The semiconductor business isn’t an easy one. After struggling for the first three years of this decade, Nvidia Corporation (NASDAQ:NVDA) finally gained traction in 2013. It wasn’t until 2016, though, that Nvidia stock truly justified its existence in most investors’ portfolios. And what a year it was — NVDA returned an astonishing 233%, a resurgence in semiconductors boosting the tech industry!
To put the performance of NVDA stock into perspective, it was the second-biggest annual haul in corporate history. The all-time greatest return was a massive 347% profit. However, that occurred eons ago in 2001.
Since then, only two years registered triple-digit returns — 2009 and 2016. In all fairness, the former could be considered a “sympathy rally” since the markets died a year earlier. But now, questions are surfacing as to whether Nvidia stock has gas left in the tank.
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The semiconductor industry is no confidence boost, as sector benchmarks like the Market Vectors Semiconductor ETF (NYSEARCA:SMH) and Technology Select Sector SPDR Fund (NYSEARCA:XLK) are also on the short end of the stick this month.
Should investors jump ship from Nvidia stock before things get any worse?
A Natural Correction Is in Order for Nvidia Stock
The obvious answer is that it depends on your particular position. If you’ve enjoyed the benefits of a 230% return, securing a good chunk of those profits is only natural. Furthermore, another crack at three digits is a mighty big challenge. Indeed, NVDA stock has never recorded back-to-back returns of 100% or higher.
Interested parties that arrived on the scene a bit late have a much harder job. Nobody wants to hold the bag, especially on an investment like Nvidia stock that has already tripled in value.
It’s a sentiment well-expressed by InvestorPlace contributor Joseph Hargett, who stated that the recent volatility “shouldn’t be unexpected for Nvidia shareholders, as many speculative investors are looking to take profits following NVDA’s blockbuster rally in 2016.” In addition, no publicly-traded asset continues to run higher indefinitely. Every bull market has a period of consolidation before their next leg up.
Although Nvidia stock is definitely declining, this is a controlled descent. An example of a non-controlled descent is the unfolding legal drama from Qualcomm, Inc. (NASDAQ:QCOM). With that company, you have no idea how things will turn out for both the short and long run. NVDA stock is a different animal. The market is merely washing out the weak hands to make room for the next leg.
We have to remember that Nvidia stock was a huge beneficiary of the so-called “Trump rally.” Between election day until the end of 2016, NVDA gained more than 50%. There’s no way that such an enormous catalyst would not later face a consolidation phase.
Way More Good Than Bad for Nvidia
The deciding factor as to which way Nvidia stock will swing is fundamental strength. When you break it down, it’s hard to justify going against the chipmaker.
Take a look at the growth and profitability metrics for NVDA stock. With operating and net margins averaging 26%, this is well above the industry median. Even taking out the impact of its recent acquisitions, NVDA comes out on top. The same can be said about the company’s top-line sales. Currently, its trailing three-year revenue growth rate is over 15%. Global semiconductors on average are lucky to hit 3%.
The balance sheet for NVDA stock is also quite stable. Controlling its liability picture, Nvidia is maintaining a respectable balance between cash and debt. That’s a smart move, considering that the floor underneath can be ripped away in the semiconductor sector.
Finally, investors can take great encouragement by NVDA’s push toward high-demand specialties. Whether it’s video games or self-automated driving, the Nvidia brand represents leadership in cutting-edge technologies. The latter is particularly alluring, as automation is rapidly becoming the norm.
While I don’t expect Nvidia stock to rally for another 230% this year, that doesn’t mean investors should ignore it. Human nature dictates that all bullish swings eventually meet consolidation. But what the future holds depends on the cornerstone of the organization.
If an investment is shoddy at its core, Wall Street will eventually wise up to it. But with NVDA stock, its true upside potential has yet to be explored.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
