On May 16, Nvidia Corporation (NASDAQ:NVDA) reported that its net income had fallen to $394 million in its fiscal first quarter from $1.24 billion during the same period a year earlier. Overall, NVDA stock did not perform well in the wake of the results which also included mostly in-line guidance.
In fact, in the wake of the report, Nvidia stock price has fallen from the mid-$160s to the mid-$130s. In other words, Nvidia stock has been in free-fall.
S far in 2019, NVDA stock is up about 1%. Despite the recent slide of Nvidia stock price, it might still be too early to get back into Nvidia stock, given its short-term risks that make it a highly volatile investment. In other words, I recommend investors wait for several weeks before buying NVDA stock.
Questions About Nvidia’s Growth Outlook
Previously a darling among investors, especially in 2017 and most of 2018, Nvidia stock gets a lot of attention, compared with other chip stocks. Many investors regard Nvidia as the premiere graphics-chip stock.
NVIDIA sells two main products: graphics processing units (GPU) and Tegra processors. Nvidia’s graphic processing units are used in PCs and data centers. Tegra is a system-on-a-chip (SoC) suite developed by Nvidia for mobile devices. But its Tegra Processors segment only accounts for about 10% of its total revenues.
Its GPUs have earned a superior reputation compared to competing products, especially within the gaming industry. GPUs accelerate central processing units (CPUs), boosting the performance of video and graphics and improving computers’ overall performance.
Nvidia stock breaks out its revenue into five target markets: gaming, data center, professional visualization, automotive, and edge computing.
Gaming accounts for over 40% of Nvidia’s total revenue. During the quarter, the unit’s revenue tumbled 39% YoY.
Over the past year, Nvidia stock price is down almost 50%. Clearly, investors are taking another look at the company’s fundamental growth outlook, which is mostly based on its GPUs for gaming and artificial-intelligence servers.
Analysts have noted that the crypto craze, which waned in 2018, can no longer be relied upon to further boost Nvidia’s GPU business. Indeed, NVDA’s fall from grace started with the collapse of the cryptocurrency craze, which has dealt a blow to its top and bottom lines.
Wall Street it also concerned that NVDA’s automotive business, which is based on the advent of artificial intelligence (AI)-powered autonomous vehicles, may also suffer in the coming months. Currently, automotive is the smallest of all of NVDA segments, accounting for over 5% of revenue.
Headwinds for the Sector and Rising Inventories
Wall Street is also debating whether the semiconductor industry, which is highly competitive and cyclical, has entered a prolonged downturn.
Additionally, the chip sector is being hurt by rising inventories and trade-war concerns. In its quarterly report, Nvidia said that the sector’s inventory levels stood at $1.43 billion, up from $797 million a year earlier.
NVDA expects its full-year revenue to be flat in fiscal 2020. The headwinds of the sector make many analysts wonder whether Nvidia can, in the near future, attain the kind of rapid and sustained growth that investors had grown used to in recent years.
The shares of Nvidia’s competitors, such as Micron Technology (NASDAQ:MU) and Advanced Micro Devices (NASDAQ:AMD), have also fallen considerably. Could these chip stocks have reached the peak of their valuations in the eyes of value investors?
Worries About the Global Economy Are Mounting
The owners of NVDA stock need to pay attention to other factors besides fading crypto demand; specifically, the increased volatility of stock markets might well be pointing to an approaching global economic slowdown.
Since 2018, the U.S.-China trade war has brought dark clouds over the markets. Many fear that the trade war is now quickly becoming a tech war. And it would be naive to expect NVDA stock to be immune to the adverse effects of the trade-war rhetoric.
Investors are also wondering if the Chinese economy is cooling down, partly because of the impact of the trade wars and partly because of the changing internal dynamics of the Chinese economy as the nation becomes more consumer-oriented. Recent Chinese official data has added to those fears.
China consumes more than 50% of all semiconductors made worldwide. Furthermore, many technology companies either have manufacturing plants in China or use Chinese companies in their supply chains. Therefore, Wall Street fears that U.S. chip makers will be among the largest losers of the trade war.
Finally, since the 2008-09 financial crisis, China has become the largest trading partner of most other Asian countries. Therefore, as China slows down, so will the Asia-Pacific region. In other words, the global financial markets are facing a great deal of negative risk.
China accounts for about 25% of NVDA’s sales. On Jan. 28, Nvidia issued an earnings warning, mostly due to deteriorating macroeconomic conditions in China. And many on Wall Street warned that if China catches a cold, many other stocks and the rest of the world will not be left unscathed.
Are Traders Shorting NVDA Stock?
As part of my short-term analysis, I monitor the extent to which stocks are shorted. Short-interest data shows the number of shares being sold short. I tend to use the data as a contrarian indicator.
For example, if over 20% of a stock’s float i.e. available shares are shorted, then even a small rise in its price could actually become a powerful short squeeze and propel the stock much higher. At this point, about 2.4% of NVDA’s shares are shorted.
So while there are traders who have shorted Nvidia stock, not enough shares are being shorted to set the stage for a massive short-squeeze rally. In other words, the decline in Nvidia stock may indeed continue for awhile longer.
When Should Long-Term Investors Consider Buying Nvidia Stock?
Later in 2019, when the stock market stabilizes and we have a better idea about the state of the Chinese economy as well as the outcome of the trade wars, Wall Street is likely to again become bullish on Nvidia’s growth outlook.
Despite the industry’s headwinds, there is strong demand for Nvidia’s graphics processors, for use not only in video games but also in data centers and work stations. Industry experts regard NVDA as the top player in the AI chip space, and its graphics chips are highly sought after for use in deep-learning applications.
The company has shifted its focus from processors to providing the full tech backbone for AI ecosystems. As the use of artificial intelligence and machine learning continues to rapidly grow, NVDA’s AI business should grow exponentially.
As new frontiers in technology, such as the internet of things (IoT), artificial intelligence (AI), autonomous driving, and 5G, are developed, I am sure that Nvidia’s results will greatly improve. As a result, I am also upbeat on the long-term outlook of NVDA stock
However, any positive earnings news that the company is likely to report in the short-term has now been factored into Nvidia stock price. Until Nvidia’s next earnings announcement, NVDA stock is likely to be a battleground between long-term investors and short-term traders.
Technical Charts Are Signalling More Volatility
Since mid-April, investors have harshly responded to various global developments as well as to Nvidia’s earnings report. As a result, the technical outlook of NVDA stock has been damaged. Its short-term chart still looks weak, and Nvidia stock price looks poised to drop soon.
Although NVDA’s momentum indicators, which describe the speed at which prices move over a given time period, are currently in oversold territory, they can stay oversold for quite a long time, especially when the stock’s overall trend is down. Therefore, more buy signals based on momentum indicators need to be conﬁrmed with further chart analysis before NVDA stock can become a buy from a technical standpoint.
I would suggest that long-term investors wait until Nvidia stock builds a base between its Dec. 2018 low of $125 and the psychologically important level of $100.
On the other hand, if the current trade tensions are swiftly resolved, the stock market as well as NVDA’s shares could rebound quickly.
The Bottom Line on Nvidia Stock
Although NVDA stock will likely reward long-term investors, tech stocks may remain volatile over the next few weeks. A couple of negative macro economic or global news headlines may drive many stocks, including Nvidia stock, down. Thus, NVDA stock might fall further, providing long-term investors with a better entry point.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.