If I could describe Nvidia (NASDAQ:NVDA) in one phrase, it would be “reversal of fortune.” At the beginning of October, Nvidia stock had gained a remarkable 48% for the year. By the tail end of the same month, NVDA had cratered to a 5% against the January opener.
The fact that the semiconductor firm had experienced a correction wasn’t a surprise. In 2015, NVDA stock enjoyed a banner year, returning over 248% for shareholders. The following year, the equity shot up 86%, providing late bandwagoners an enviable ticket to the party.
But at some point, even the best companies need a breather. So no, I wasn’t taken aback when Nvidia stock corrected. Rather, I found the selloff’s magnitude difficult to stomach.
Since this month’s opening price, NVDA stock hemorrhaged almost 35%. Worse yet, the markets offered little mercy to stakeholders. Only six sessions featured positive figures. Of the remaining negative sessions, NVDA averaged losses of 3.8%.
Unfortunately, if you didn’t hit the sell button during those brief, positive moments, Wall Street didn’t afford many options.
But what caused this catastrophic loss in what has otherwise been a reliable investment in Nvidia stock? For one thing, the cryptocurrency market hasn’t done any favors for the company. As our own Bret Kenwell noted for Advanced Micro Devices’ (NASDAQ:AMD) recent earnings report:
Cryptocurrency revenue has completely dried up as assets like bitcoin have plunged throughout 2018. It’s no longer profitable to buy GPUs to mine crypto and it’s hurting firms like AMD.
If bitcoin’s slowdown hurt AMD, it especially impacts Nvidia stock. That’s because NVDA produces arguably superior but inarguably more expensive mining-centric GPUs.
Another big concern is that GPU sales in general have declined, suggesting broader weaknesses in the gaming sector.
Extreme Patience and Nvidia stock
Within the technology sector, there’s a temptation to dive into granularity when explaining possible corporate shortfalls. For me, I’m going with the obvious point: the potential escalation of a trade war with China has victimized Nvidia.
Fundamentally, the tech firm doesn’t have too many weaknesses, so the volatility is difficult to explain outside the China factor. Perhaps the one sticking criticism is that NVDA stock wasn’t undervalued at $280, and it’s still not undervalued near $180. However, I don’t share this sentiment.
When you look at the financials for Nvidia, they’re loaded from top to bottom. On the balance sheet, you have rising cash levels against flatlining debt. That’s particularly important during a distressed economic phase. Moreover, NVDA features industry-leading profitability margins and double-digit revenue growth. While it’s not cheap on paper, Nvidia more than justifies its premium.
The most significant point is that the markets are overstating the bearish case.
Again borrowing from Kenwell, “Anyone who calls Nvidia stock a bubble must believe that autonomous cars will not come to fruition, datacenters will dissipate, gaming is a fad and professional graphics will no longer be necessary.”
I’d especially like to focus on the gaming aspect, which is a growing sector despite what the semiconductor selloff suggests. A prime example is China, which generates over $32.5 billion in video-game revenue. That’s a big number considering that the U.S. is “only” responsible for $25.4 billion.
However, China has four times the population. Thus, on a per-capita basis, China currently lags the U.S. and Japan, which generates $14 billion.
Yes, we’re likely headed to a protracted trade war with China, which presents headwinds for NVDA stock. At the same time, it’s in both countries interest to eventually find common ground.
The Markets Always Have the Last Word
I’d like to add another potential tailwind: the resurgence of the cryptocurrency market. While bitcoin-haters are enjoying their moment, I highly doubt it will last. Of course, the blockchain sector looks ugly, but, fundamentally, the cat is out of the bag.
Against a broader scale, the public has witnessed the viability of a true alternative currency. Now, the focus has shifted to everyday practicalities. Recently, developers have introduced platforms to help transact purchases in smaller denominations. This has been occurring while bitcoin was folding, which tells me that crypto innovation will only increase in the future.
Still, the markets have the last word, and I can’t stress enough how awful NVDA stock is right now. Shares are back to where they were in December 2017. Further, I don’t like how NVDA cratered past key support lines, such as the moving averages and previously-established price ranges.
When the general public is in panic mode, it’s best not to stand in the way. However, once the bleeding finally stops, you should seriously consider the contrarian proposition for Nvidia stock. The underlying company has too many proven and lucrative channels to simply ignore.
As of this writing, Josh Enomoto is long bitcoin.
