Nvidia (NASDAQ:NVDA) was hammered through the month of May, but its decline is hardly unique. Plenty of other chip and memory stocks were hit as well, as trade-war tensions intensified and threaten to crimp the semiconductor business even more.
That concern is still front and center, particularly with the G20 summit starting in just a few days. There, President Trump and China’s President Xi will meet to discuss trade. Coming into May, investors were under the impression that the trade war rhetoric was beginning to improve and that both sides were actively working toward a deal.
Trade War and NVDA
A Sunday night tweet from President Trump sent the markets into a tailspin, though, as investors quickly realized the trade war was escalating. This put Nvidia, Broadcom (NASDAQ:AVGO), Micron (NASDAQ:MU), Intel (NASDAQ:INTC) and others under immense pressure. If it weren’t for all the positive individual news, Advanced Micro Devices (NASDAQ:AMD) would have been under pressure too.
So now what?
The trade war is likely to remain an overhang for semiconductor stocks going forward. AVGO’s earnings report in mid-June highlighted as much. Management shaved its full-year outlook, as a second-half recovery is looking less and less likely.
That could be bad news for NVDA and its peers, as many investors and analysts had been banking on a second-half recovery. While Nvidia is still experiencing several intermediate-term headwinds, it is seeing improvements. The question turns to how long the trade war will continue having an impact versus whether it will have an impact. For investors, though, that headwind has presented an opportunity.
I’ve owned NVDA stock for a long time. From my view, I would rather have the company struggling due to third-party forces like the trade war, than company-specific errors like management’s mishandling of inventory amid a boom in gaming chips.
Valuing Nvidia Stock
Admittedly, trade war pressures are frustrating to navigate through, but the company-specific issues seem to cut deeper. For instance, NVDA saw its stock price fall by more than 50% in the fourth quarter alone. That’s more than double the decline we saw in the PowerShares QQQ ETF (NASDAQ:QQQ).
Some will argue that Nvidia had no choice but to book those crypto-related revenues when they could. That’s true. But either management believed — or at least had investors believe — that gaming demand was driving those sales, not crypto. In fact it was crypto driving demand, and the bloated inventory mess Nvidia found itself in once demand dried up has been a multi-quarter hangover.
Although estimates call for a year-over-year decline for both earnings and revenue this year, Nvidia remains a best-of-breed company. It produces top-line technology and is a leader in a number of different spaces. Long-term tailwinds — like data center, gaming, autonomous driving and machine learning/artificial intelligence — will continue to bolster its financials.
Current year estimates call for a 20% decline in earnings, down to $5.30 per share, and a 6.2% decline in sales, to ~$11 billion. That leaves NVDA trading at 28.7 times this year’s earnings. Not screamingly cheap, but also not wildly expensive for a company of NVDA’s caliber.
Estimates for next year call for 19.5% revenue growth, to $13.1 billion. Notably though, earnings are forecast to jump 33% to $7.08 per share. At the same valuation — roughly 28 times current year earnings — we get a $200 stock price. Will investors be okay with that type of 12-month return, though, given where NVDA stock fell from?
Trading NVDA Stock Price
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Back in early June, we pointed out that the Nvidia stock price had slid almost 25% in the month of May. I am long NVDA, but I’m not blind to its reality. Nvidia is fighting through its own company-specific and trade-war headwinds. Unless you’re a long-term investor, that’s a tough stretch to own a stock through. Even with these headwinds, though, this type of decline was simply too much, too fast. Nvidia stock was due for a rebound and we’re seeing it so far this month.
NVDA shares are steadily climbing uptrend support (purple line No. 2) and reclaimed it 20-day moving average last week. It’s next test? The declining 50-day moving average, currently at $162. My short-term concern is the G20 summit. If the stock rallies into the event with expectations too high for a trade deal, NVDA stock could get hit.
If that’s the case, we could see another move below uptrend support, just as we did when that mark (purple line No. 1) gave way in May. That could pave the way to more summertime volatility and choppy price action.
Should support hold and NVDA continue climbing higher, we may finally see a push back toward $200. To get there, though, it will need to push through thick resistance. Above the 50-day is the 200-day moving average, which NVDA hasn’t been above since October. North of that is the $190 to $193 level, which was resistance throughout April.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long AMD and NVDA.
