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Nvidia May Need to Get Worse Before it Gets Better

Earlier this year, analysts were projecting a poor year for the semiconductor sector. The emergence of the novel coronavirus brought about extreme mitigation efforts that shut down major segments of the economy. And that was bad news for companies like Nvidia (NASDAQ:NVDA) and Advanced Micro Devices (NASDAQ:AMD). But the market is always forward looking. And that’s good news for semiconductor stocks, including Nvidia stock.

NVIDIA (NVDA) logo on microchip
Source: Antonio Baccardi /

In June, a McKinsey report forecast that revenue for the semiconductor sector would be down on a year-over-year basis. However, at the end of their second fiscal quarter in August, Nvidia had delivered $6.95 billion in revenue. And the company is forecasting approximately $4.4 billion in revenue in the third quarter.

This puts the company on pace to shatter their fiscal 2020 revenue of $10.92 billion. However, investors will get a better sense of this when the company reports their next quarter earnings in November.

But with all this good news, it’s hard to escape the fact that Nvidia is an expensive stock. NVDA is down nearly 5% since early October. But even with that pullback, Nvidia stock is still trading at approximately 57x projected earnings.

Which means that, even with some catalysts, Nvidia stock may have further to fall from its present level. I think it might. So if you’re considering buying Nvidia you might want to wait a little while.

It’s Not About the Election

When I say wait, I don’t mean waiting on the outcome of the presidential election. The semiconductor segment should be fine either way. The electric-vehicle movement continues to gain momentum. And despite the rumblings about breaking up the big tech companies, there will continue to be a need for data. Which means demand in the data center segment will continue to increase.

Or will it?

As of this writing, Nvidia stock is trading right at its 12-month price target. But that’s a little skewed because of one analyst that issued a rare sell rating on Nvidia. In October, New Street analyst Pierre Ferragu gave Nvidia downgraded Nvidia and gave the company a price target of $400.

As Mark Hake wrote, one reason that Ferragu gave for his analysis was an expected peak in demand in data center and gaming chipsets in the next two quarters. To that end, he believes Nvidia stock is pricing in all that growth.

If that analysis is correct, it’s reasonable to expect Nvidia stock to be moving lower between now and the end of 2020.

Competition May Be a Bigger Threat

It’s not unthinkable that Nvidia will have a number of catalysts over the next several years. And that means that investors may be able to overlook the stock’s high valuation.

A more problematic issue for Nvidia is the growth of Advanced Micro Devices (NASDAQ:AMD). At one time, AMD operated “below the line” (i.e. the premium segment) operated by Nvidia. But that is starting to change. AMD has just released its new RX 6000 series of graphic cards, which is built on its RDNA 2 architecture. This is the same architecture that has garnered praise for its performance and efficiency.

Is Nvidia Stock a Buy On the Dip Candidate?

The pandemic will have lasting effects on the world’s economy. Working from anywhere is no longer going to be a novelty even with a vaccine. Artificial intelligence will continue to expand in areas like autonomous vehicles. The 5G build-out continues to expand. There is hope that car sales will improve in 2021. Cloud computing and the need for storage is only growing.

And those are just the macro issues. As we move into the holiday season, there is likely to be high demand for gaming systems and software. But it’s fair to say that much of that growth is already priced into Nvidia stock. And we may be looking at a delayed (if not extremely contested) election which could be a drag on the entire market.

I’d prefer to wait on Nvidia stock. But if you want to dive in right now, Nicolas Chahine has some options trade scenarios for you. And if you’re currently long on Nvidia, I would encourage you to hold on. The stock may have further to drop, but you should be rewarded in the long term.

On the date of publication Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Chris Markoch is a freelance financial copywriter who has been covering the market for over six years. He has been writing for Investor Place since 2019.

Article printed from InvestorPlace Media,

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