In mid-July, it looked like beaten and bruised chipmaker Nvidia (NASDAQ:NVDA) was on the cusp of making a huge comeback. NVDA stock was being boosted as semiconductor market conditions were improving against the backdrop of easing trade tensions. Then the trade war flared up again, and the comeback collapsed.
By mid-August, Nvidia stock had shed more than 10% of its value.
But Nvidia subsequently announced second-quarter numbers in mid-August that were much better than expected. They confirmed that Nvidia’s fundamentals are indeed improving. NVDA stock jumped in response to the news. But it failed to reclaim its July highs. Over the last month, Nvidia stock is still down about 4%.
Nvidia’s fundamentals are improving, and all else being equal, Nvidia stock is worth buying now. But, all else is not equal, and the trade war has put Nvidia’s comeback on hold. Until there’s more clarity as to which way this volatile trade war will go next, Nvidia stock won’t stage its long-overdue comeback.
As a result, investors should be patient with Nvidia stock. Over the long-term, NVDA stock is going higher. But expect more near-term volatility as trade-war concerns continue to weigh on Nvidia stock.
The Outlook of Nvidia’s Long-Term Fundamentals Are Solid
The long-term growth fundamentals supporting Nvidia stock are very healthy, and pave a path for the shares to move significantly higher in the long run.
Specifically, Nvidia is creating the building blocks for data and artificial intelligence that will influence markets. All of tomorrow’s most important markets, ranging from data centers, to automation to self-driving, to machine learning will be influenced by data and AI. All of these markets have tremendous growth potential over the next several years as we migrate into a data-driven and AI-dominated world. Consequently, demand for data and AI will inevitably and significantly expand over the next several years, greatly benefiting Nvidia’s chip business.
That’s the long-term bull thesis on NVDA stock. But, as most investors know, the semiconductor industry is notoriously cyclical. Right now, the sector is in a downturn. That’s why Nvidia stock has been killed over the past several years. Weakening demand has combined with sky-high inventory levels, causing the company’s revenues, margins, and profits to all tumble.
The near-term bull thesis on Nvidia stock is that NVDA’s Q2 results indicate that the worst of this downturn is over.
Specifically, its revenues declined in Q2 by less than they did in Q1. Similarly, its gross margins fell by less in Q2 than they did in Q1, as did its profits. The company’s Q3 guidance calls for the declines of these metrics to continue to moderate in Q3. NVDA’s guidance even calls for its gross margins to rise year-over-year this quarter.
As a result, it appears that Nvidia is gradually clawing its way out of this downturn. As it does, Nvidia’s results will continue to improve, likely pushing Nvidia stock higher.
Near-Term Noise Will Create Turbulence
Although Nvidia’s fundamentals are improving, there’s an intense trade war going on between the U.S. and China. The trade war has been highly volatile and largely unpredictable. It has dampened business confidence and certainty, and when businesses aren’t confident or certain, they stop spending as much. That means they will stop spending as much on things like Nvidia’s chips.
Thus, the trade war is a huge risk to Nvidia’s comeback bid. Nvidia’s fundamentals have been improving, but the trade war could change all of that in a heartbeat.
I don’t think the trade war will get that much uglier. Neither side has any incentive to escalate tensions much. Trump doesn’t want to send the economy into a recession before the 2020 election. China doesn’t want U.S. companies to stop having their products made in China. It’s in the best interest of both parties to quickly resolve the dispute.
Consequently, I think the trade war will get resolved by 2020. But between now and then, I expect a lot of news and uncertainty on the trade-war front. All of that news and uncertainty will make Nvidia stock volatile.
Until the trade war dies down, Nvidia stock won’t make much progress on its comeback bid.
The Bottom Line on NVDA Stock
In mid-July, Nvidia’s fundamentals were dramatically improving, marked by reinvigorated demand from its AI and data end markets. But the trade war has since escalated, and that escalation has dampened the hopes of a major turnaround by Nvidia stock.
Until the trade war goes away, Nvidia stock probably won’t stage a meaningful and sustainable comeback. But, once the trade war does go away, NVDA stock appears positioned for a big rally, given its enormous long-term growth potential.
As of this writing, Luke Lango did not hold a position in any of the aforementioned securities.
