Nvidia (NASDAQ:NVDA) stock has many longer-term, positive catalysts.
In the shorter term, however, NVDA stock is quite expensive and likely to be hit by a meaningful cryptocurrency downturn.
Therefore, I urge long-term investors to wait for that likely pullback before adding the name to their portfolios.
Among Nvidia’s longer-term catalysts is the rapidly increasing demand for chips that enable artificial intelligence and automotive chips.
Further, if Nvidia’s acquisition of ARM Holdings closes, the combined company will have tremendous cross-selling and growth opportunities.
A Closer Look at NVDA Stock
In the age of artificial intelligence, Nvidia plans to use AI to accelerate data centers’ speed by 1000% while lowering costs by 90%.
“Even if Nvidia is unsuccessful at acquiring Arm Ltd., we believe it will still be able to execute on this strategy by actively participating in the Arm ecosystem,” siliconANGLE stated in its May 29 article.
According to the publication, the use of AI by data centers and the number of data centers are both rapidly increasing. Given these points, along with data centers’ concerns about IT security, the centers will employ higher-powered processors than they currently do.
In this new world, siliconANGLE believes that Nvidia is best positioned to get a big boost.
Indeed, Forbes columnist Karl Freund, the founder of Cambrian-AI Research, recently reported that Nvidia’s DGX server, which is used to develop AI, has been adopted by “10 of 10 top Aerospace companies, 6 of 10 top US banks, and 8 out of 10 top global telcos.”
Additionally, Nvidia recently launched its first CPUs, which should also greatly enhance its revenue from data centers.
On the automotive front, demand for chips should remain very strong, even after the current chip shortage eases. That’s because so many components of modern automobiles use chips.
Additionally, more and more automobiles are starting to incorporate additional computerized functions like advanced driver assistance systems and various levels of autonomy. Nvidia’s automotive chip business, in turn, should benefit meaningfully from these trends.
The Cryptocurrency Issue
Nvidia sells chips widely used by the miners of cryptocurrencies. In fact, the company reported first-quarter revenue of $155 million from such chips and predicts that it will generate sales of $400 million from them in Q2.
The latter figure only constitutes 6% of Nvidia’s total Q2 revenue guidance. Moreover, in a note to investors on May 26, Bank of America (NYSE:BAC) said that NVDA had minimized the risk of a cryptocurrency collapse by launching “cost-effective” chips for miners and by lowering the mining capacity of its PC gaming cards.
Still, I think that if Nvidia’s quarterly results come in, say, 5% below analysts’ average outlook due to a crypto collapse, NVDA stock will tumble meaningfully. And a sharp decline in crypto prices may cause a meaningful pullback of Nvidia’s shares even before the company reports its Q2 results.
Even Bank of America says that the company’s crypto business “can create concerns for investors.”
Since I do expect cryptocurrency prices to collapse sooner rather than later due to the waning of government stimulus and the imposition of new regulations, I believe that NVDA stock is vulnerable to a meaningful drop in the short to medium term.
The Arm Deal Would Be Huge for NVDA Stock
As I stated in my November column on Nvidia, the acquisition of Arm Holdings by Nvidia would give “the combined company…one of the biggest and best cross-selling/upselling opportunities in history.”
Specifically, if the deal closes, Nvidia will be able to sell its AI-enabled chips to the many mobile chip makers that license Arm’s technology while also marketing separate AI-enabled products to the semiconductor companies that currently license Arm’s designs.
Many pundits have significant doubts as to whether Nvidia’s acquisition of Arm will be approved by governments. Still, the deal effectively gives the owners of NVDA stock a potentially very valuable call option on the approval of the transaction.
The Bottom Line
Nvidia’s long-term outlook is superb, but it’s likely to hit a meaningful speed bump soon.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Larry has conducted research and written articles on U.S. stocks for 14 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, Plug Power and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.