After rising steadily over the last three years, Nvidia (NASDAQ:NVDA) stock fell sharply in early October. As a result, all of the gains that Nvidia stock generated since June 2017 have disappeared.
Now, investors need to know whether they have a great stock that went on sale or if they’re looking at a falling knife. A glut of available chips will likely continue to hurt NVDA for now. However, many companies still use Nvidia’s chips to power a wide array of cutting-edge technologies. For this reason, investors should focus not on selling Nvidia stock, but on finding the right time to buy it.
Nvidia’s Stock Plunged Suddenly And Sharply
Until recently, Nvidia stock appeared to be unstoppable. It rose from trading below $20 per share in 2015 to a peak of $292.76 per share on Oct. 2. After hitting this peak, it lost more than half of its value over the next seven weeks.
The plunge of NVDA continued following its recent quarterly report. Its earnings per share beat analysts’ consensus outlook, but its revenue came in below the consensus estimate, even though its top line surged 20% year-over-year. Before the results, Nvidia stock had dropped from its 52-week high of $292.76 per share to $202.39 due to the tech correction. Since the earnings report, the downturn has intensified, with NVDA stock briefly falling below $140 per share.
Crypto’s Collapse Hurt NVDA
The decline of cryptocurrency has caused most of Nvidia’s pain. After several months of stability, bitcoin has recently declined sharply. Bitcoin stayed above $6,000 for most of the year, but it fell below that resistance level just before NVDA reported its earnings. Bitcoin now trades in the $4,500 range, its lowest point in more than one year.
Now crypto miners are unloading their chips in droves, flooding the market. As a result, NVDA, along with a number of its peers, such as AMD (NASDAQ:AMD), have dropped further.
But investors need to get over crypto. The crypto craze bears a great deal of resemblance to the gold rushes we read about in history books. The real beneficiaries of the gold rushes were the retailers who sold food, shovels, or gold pans to the miners. By the same token, chip makers made the big profits during the crypto craze, which appears to have ended now. It was an excellent money maker while it lasted, but investors need to move past it.
Look for a Good Time to Buy Nvidia Stock
Admittedly, Nvidia has been hurt by the loss of its crypto business, as analysts predict that its profits will only rise 2.2% next year. However, over the next five years, they think its bottom line will jump by an annual average of 11.53%. Outside of crypto, NVDA is still benefiting from the proliferation of artificial intelligence, virtual reality, augmented reality, and other tech applications. Far from short-term crazes, these trends constitute much of the future of high tech.
Their tremendous growth has also enabled NVDA to become more successful than a number of its peers, including AMD and Intel (NASDAQ:INTC). After bringing NVDA stock out of obscurity, these trends will cause Nvidia stock to rise in coming years.
Thus, the long-term bull case for Nvidia stock remains intact. But investors need to know when to buy NVDA stock. The current price-earnings ratio of NVDA stands at about 20. That appears low compared to the 50-plus price-earnings ratios it attained earlier in the year.
However, the average multiple for NVDA early in the decade fell to the low-to-mid teens. While the stock’s price-earnings ratio may or may not fall that low going forward, history suggests that the price of NVDA stock could fall further.
Also, thanks to the crypto decline and a slowdown of gaming, there is a glut of chips. Still, regardless of how much Nvidia stock falls, investors need to look for a time to buy it instead of running to the hills.
The Bottom Line on Nvidia Stock
After the sharp and terrifying decline of Nvidia stock, a buying opportunity has begun to emerge. Yes, a crypto selloff has flooded the market with chips, and, as a result, NVDA will suffer in the near term. However, with that modern-day gold rush fading into the past, investors can focus on Nvidia’s more stable businesses.
Despite the setback, enterprises will still need Nvidia’s chips to enable applications such as AI and VR. Moreover, the decline of NVDA has taken its price-earnings ratio to lows not seen for several years. Given these conditions, investors should not ask if they should buy Nvidia stock, but when they should do so.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.