Calendar 2018 was a flat year for stocks. But, it was an outright awful year for Nvidia (NASDAQ:NVDA). The once high-flying chip stock, which was on everyone’s Buy List at the beginning of 2018 due to its robust AI exposure, is down 20% year-to-date and presently more than 45% off 2018 highs. What happened to Nvidia stock in 2018?
Quite simply, the bull run ended because growth slowed. A combination of headwinds were to blame. Namely, the cryptocurrency bubble popped and created a GPU inventory overhang problem.
Also, escalating trade war headwinds have caused global semiconductor demand to drop amid rising costs. Overall, Nvidia’s growth fundamentals have weakened throughout 2018. As they have, the bull run in Nvidia stock has ended.
But, if 2018 was the year that ended the bull run in Nvidia stock, 2019 could be the year that brings it back.
In 2019, cloud and AI related growth will remain robust. Meanwhile, the crypto and trade war headwinds should pass. The overall growth trajectory should improve. Margins should track higher. Profit growth should remain robust.
All those operational tailwinds will converge on an Nvidia stock that is now trading at its lowest valuation in several years. This convergence will ultimately put Nvidia stock back on a winning path in 2019.
2018: The Year That Killed Nvidia Stock
Make no mistake about it. Calendar 2018 was the year that killed the bull run in Nvidia stock. And, it had almost nothing to do with the company’s core fundamentals.
Over the past several years, Nvidia has gone from largely inconsequential chipmaker to a leading player in secular growth AI and data related markets. During that stretch, Nvidia stock went from $20 in mid-2015 to $300 by mid-2018. Not much of that run had anything to do with cryptocurrency mining.
Yet, because the cryptocurrency mining tailwind has entirely disappeared, Nvidia stock has dropped in a big way.
How does that make sense?
It makes sense because the sell-off wasn’t necessarily about investors fretting over a crypto mining slowdown. Instead, it was about investors not wanting to pay over 40 forward earnings for a company whose revenue growth had suddenly and dramatically dropped from nearly 70% at the beginning of fiscal 2019, to barely above 20% last quarter.
That big slowdown can be attributed to the company losing about 10% of its revenue from crypto mining sales. Meanwhile, margin expansion moderated and bigger tariffs threatened the prospect of further expansion.
Overall, then, the big sell-off in Nvidia stock in 2018 wasn’t about the crypto bubble popping, and that pop killing the long term growth prospects of this company. Instead, the big sell-off was about the crypto bubble pop exposing a richly valued stock suffering from a near term growth slowdown.
As such, investors shouldn’t expect material weakness in Nvidia stock to last. The long term growth drivers supporting this business remain unchanged and as robust as they were when this was a $300 stock.
2019: The Year That Nvidia Stock Will Bounce Back
In 2019, the long term growth drivers supporting Nvidia stock will once again rush to the forefront, and as they do, Nvidia stock will bounce back.
Right now, revenue growth at Nvidia is slowing and margin expansion is moderating. But, the catalysts behind this operational deterioration have nothing to do with the long term fundamentals.
Revenue growth is slowing because of lost crypto sales, which are a footnote in the Nvidia growth narrative. Meanwhile, margins are dropping because of crypto-related inventory headwinds and tariffs, neither of which are here to stay for the long run.
From this perspective, the long term fundamentals supporting Nvidia stock remain unchanged and robust. Those fundamentals are that this company is creating the building blocks for tomorrow’s most important markets, namely all and every market with exposure to AI and data.
When you think about where the world will be in five to 10 years, you will start to understand that nearly every industry in the world will be incorporating AI technologies, while nearly every management team in the world will be leveraging data to make decisions. As such, Nvidia is creating building blocks of lasting and growing importance and value.
In 2018, Nvidia’s long term growth drivers were clouded by a crypto-related slowdown and tariffs. But, those headwinds should pass in 2019. Crypto mining revenue is already essentially at zero, so there’s nothing more to lose.
Meanwhile, the ninety day trade war truce between the U.S. and China amid broad economic turbulence implies that these two parties are desperate to come up with a resolution.
As those two headwinds move into the rear-view mirror in 2019, Nvidia’s growth trajectory will inflect upward. This will go from a “revenue growth slowing” company, to a “revenue growth picking up” company. Meanwhile, Nvidia will also inflect from a potential margin compression company, to an enduring margin expansion company.
These shifts will push estimates higher and improve sentiment. The combination of positive estimate revisions and improving sentiment will push Nvidia stock higher in 2019.
Bottom Line on NVDA Stock
Calendar 2018 was the year that killed Nvidia stock, and calendar 2019 will be the year that brings it back to life. This stock may not retake its $300 highs any time soon. But, enduring secular growth tailwinds in the AI and data related markets will ultimately power a strong recovery rally in 2019.
As of this writing, Luke Lango was long NVDA.
