Tech stocks rebounded with a vengeance since March’s novel coronavirus sell-off. That includes Nvidia (NASDAQ:NVDA) stock, which now trades higher than where it was before the outbreak.
But, does that mean shares will continue to climb? Or, will investors finally lose their love for the semiconductor giant?
It’s debatable. On one hand, who’s to say the company can’t still “crush it” in a recessionary environment? Bulls point to the company’s exposure to the “stay-at-home” economy.
In other words, “shelter-in-place” may not be a headwind, but a tailwind for the company.
On the other hand, you can argue that the recent performance of NVDA stock is more about investors pivoting to tech stocks in an uncertain market. As of late, everyone and their mother has been bidding up large-cap tech stocks like this one higher.
So, what’s the story with Nvidia? Is it a technological powerhouse that could move higher, even as the overall economy flounders? Or, is this merely a bubble driven by FOMO, which could pop at any moment?
In past analysis of this stock, I’ve been mostly bearish. But not just due to valuation; other issues such as competition factored into that opinion. I still hold this opinion on the stock. Yet, in this unique investing environment, it’s plausible the company’s shares could continue to climb higher.
With this in mind, it’s easy to see how this stock could go either way in the near-term.
How NVDA Stock Could Hit New Highs
There are many solid reasons why Nvidia shares could continue to climb. Even with the global economy reeling from the pandemic. As our own Matt McCall wrote May 6, the “new normal” could be a tailwind for the company. Even after the last “shelter-in-place” order expires.
How so? The temporary “stay-at-home” economy may be accelerating the move to new technologies such as cloud computing. In turn, this could help sustain the company’s growth in the data center market.
Increased video game usage also could be an additional catalyst. This boosts the company’s GPU chip business.
Beyond these catalysts, there are other reasons why this high-flying stock could continue to climb. As this Seeking Alpha contributor recently discussed, the growth of AI could be another catalyst for NVDA stock. Simply put, there’s plenty of ways the company could thrive in the coming years.
As it stands now, investors have no reason to fall out of love with Nvidia. Or do they? As solid as this bull case for the company is, the bear case for this stock is just as strong.
Why the Nvidia Bubble May Pop
As a “story stock,” valuation really hasn’t mattered for this company’s shares in the past year. Despite trading at a forward price-earnings ratio of 41.5, investors have expressed little concern for today’s frothy valuation.
Sure, Nvidia looks relatively cheap compared to its main rival. Advanced Micro Devices (NASDAQ:AMD) trades for a staggering 52.2 times forward earnings. But neither stock can really be judged on this factor alone. As long as their respective growth stories continue, expect both shares to stay at high multiples.
Yet, that’s not to say this stock is immune to corrections. Look what happened in March’s sell-off. As investors feared the worst from coronavirus, NVDA fell from around $275 per share, to prices below $200 per share.
The same thing could happen again, if markets overall take another tumble. But that could just be the start. What happens if results fall short of expectations? Say goodbye to this being a “hot stock.”
Remember late 2018 to early 2019? NVDA stock fell significantly, as near-term results fell well short of expectations. Granted, it was different factors driving the decline (crypto collapse, etc.) But, while history doesn’t repeat itself, it does rhyme. Keep this in mind before buying this stock out of pure FOMO.
The Bottom Line: Sit This One Out
What’s the play with Nvidia? I wouldn’t go long, as speculation continues to trump fundamental analysis. On the other hand, it’s too dangerous to short this name. Either the company’s growth remains in motion, and this “story stock” keeps on trucking. Or, shares continue to climb, despite weaker numbers, as the tech bubble continues in today’s uncertain stock market.
With these factors at play, it doesn’t look worthwhile to waste time and risk capital with either a long or short position in NVDA stock. Sit this one out and look for clearer opportunities elsewhere.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis for web-based publications since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
