The stock market is having its best year since 1997, rising more than 17% so far in 2019, as global economic fundamentals have dramatically improved over the past six months. U.S. economic activity has stabilized. China has provided much-needed stimulus to its slowing economy. Trade tensions are finally starting to calm, and a trade deal looks likely to be reached in the foreseeable future. Finally, the Fed has turned extremely dovish.
All in all, the global economic backdrop has improved dramatically in 2019, and as it has, stocks have rallied to all-time highs. But chip giant Nvidia (NASDAQ:NVDA) didn’t get invited to the party. While NVDA stock is up more than 20% in 2019, it currently trades about 15% off its 2019 highs, and 45% off its 52-week highs.
In other words, while the stock market has rushed to fresh all-time highs in 2019, NVDA stock remains nearly 50% off its all-time highs.
There are multiple reasons for the discrepancy. Almost all of them are tied to the persistent weakness of the semiconductor market which has weighed on Nvidia’s revenue and profit growth. More importantly, I don’t think the discrepancy will last. History and fundamentals suggest that the conditions of the global semiconductor market will improve in the back half of 2019 and into 2020. That improvement will provide a nice positive catalyst for Nvidia’s revenue and profit growth. As its top and bottom line growth accelerates, NVDA stock will rally.
As a result, buying NVDA while it remains depressed seems like the right move. Its fundamentals will only get better over the next several quarters. As they do, Nvidia stock will rebound.
Why Nvidia Stock Has Tanked
At one point in time, Nvidia was hailed as an unstoppable force in the AI world.
That was back in 2016, 2017, and into 2018. Nvidia reported huge revenue growth every quarter during those years, powered by demand for the company’s next-gen AI chips. All that strong revenue growth came on top of powerful gross margin expansion, creating profit growth.
Not surprisingly, from early 2016 to September 2018, NVDA stock soared from $30 to $300.
Then, reality struck. In reality, Nvidia isn’t a super powered AI company with a secret sauce that will help it grow forever. Instead, Nvidia is a formidable AI chip player that, despite having strong, non-cyclical growth drivers, isn’t exempt from the notorious cyclicality of the semiconductor market.
Thus, as the global economy cooled in late 2018 and demand throughout the semiconductor sector dried up, NVDA struggled. Demand for its products slowed, too, as inventory stockpiles increased. Consequently, over the past several months, Nvidia has been beset by weak demand and huge supply. Those dynamics don’t bode well for its revenue, margins, or profits.
As a result, the company’s revenue has been meaningfully sliding. Its top line dropped more than 30% year-over-year last quarter. Similarly, its margins are falling significantly. Its gross margins dropped over six percentage points last quarter.
As its revenues and margins have taken a step back, its profits have sunk, dragging NVDA stock down from $300 to $164 over the past few quarters.
Why Nvidia Stock Will Rebound
Over the next several quarters, the fundamentals of the semiconductor market will improve, Nvidia’s profit will resume growing, and NVDA stock will roar higher.
The decline of the semiconductor market this year is nothing abnormal. It’s par for the course. The semiconductor market is notoriously cyclical. History shows that a few consecutive big up years are followed by a weak year or two. That’s followed by years that feature gigantic rebounds.
Thus, history says a bounce back is imminent, and the fundamentals also indicate that the sector is poised for a rebound.
Trade tensions between the U.S. and China are cooling, and it increasingly appears that they will make a trade deal soon. Such a deal would boost semiconductor demand. At the same time, the Fed has turned dovish, and interest rate cuts appear to be on their way. A rate cut would also be positive for U.S. demand.
Bitcoin is surging once again, and that will reinvigorate Nvidia’s bitcoin-mining tailwind. Self-driving taxi and delivery services are starting to be beta tested all across the country, and such tests could lead to hockey stick-like growth for Nvidia’s autonomous driving-related revenue. Cloud gaming services are set to launch later this year and in 2020. Those launches will meaningfully increase demand for Nvidia’s GPUs.
Given all of these upbeat trends, the fundamental backdrop of NVDA is improving, as history says it should after a sharp correction in the first half of 2019. As the fundamental backdrop improves over the next several quarters, Nvidia’s growth will re-accelerate, and that re-acceleration will push NVDA stock higher, too.
The Bottom Line on NVDA Stock
The global semiconductor market took a very natural and normal step back in the first half of 2019. Both history and fundamentals suggest that this slowdown will moderate in the back half of 2019, while growth will return in 2020. As its market improves, Nvidia’s growth will re-accelerate, and that will spark a rally by NVDA stock.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
