Tech stocks are under fire again. June has been a bumpy month for the sector. And, Nvidia Corporation (NASDAQ:NVDA) has fallen with the group. NVDA stock has declined more than 8% over the last two weeks. Given tech’s upward momentum this year, many folks are eager to buy the tech dip.
Is Nvidia stock a good way to play this recent market decline? Or will the bears such as Citron Research that have been hammering on NVDA stock be right? Let’s take a look at the pros and cons here.
NVDA Stock Cons
Tech Troubles: The last time I wrote on Nvidia, I warned that the company was vulnerable to a broad market sell-off. We’ve since seen that play out. On Thursday, NVDA stock fell more than $5 per share despite any major company-specific news. Given Nvidia’s popularity with momentum trades, hedge funds, and other fast money movers, NVDA stock will be subject to large bouts of random volatility as tech stocks move about.
The latest jitters come as investors fret about overvaluation in the semiconductor space. The whole sector has run up sharply. Investors have bid everything up: the high-quality names such as Texas Instruments Incorporated (NASDAQ:TXN), the leading-edge high-risk, high-reward plays like NVDA stock, and the speculative darkhorses such as Advanced Micro Devices, Inc. (NASDAQ:AMD).
Given competitive forces, it’s unlikely that all these stocks can continue to prosper. Even assuming Nvidia performs strongly, its stock can get hit as other semiconductor and tech stocks sell off hitting the sector’s sentiment.
Crypto-Currency Top Coming? The digital currencies have made a phenomenoal run in 2017. Bitcoin has rallied from around $1,000 to as high as $3,000 so far this year. Other up and comers such as Ethereum have put in even bigger percentage gains, and under-the-radar, others digital currencies such as Litecoin and Ripple have also made big moves.
However, the one-way upward trade may be ending. In recent weeks, volatility has surged in the digital coin space. Traders have violently sold off both Bitcoin and Ethereum on multiple occasions over the last few weeks. While it’s dangerous to call a top yet, warning signs are growing. Much of the enthusiasm for NVDA stock has come from its new mining card offerings. But a pullback and Bitcoin and other coin prices would put a damper on this excitement.
Self-Driving Competition: Nvidia has the early edge in self-driving vehicle deployment. But it’s far from a guarantee that they will own the space indefinitely. We’re likely three years away from significant self-driving revenues for Nvidia, and in tech, three years can be an eternity. Given that NVDA stock already reflects great expectations, plenty could go wrong.
And plenty of competitors are coming to the space quickly now. Intel Corporation (NASDAQ:INTC) seemed to have missed the boat at first, but their Mobileye NV (NYSE:MBLY) acquisition has them right back in the running. Qualcomm, Inc. (NASDAQ:QCOM) can potentially kill Nvidia’s pricing over time, since Qualcomm has a wider range of sensors, modems and other such goods that fill-out their potential self-driving platform. And other competitors such as Waymo and AMD, via its machine-learning technologies, can make a run at disrupting Nvidia as well.
NVDA Stock Pros
Auto Competition Overblown: The above drawback to NVDA stock represents a real risk. But there is a mitigating factor at work here as well. There is long lead time on automotive technology.
Thus, Nvidia earns a substantial edge from being first to market. The Drive PX 3 system can be deployed in 2018. Given that it generally takes several years for autos to be designed before they hit market, that means Nvidia is largely the only viable option for self-driving cars coming to market up through 2020. Yes, over time, the commoditization and lowered margins bears forecast will eventually hit. But anyone shorting NVDA stock today on that thesis might wait a while to get paid.
Mining Boom Could Continue: While the short-term outlook for digital currencies seems increasingly negative, in the longer-run, this may just be the start of a major structural change.
For centuries, traditional banks have dominated the monetary system, extracting their pound of flesh for almost all substantial financial transactions. The blockchain, and the numerous coins riding it, may displace banks, and democratize finance. Much of this remains speculation, and is subject to evolving government regulation of the financial sector.
However, if digital coins replace much of the traditional banking sector, NVDA could be a huge winner, as it offers the technological tools that drives the blockchain. As the saying goes, in a gold rush, the real money comes in selling picks and shovels, rather than gold.
Strong Technicals: Tech stocks have led the market in 2017. Within tech, NVDA stock has been one of the sector’s big leaders. Up as much as 8x since 2015, Nvidia has deservedly earned a reputation as a go-to stock for tech traders. That means that during tech sell-offs, such as what we saw in June, Nvidia will be one of the first names people use to buy the dip.
Nvidia has consistently made higher lows and higher highs on its chart all year. As a leading stock in the market’s leading sector in a bull market, the trend is strongly higher. Bears are fighting a powerful rising tide. Given the low volume summer trading environment at present, it’s unlikely that the market is about to make a major correction here. As such, Nvidia should recover as the market resumes trending.
Bottom Line on Nvidia Stock
Nvidia is a classic growth story. The numbers this year, or even in 2018, don’t come close to justifying the current stock price. Bears have hammered Nvidia stock all year, suggesting the company is a slam-dunk short sale.
The bears’ arguments are solid. Valuation is very high, and several tenets of the bull thesis seem shaky. In particular, I’m far from convinced that Nvidia has long-term dominance of the self-driving auto space, and I wouldn’t be surprised if digital currencies experience choppy trading for the rest of the year. Ultimately, though, bears are fighting the market, and at least in the short run, the path of least resistance is for NVDA stock to keep moving higher. I wouldn’t want to be short NVDA here, though if I owned any, I’d keep it on a tight leash.
At the time of this writing, Ian Bezek owned TXN, INTC, and QCOM stock. He held no positions in any of the other aforementioned securities. You can reach him on Twitter @irbezek.