It’s easy to assume that the problems facing Nvidia (NASDAQ:NVDA) will pass relatively soon. The Nvidia stock price is down about 50% from early October highs, but most chip stocks have struggled. Trade war concerns aren’t helping. The company is lapping quarters boosted by cryptocurrency demand.
At some point, a bull could argue, those problems will fade. Once that happens, Nvidia earnings will start growing again, and NVDA stock will regain its upward trajectory.
After all, for the short-term worries that are hurting Nvidia’s results, there are longer-term trends that should lift NVDA stock. Gaming demand is likely to rise. Datacenter growth has stalled out, but that’s not solely an Nvidia issue: other providers such as Intel (NASDAQ:INTC) and Nutanix (NASDAQ:NTNX) have cited a similar slowdown. Demand eventually has to return, given growing cloud adoption.
In other words, this too shall pass. Semiconductors remain mired in a cyclical industry, despite hopes that had changed. Nvidia — and shareholders in NVDA stock — simply need to ride out this downcycle.
It’s an intriguing case. But it’s becoming tougher to accept of late. At the very least, after this month’s fiscal first-quarter report, investors must exercise significant patience with Nvidia stock.
The Nvidia Stock Price Tanks Again
The tech firm’s equity has tumbled of late, falling nearly 25% from April’s highs. NVDA stock now trades only about 13% above December lows. That occurred when the entire market was in a state of near-panic.
Again, external factors are likely at play. Trade war fears have hit semiconductor stocks. As confirmation, the Philadelphia Semiconductor Index is down almost 20% from April’s highs. Weak guidance across the space — including from Intel — hasn’t helped.
But Nvidia’s own earnings this month did little to inspire confidence. The Nvidia stock price originally soared, thanks to a big headline beat. But NVDA actually closed down the following day, and it has kept falling.
The problem is that the report raised more questions than it answered. As I wrote in March, NVDA stock clearly was pricing in a better second half. Nvidia would lap its self-described “crypto hangover.” Data-center demand was expected to return. With those headwinds moderated, growth in gaming could get the company back on track.
It doesn’t look like that’s going to be the case, however. Nvidia pulled full-year guidance, with management seemingly admitting that previous projections for a modest decline in revenue were too optimistic. The “pause” in data-center spending as CFO Colette Kress termed it on the Q1 conference call, is extending at least into Q2. Automotive demand remains muted. Professional visualization sales declined sequentially and increased less than 6% year-over-year.
Even discounting crypto, Q1 apparently reflected a relatively stagnant business. Management’s outlook doesn’t suggest that will change any time soon. And so the pullback in NVDA stock makes some sense.
The Challenges for NVDA Stock
Again, the argument might be that Q1 results aren’t that big a deal. Demand may have been pushed out a quarter or two. But the long-term drivers are intact.
That’s true to some extent. But there are three broader concerns that undercut that argument.
First, Nvidia stock still isn’t cheap. Even backing out net cash, it still trades at nearly 20x fiscal 2019 earnings, a year when Nvidia had help from cryptocurrency-mining demand and a stronger end market in data centers. That multiple might seem cheap in the context of tech, but it’s not particularly so for a semiconductor firm.
And what recent results — and guidance for the rest of the year — suggest is that Nvidia is a chip stock just like any other. It still has cyclical exposure. It still must drive better products without commensurate pricing gains; that’s the biggest difficulty of the semiconductor-business model. If Nvidia is just another chip company, that alone likely keeps a lid on NVDA’s valuation longer term.
Secondly, competition is coming in the form of Advanced Micro Devices (NASDAQ:AMD). AMD is seemingly the only company thriving in the current chip environment. As an analyst pointed out recently, its high-end GPU options are becoming real competitors to Nvidia’s longstanding dominance.
Finally, long-term expectations may have to come down. Data-center demand doesn’t have to pause but simply be lower than expected. Material automotive revenue is years away. A GPU glut driven by the crypto bubble could stick around for years, both in terms of new and used units.
If investors believed before Q1 that a recovery was coming in a matter of quarters, they must now at least consider the possibility that a recovery could take years. In that scenario, NVDA still isn’t cheap enough.
NVDA in the Penalty Box
Historically, chip stocks have managed to move before the underlying business does. Highly cyclical memory plant Micron Technology (NASDAQ:MU) is a perfect example. The gains in NVDA through April seemed to come from investors trying to time this recovery. They speculated on news improving in the second half of this year.
Those investors, however, were too early. And it seems likely that from here, NVDA will be a case of “fool me once, shame on you; fool me twice, shame on me.”
It’s going to take more than just optimism for Nvidia stock to rally again; it’s likely going to take results. And the takeaway from Q1 has to be that those better results may be a long time coming. So, too, will be another rally in NVDA.
As of this writing, Vince Martin has no positions in any securities mentioned.