Semiconductor giant Nvidia (NASDAQ:NVDA) has always generated headlines since moving to the sector’s limelight. Last year, however, the vaunted company did so for completely the wrong reasons. After enjoying a positive start to 2018, Nvidia stock was on its way to another resounding performance. Unfortunately, October had other ideas.
In the month that hosts Halloween, investors received a horrifying gut-check, losing nearly 26% on their portfolio. This includes a double-digit dead-cat bounce that initially encouraged speculators jumping on the discount.
However, the following two months produced further hemorrhaging. October through December, NVDA stock cratered 53%.
Understandably, stakeholders fumed. While investing is always risky (and this is especially true for tech stocks) Nvidia stock compared poorly to its rivals. The perpetually volatile and unpredictable Advanced Micro Devices (NASDAQ:AMD) lost 40% over the same timeframe: not great, but noticeably better than NVDA.
Another top competitor, Intel (NASDAQ:INTC), actually registered a slight gain since October. Therefore, several investors believed that they got the short end of the stick with Nvidia stock.
Nvidia and the Class-Action Lawsuit
To address their grievances, law firm Bragar Eagel & Squire announced that they filed a class-action lawsuit against Nvidia. The complaint asserts that NVDA management assured shareholders that they could positively adapt to fluctuating cryptocurrency markets.
Additionally, the lawsuit alleges that the company misled stakeholders into believing that crypto demand for mining-specific GPUs wouldn’t impinge upon GPU inventory for video gaming.
But as we saw for the third-quarter fiscal 2019 earnings report, inventory represented a massive headwind for Nvidia stock. Specifically, management admitted that they had an excess of mining GPUs, which will take time to resolve.
On the earnings conference call, Nvidia CEO Jensen Huang regretted not realizing the problem earlier. The lawsuit implies he really should have.
Nvidia Stock in a Tricky Legal Situation
In my opinion, this legal matter is a surprisingly-complicated situation. My initial reaction was that Nvidia received a frivolous lawsuit, but looking at the case closely, I can appreciate the other side’s point-of-view.
The reason I jumped quickly in favor of the tech firm is the fundamental concept of caveat emptor. In Latin, the phrase means “let the buyer beware.” It applies not just to investing in NVDA stock but to almost everything we do. It’s the polite way of reminding others that hot coffee is hot.
The adage also serves as an incentive for due diligence. Perhaps NVDA was overzealous in their optimism. But if I sued every publicly-traded company for promoting themselves in the best light, I’d be on a permanent vacation. On Wall Street, you must expect a certain level of BS.
That said, information is power. In the markets, information is both liquid and fungible. Regarding Nvidia stock, management probably knew that they were facing serious inventory and revenue concerns in the cryptocurrency sphere.
Benchmark blockchain assets bitcoin and ethereum cratered early in 2018 and rarely demonstrated sustained positive momentum. Such volatility hurts crypto miners as their costs to mine overwhelm their reward potential. Nvidia should know this because they reported disappointing mining-GPU sales in Q2.
Equally damning is that no insider bought Nvidia stock last year, or the year before that. You’d have to go back to December 2015 for the last insider purchase.
Under this light, management has some explaining to do. But proving wrongdoing is another matter. In this situation, prosecuting Nvidia is a slippery slope. At what point does projecting confidence in your company turn into an actionable case? From the evidence that we have, I’m not sure that management released materially-misleading information.
Outlook Positive for NVDA Stock
Of course, I’m not an attorney so I have no idea how this will turn out. Personally, I grow perplexed at our legal system every year, so I can’t give the best opinion in that department.
What I do know is that Nvidia is on a fire sale. By that, I’m not trying to dismiss the awful losses that the company has absorbed. I further acknowledge that many challenges, including internal pressures and broader ones, will create turbulence. But the overriding reality is that NVDA is trading at levels not seen since a year-and-a-half ago.
More important, the discount is coming at a time when the semiconductor firm enjoys ample, groundbreaking opportunities. For instance, Alphabet’s (NASDAQ:GOOG, NASDAQ:GOOGL) fully-autonomous Waymo taxi service launched last month. Nvidia is a key developer in driverless-vehicle technologies, offering natural synergies towards this emerging sector.
Another exciting market is the 5G network. Thanks to its ultra-fast data-transmission speeds, 5G further bolsters NVDA’s dominance in driverless AI. But it also positively impacts virtually every digital subsegment, including gaming.
In other words, don’t dwell on the pessimism. The pricing for Nvidiahas changed. Its core fundamentals have also changed, but for the better. We just need to wait for the markets to catch up.
As of this writing, Josh Enomoto is long bitcoin and ethereum.