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Why This Time Will Not Be Different for Nvidia Stock

Matt McCall and the InvestorPlace Research Staff
·4 mins read

In three sessions beginning last Thursday, Nvidia (NASDAQ:NVDA) stock lost 17% of its value. However, investors shouldn’t panic.

Nvidia (NVDA) logo on the indoor wall of a corporate building made of yellow tiles
Nvidia (NVDA) logo on the indoor wall of a corporate building made of yellow tiles

Source: JHVEPhoto / Shutterstock.com

After all, we’ve been here before. It was just six months ago that the market as a whole was plunging. My advice then was simple: take the long view. In turn, investors who kept that focus, kept their cool and focused on high-quality stocks were rewarded.

September hardly looks like March, but I’ll admit the last few sessions have been nerve-wracking. The tech-heavy NASDAQ Composite dropped an even 10% over the same three trading days. As noted, NVDA stock has done even worse.

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But Nvidia stock, too, has been here before. In the February/March selloff, it declined 38% in less than four weeks. By May, it had regained the losses — and shortly after, reached new highs.

An investor can go back to late 2018 as well. Fears of a “crypto hangover” and another market-wide rout led the stock to drop by more than half in less than three months. Investors did need some patience then, as it took NVDA more than a year to reach new highs. But any investor who bought the dip has done exceedingly well — even if they were early.

That’s already true in the early going, as both tech and Nvidia stock rallied on Wednesday. And looking forward, I simply don’t believe this time will be any different. Overall, NVDA stock is a buy on the dip this time, just as it has been in the past.

Valuation Concerns

The primary driver of the recent selloff appears to be concerns about valuation in the markets — particularly for 2020’s gainers. From a broad standpoint, I’m somewhat sympathetic to those concerns.

After all, we have seen a massive rally since March. The market’s multi-year performance has been strong as well. Some investors are getting nervous, while others are looking to take profits.

That sense of caution seems logical, but I’m not sure that it is. Just because the market offered a huge number of opportunities in March (and it did) doesn’t, in turn, mean that stocks are overvalued in September.

However, there’s another important thing to keep in mind for both Nvidia and the market as a whole. The novel coronavirus pandemic is accelerating technological change. It’s changing how we work, how we live, even how we get around — and for the long term.

NVDA stock is a play on so many of those trends. Increasing cloud growth? Check. Higher gaming demand? Check. Autonomous driving? Another check.

It’s not as if Nvidia stock has soared on no news. And it’s not as if Nvidia stock is particularly expensive right now.

Yes, the stock trades at 58x forward earnings. That seems like a big number, but it’s not a huge number in the context of this market. Meanwhile, the Wall Street analysts — on whose estimates forward earnings are based historically — have underestimated Nvidia’s earnings power. NVDA probably is cheaper than that single metric suggests.

More importantly, valuation is not a reason to sell a quality stock. And there are few stocks of better quality than NVDA. (In fact, I don’t see any in the chip space.)

The company has years, and potentially decades, of growth in front of it. Thus, is 58x earnings really “expensive” in that context?

Stick With NVDA Stock

Any investor with a long-term position in a stock is going to see near-term drawdowns. That’s simply the nature of investing. Decades of history show that stocks generally rise over time — and superior stocks provide impressive returns.

But the gains aren’t linear. Investors have to live through events like the coronavirus rout or the financial crisis, let alone minor corrections like we’ve seen during the past week or so.

Good investors shut out the noise and focus on what works for their portfolio. And what generally works is owning quality names and, yes, paying a reasonable price.

There’s little debate at this point that Nvidia is a quality name. That said, what is making investors nervous right now is the valuation.

However, that valuation is cheaper than it was last week — and NVDA stock was a buy then, too. It’s still a buy right now. This, too, shall pass.

On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.

Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. Click here to see what Matt has up his sleeve now. As of this writing, Matt did not hold a position in any of the aforementioned securities.

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