investment into these things, then they risk being left behind.
As such, once the virus is fully contained, demand for Nvidia’s chips will rebound in a big way, and stay vigorous for the next five-plus years.
Nvidia Has Compelling Long-Term Upside
If you do the math on Nvidia stock, then it’s clear to see that there is huge upside potential from here over the next few years.
Global semiconductor revenues have grown at a mid-single-digit compounded annual growth rate for the past two decades. Nvidia is a share gainer in that market, thanks to its robust product portfolio tailored to the market’s highest growth segments (AI, data-centers, self-driving, automation, etc.).
The company reasonably projects as a 10%-plus revenue grower over the next five years. Steady demand will allow for gross margin expansion, while double-digit revenue growth should drive positive operating leverage. You’re talking about a 10%-plus revenue grower with healthy upside margin drivers. That implies 20%-plus annual profit growth potential here.
Assuming so, Nvidia could easily reach around $16 in earnings per share by fiscal 2025. Based on a 20-times forward earnings multiple — which is the medium-term average multiple for tech stocks — that implies a 2024 price target of $320.
That’s 60% above where shares trade hands today.
Bottom Line on NVDA Stock
Nvidia is a long-term winner. But it likely won’t get back to its winning ways until the coronavirus storm clears up. As such, the investment thesis is simple. Sit and wait for things on the coronavirus front to get better. Buy the dip in NVDA stock once they do.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.
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