Generally speaking, I’ve been bullish on Nvidia (NASDAQ:NVDA). Its market performance during the novel coronavirus calamity demonstrates why. After taking a sharp dive throughout the first half of March, NVDA stock quickly rebounded. The calendar hadn’t even turned to April until shares were already back in the black for the year.
While many bullish factors were in play, overall, the company is levered to multiple relevant sectors. From video games to data centers to cryptocurrencies and other advanced fields, the technology firm – best known for its graphics processing units – never stops innovating. This consistent hunger appears to have once again help dig the company out of a hole.
Additionally, the Covid-19 pandemic wasn’t entirely a negative for NVDA stock. As infection rates worsened, the U.S. government essentially locked down its economy, grinding everything except essential services to a halt. Immediately, this action eliminated multiple consumer entertainment options, leaving streaming and video games as the most pertinent solutions.
Everyone has talked about the explosive rise of Netflix (NASDAQ:NFLX) during the quarantines. However, the video game industry had also enjoyed a remarkable boon in activity and engagement. With every incentive to stay indoors, even non-gamers found themselves riveted in their digital fantasies.
More importantly for NVDA stock, canceled sports leagues, such as the elite motor racing series Formula 1, turned to esports to fill in the gap that the coronavirus created. With real drivers participating in various online tournaments, this gave fans a once-in-a-lifetime opportunity to compete against the best in the world.
But to make the most of esports requires high-end GPUs. And in this department, few can hold a candle to Nvidia.
Buying NVDA Stock Now Is a Questionable Proposition
However, with all states having initiated reopening measures, it’s fair to assume that gaming demand will eventually give up much of its prior gains. After all, with employers calling back their workers, that leaves fewer hours available for play. In addition, other entertainment options will eventually return, competing for consumers’ attention.
Still, bulls will contend that NVDA stock is nevertheless a credible buy. Even with gaming demand returning to pre-pandemic levels, other areas – particularly the data center – have become incredibly relevant. With so much work suddenly shifting to the cloud, Nvidia has an opportunity to organically market its premium hardware.
I don’t doubt for a second that NVDA stock has a long upside pathway. Where I’m hesitant is whether investors should jump onboard today.
Mainly, I’m skeptical about the implications of the recent May jobs report. Although the economy added 2.5 million jobs, most of these gains came from businesses like restaurants calling back their employees. Frankly, the hospitality and leisure sector isn’t where people go to make the big bucks. As well, the mitigated nature of the nationwide reopening means many of these employees are coming back to reduced hours.
Moreover, the employment level for May stands at 137.2 million, yet the average price for NVDA stock in that month was $354.86. So far, this is an all-time record, although Nvidia is on course to break it this month.
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Essentially, the employment level is back to where it was in April 2000. But at that time, NVDA stock was trading hands at less than $7.
True, much has changed over the last two decades. Yet if the employment level remains significantly deflated, there’s no doubt in my mind that Nvidia is overvalued.
Waiting Is the Safer Option
Therefore, if you’re worried about holding the bag, I would wait until we get a better read on employment data. Specifically, I’d look at initial weekly jobless claims, as well as the number of people still on unemployment. If both metrics remain extremely elevated relative to historical averages, it’s likely that NVDA stock will correct.
Statistically, Nvidia shares and the employment level have a correlation coefficient of 71.3% from January 1999 to May 2020. Back out the impact of the coronavirus and you’re left with a stronger coefficient of 80.5%. In other words, the stronger the labor market, the more enthusiastic trading is for NVDA.
Of course, anything can happen. Nvidia could disconnect itself from the underlying fundamentals. But given how closely tied the fundamentals have been to NVDA’s fortunes, I wouldn’t count on it.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
