Nvidia (NASDAQ:NVDA) stock is showing small signs of progress. NVDA stock has been a falling knife over the past six months. But now, the stock, while not recovering tremendously, has at least stopped going down for the time being. Is Nvidia stock’s seemingly endless plunge finally over?
The answer likely comes down to the following question: Will NVDA stock catch up to the stock market, or continue to trade on its own merit? The stock market is obviously booming, with the major averages making new all-time highs. Tech stocks in particular have been on fire. Meanwhile, Nvidia stock has been going up a little with the market, but then slipping back quickly. For example, last week, NVDA hit $166, but then slipped back to $160, even as the market continued to surge.
That’s because NVDA faces a ton of company-specific and sector-specific problems. These range from excessive inventory to the product issues facing Intel (NASDAQ:INTC), and the trade war.
The Semiconductor Industry Is Caught in the Crossfire
The trade war is dragging on and on. That’s awful news for leading semiconductor companies such as NVDA. According to Nvidia’s most recent annual report, fully 74% of the company’s revenues came from Asia during its last full fiscal year. The company generated $3.4 billion of revenue from Taiwan alone last year. It got $2.8 billion from mainland China and Hong Kong, and another $2.4 billion from the rest of Asia.
NVDA got just $1.5 billion of revenue from the U.S., equaling barely 10% of its overall revenues. Amazingly, the small island of Taiwan buys more than twice as much from Nvidia as all of the United States does. Needless to say, the longer the trade war goes on, the more NVDA stock and its peers will suffer negative consequences.
There’s been some upbeat chatter about a potential resolution to the U.S.-China trade issues. Reportedly Trump and the Chinese delegation did a lot of talking ahead of the recent G-20 meeting. And there was an agreement of sorts related to Huawei, but it appears to be more of a temporary ceasefire than a solution. Until we get something concrete, Nvidia and the rest of the semiconductor industry will likely struggle.
Rivals Feeling the Heat
Global electronics giant Samsung exemplified the trade war issues with its earnings pre-release last Thursday. Samsung makes both semiconductor chips, competing with the likes of Micron (NASDAQ:MU) in memory. while also making plenty of end products such as phones and TVs.
In any case, Samsung announced that it sees its operating profits for this quarter falling by more than 50%. Samsung blamed the decline on a combination of the trade war, weak memory prices, and soft demand from other customers. Reportedly, for example, the demand for Apple’s (NASDAQ:AAPL) iPhone was so sluggish that Apple will have to pay Samsung some sort of compensation for not meeting minimum order levels.
When giants like Apple and Samsung are failing to meet investors’ expectations, it’s clear that there’s a broad slowdown in consumer electronics. As great as Nvidia’s technology is, NVDA can’t prosper in a world in which the whole consumer electronics sector is in a slump. If Apple, Samsung etc. continue to struggle, NVDA stock isn’t going anywhere, either.
Why Nvidia Stock Price Can Rebound
Nvidia hasn’t given a whole lot of details about its outlook for the rest of the year. Starting with its last quarterly earnings report, NVDA stopped providing full-year guidance. That’s often a sign of trouble ahead. That said, if you’re looking for a bullish case on Nvidia stock, you can patch one together.
For one thing, its inventory levels have declined in some areas, particularly in graphics. It appears the overbuilding of graphics cards has ended. And while bitcoin’s surge won’t set off another mining boom like it did in 2017, it will probably help increase demand to a certain extent. People still use GPUs to mine cryptocurrency after all.
Overall, Nvidia’s revenues will probably start to flatten out by the end of the year. If nothing else, at least the jarring double-digit-percentage revenue declines across all of its business segments will come to an end. If and when the trade war ends, Nvidia should finally be able to get back to revenue growth. As is often the case for tech companies, once NVDA’s revenue bottoms, Nvidia stock price should start shooting back up again.
The Verdict on NVDA Stock
If Nvidia stock price was trading at fire-sale levels, there’d be a case for buying NVDA at this point. The company has fantastic technology and will surely bounce back sooner or later.
But Nvidia stock is still aggressively valued after its seemingly huge decline. Nvidia is now selling at 31 times its trailing earnings. If you believe analysts’ average estimates, its earnings will shoot up to $7 per share over the next year, pushing the P/E ratio to a more reasonable – though hardly cheap – 23. With its revenues still declining, however, it’s hard to see how this earnings explosion is going to occur.
Ultimately the trade war will get sorted out, and Nvidia will get its momentum back. But there’s no reason that such a development will necessarily happen in 2019. Nvidia stock price is far from cheap at this valuation. It may go up a little if the stock market keeps roaring higher. But until Nvisia’s business gets its momentum back, the stock will continue to underperform the market as a whole.
At the time of this writing, Ian Bezek owned INTC stock. You can reach him on Twitter at @irbezek.