Back in June, I made the case why waiting for a pullback was the best move for Nvidia (NASDAQ:NVDA) stock. In hindsight, this call came a bit too early. In the weeks following publication, shares climbed from a split adjusted $180 per share, to as much as $208.75 per share.
But given the graphics chip powerhouse has sold off throughout July? Perhaps I was barking up the right tree. This pullback, driven mainly by its exposure to crypto mining, shows it may not take much to change the narrative surrounding this stock.
That is, investors are willing to pay up for it, as long as it continues to knock things out of the park. If it falls short? It’s at risk of making outsized moves lower, after its many outsized moves higher.
The negative crypto news is giving some déjà vu for what played out during the crypto crash. Yet, that scenario isn’t likely to repeat itself. With the company’s other tailwinds, chances are it’ll continue to meet (or beat) expectations. This could allow it to retain its rich valuation, and continue climbing to higher price levels. If you’re bullish that the growth story with Nvidia is far from over, entering a position now, after its pullback, may be an opportune move.
NVDA Stock and its Crypto Hiccup
Demand from other cloud and gaming end users has been the main driver behind Nvidia’s strong results in recent quarters. But it’s the company’s crypto exposure that has analysts and investors worried. Not as much exposure to crypto prices (which since May have been volatile) per se, but exposure to the crypto mining industry.
With China cracking down on the mining of Bitcoin (CCC:BTC-USD) and other cryptos, concerns are mounting that we’ll see a repeat of what played out during the 2018-2019 cryptocurrency crash.
If you recall, following the crypto crash came the “crypto hangover.” Chip makers like this one were left with supply gluts. In turn, this had a dramatic impact on NVDA stock during that time. Will this repeat itself, if the mad rush into Bitcoin mining makes another 180?
Not so fast. As InvestorPlace’s Louis Navellier broke it down July 7, the company has taken measures to prevent it from getting burned again. First, it made its RTX 3000 line of graphics cards less optimal for mining. Also, it came out with a separate chip designed for crypto mining. With these measures, Nvidia in 2021 is less at risk of repeating the chip glut issues that knocked it down in 2018.
To some extent, investors understand this. That’s why this recent pullback has only been slight. There are some other negative factors that could weigh on it further. But given the positives that remain in play, shares have the ability to resume their upward climb.
As for Other Factors? The Positives Outweigh The Negatives
Besides the crypto hiccup, what else could sink NVDA stock? I’ve said before that valuation is likely not what will sink this richly-priced stock. Yet, given the risk that growth stocks experience multiple compression if interest rates rise, it’s certainly something to consider.
On the other hand, as the Federal Reserve maintains its “transitory inflation” thesis, and traders doubt that rates will soon rise dramatically, this risk will continue to be more than countered by the positive factors that remain in Nvidia’s favor.
The main positive factor? Nvidia’s high levels of growth could last longer than analysts on average currently anticipate. In a research note from BofA, provided to InvestorPlace, analyst Vivek Arya laid out why this may be the case. It’s mostly, due to possible higher-than-expected capital spending from cloud computing end users. But another catalyst is continued strong growth due to demand from other key end users in gaming and artificial intelligence.
Analyst consensus calls for Nvidia’s sales to rise 49.1% this fiscal year (ending January 2022), with earnings soaring around 58.2%. Estimates for fiscal year 2023 (ending January 2023) may imply a slowdown in growth (10.2% revenue increase, 9.3% earnings increase). Yet, if Arya’s thesis plays out, and cloud capital spending remains strong, the company may be set to continue delivering the above-average levels of growth investors have come to expect.
Bottom Line: ‘Buy the Dip’ Makes Sense Here
Crypto worries have taken some of the wind out of Nvidia’s runaway rally. Yet, when you look at the details? It’s clear the company is at little risk of the 2018-2019 “crypto hangover” repeating itself. A decline in crypto mining will likely have a less severe impact this go-around.
Besides the crypto-related risk, valuation is a bit of a concern, too. But in the near-term, it may not have much of an impact. As its positives still outweigh its negatives, now may be the time to buy NVDA stock.
On the date of publication, Thomas Niel held a long position in Bitcoin. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.
