When you look at NVIDIA’s (NASDAQ:NVDA) more than 50% drop over the past two months, Warren Buffett’s famous advice to be “fearful when others are greedy and greedy when others are fearful” is probably ringing in your ears. A stock that loses half of its value in just a few weeks is certainly worth considering, especially in today’s market where nervous traders are selling off at the drop of a hat. However, NVDA stock isn’t just the victim of bad press, the company is facing some troubling headwinds, making some of the firm’s losses deserved.
With that in mind, here’s a look at what both the bulls and the bears say about Nvidia stock.
The Bear Case for NVDA Stock
NVDA stock saw its share price plummet shortly after its third-quarter results came out. It’s not that things were terrible at Nvidia, but in today’s market with inflated share prices, traders are looking for more than just “okay” quarterly results and in that respect NVDA didn’t deliver.
The firm reported a 21% revenue increase and EPS was up, but profit margins were down 290 basis points, sparking concern among investors. The final blow came when the company delivered Q4 guidance forecasting a revenue decline of around 7%.
Nvidia blamed the collapse of cryptocurrencies for the bad news, saying that its mid-range GPUs haven’t sold as well as expected leaving the firm with a lot of excess inventory.
So, is that enough to strip NVDA stock of half of its value? The bears think so. Some point to the fact that the company will be up against difficult, cryptocurrency-inflated comparisons for at least two more quarters which will continue to put pressure on the share price.
Others point to the fact that the semiconductor industry is cyclical and that the cycle is entering a downturn. If that’s the case, we’re likely to see NVDA produce single-digit growth at best in the quarters to come.
What the Bulls Say About Nvidia
Bulls recommend buying NVDA stock with both fists. After all a selloff like this doesn’t come often. Yes, Nvidia has been hurt by the cryptocurrency bubble-burst, but that won’t last forever. First of all, the bad news is out there and bulls believe it has been fully priced into NVDA shares. Secondly, this isn’t the first time that cryptocurrencies have plummeted and history tells us that there will be a rebound eventually.
As far as the inventory issues go, bulls say the market is overreacting. Nvidia CFO Colette Cress says the GPU in question is “well positioned as the GPU of choice in the midrange for the holidays.” She also said the company expects to have worked down its inventory issues over the next six months, suggesting that the big issue investors are grappling with will be all but forgotten in just a few quarters.
Plus, there’s the argument that the semiconductor business has changed and may not be quite as cyclical. Industries like Artificial Intelligence, autonomous driving, cloud computing, gaming and even graphic design all require the chips that companies like NVDA are producing. Those tech trends aren’t going anywhere; most should continue to grow rapidly in the years ahead.
So Who’s Right?
The bears aren’t wrong about the fact that Nvidia stock needed to come back down to earth, but I don’t see how you can halve the company’s value based on the news that came out in October. The cryptocurrency bust has been problematic for NVDA stock, but that isn’t the only place its GPUs are useful and therefore I don’t see demand falling quite as much as the bears are forecasting.
Plus, despite the bad news expected in Q4, Nvidia has actually had an okay year. Sales have already surpassed last year’s and margins are expected to rebound in the fourth quarter. The inventory issues aren’t great, but if they are able to be fixed in just two quarters, that doesn’t sound like a major blow to the firm’s long-term growth story.
In short, the NVDA stock selloff doesn’t change the company’s long-term potential. The tech trends that use Nvidia chips are still growing rapidly and two quarters of muted revenue growth while the firm works off its inventory issues isn’t enough to warrant a 50% loss. Buying the dip looks like a great way to set your portfolio up for big gains in 2019.
As of this writing Laura Hoy did not hold a position in any of the aforementioned securities.