It’s amazing how one quarter can change everything. Up until October of 2018, semiconductor firm Nvidia (NASDAQ:NVDA) seemingly defied gravity. While so many other publicly-traded companies struggled for traction, Nvidia stock was about to book another stellar year. But the month of Halloween rolled around and left a bloodbath.
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In that final quarter, NVDA stock lost more than half its market value. Shares reached levels not seen since the spring of 2017. Even worse, the company appeared to have lost its main revenue drivers with no respite in sight.
Demand loss in video games and cryptocurrencies, as well as the U.S.-China trade war weighed heavily on Nvidia’s disappointing third-quarter fiscal 2019 earnings report.
That said, optimistic contrarians consoled themselves that the bad news was likely baked in. For a few weeks, it seemed as if that was the case. As an example, Nvidia stock gained 26% from Christmas Eve to the close of Jan. 25. Finally, the bulls could smile again.
Unfortunately, the enthusiasm was short-lived. After previously disclosing shortfalls, management brought forward more bad news. This time, the Nvidia dropped its Q4 revenue guidance to $2.2 billion from $2.7 billion.
The explanation came from the usual suspects. Citing “deteriorating macroeconomic conditions” due to the ongoing trade war, demand for gaming-centric GPUs plummeted. As expected, Wall Street punished NVDA stock, handing shares their worst single-day performance since last November.
As bad as the sudden volatility was, tech companies usually see wild trading more so than other sectors. What made this disclosure stand out was the analyst response. Both Morgan Stanley and Needam analysts downgraded Nvidia stock. Bank of America dropped it from its best stocks to buy list.
Is the writing finally on the wall for this once-untouchable tech firm?
Panicking on Nvidia Stock Is a Mistake
Unsurprisingly with the latest concession, other mainstream figures issued their own warnings about NVDA stock. Most notably, CNBC’s Jim Cramer cautioned against buying into NVDA as shares likely have further to fall.
Cramer isn’t unjustified in his pensiveness. He referenced a Chinese crackdown on video games as an obvious negative. Also, the slowing data-center business and an inventory glut of crypto-mining GPUs have negatively impacted Nvidia stock.
Certainly, the fallout in other companies don’t offer confidence. Gaming stocks like Electronic Arts (NASDAQ:EA) and Activision Blizzard (NASDAQ:ATVI) have tanked in recent months. Rival Advanced Micro Devices (NASDAQ:AMD) has gone largely sideways since late October.
But despite the awful ambiance, we’re not really seeing anything new. For instance, pundits have long debated the impact of the U.S.-China trade war. Particularly, we’ve seen the dramatic effect the sanctions have levered against Apple’s (NASDAQ:AAPL) flagship iPhone.
At the same time, this economic conflict isn’t occurring inside a vacuum. Last month, The New York Times detailed just how badly China has been hurt from the geopolitical tit-for-tat. From plunging real-estate prices to layoffs, the Asian juggernaut can’t keep fighting the U.S. indefinitely.
And what about the video game crackdown? Again, this is nothing new. A year-and-a-half ago, the communist party attacked Chinese game developers, scapegoating them for worrying youth behavior trends. However, despite already-strong oversight, government officials have not found much success in enforcing video-game censorship.
Currently, the Chinese are cracking down on games to help curb a rise in myopia. I think we’re probably going to see further ineffective policies, thus negating the impact towards Nvidia stock.
But even if the government completely cracked down on video games, this would only hurt their own vibrant gaming industry. Ultimately, the fundamentals just don’t support panicking on NVDA stock.
The Bottom Line on Nvidia Stock
This segues into another bullish argument: NVDA is a solid investment that has been victimized by poor timing.
Ironically, Jim Cramer’s cautionary tale actually supports this reasoning. In his “Mad Money” program, the host worried about Nvidia’s transition to its next-generation Turing chips. Cramer argues that the Turing is apparently too advanced for present use.
While that might be the case, this shouldn’t deter people from NVDA stock. In fact, having a leg up in the fast-paced semiconductor world is an envy-inducing accomplishment. The only reason that shares haven’t caught on with this development is timing.
But if that’s the overriding complaint, I don’t see that as a reason to give up on NVDA. Plus, I’m sure that by now, the bad news really has been baked in. Given its vast resources and innovative edge, I believe a turnaround is much more likely than a continuation of bearishness.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
