I remain upbeat on Nvidia’s (NASDAQ:NVDA) long-term outlook. However, I think that the company looks poised to suffer some short-term and medium-term setbacks that are likely to send NVDA stock lower.
Consequently, I advise investors to wait for a meaningful pullback in the name before taking a bullish position in the stock. Why wait? In a word: cryptocurrency.
As I noted in my most recent write-up on Nvidia in mid June, the company generated $155 million of revenue from selling chips used in mining cryptocurrencies. Although that amounted to only 6% of the chip makers’ second-quarter sales outlook, I theorized that weakness in the category could cause NVDA stock to fall meaningfully.
Showing that my hypothesis could be correct, on June 21, the company’s shares slumped more than 3% during the trading day, after China tightened its regulations on the sector.
While the cryptocurrency collapse that I’ve predicted over the last few months hasn’t yet occurred, as of the end of July, the asset class’ momentum had definitely stalled.
Crypto Fall Will Ripple Into NVDA Stock
I believe that cryptos’ recent momentum will prove to be temporary. One reason for my belief is that U.S. lawmakers and regulators appear to be poised to take action against the cryptocurrencies.
The infrastructure bill making its way through Congress tightens IRS reporting requirements for cryptocurrency brokers, and lawmakers expect that provision to increase the government’s revenue collection from the sector by $28 billion. Moreover, Treasury Secretary Janet Yellen is lobbying against attempts by members of Congress to “exclude certain crypto companies from the reporting requirements for brokers,” Cointelegraph recently reported.
Although the attempt by a few members of Congress to loosen the requirements appears to have been a key impetus for the crypto rally, I think that the implications for these developments are largely negative for the asset class.
For one, the fact that Congress, in a move that’s expected to force the sector to pay higher taxes, is poised to tighten reporting requirements for cryptocurrency at all suggests that lawmakers are willing to take action against the sector. Meanwhile, Yellen’s willingness to lobby for a harder line on the sector indicates that she’s ready to take additional steps to rein it in.
Meanwhile, SEC Chairman Gary Gensler said that his agency needs more power to effectively regulate cryptocurrency. In my opinion, the statement suggests that Gensler, seen by many as a friend of crypto, also is looking to pull in the sector.
Finally, as I’ve stated previously, I believe that the end of the federal unemployment bonus, set to occur next month, should cause cryptocurrencies to drop as millenials have less money to invest in the sector.
Taken together, I believe that in the short-to-medium term, increased regulation and taxation, along with reduced inflows, are likely to cause cryptocurrencies to plunge, causing NVDA stock to fall meaningfully.
ARM Merger Still At Risk
In a November 2020 column, I wrote that Nvidia’s proposed acquisition of ARM Holdings would create “one of the biggest and best cross-selling/upselling opportunities in history” for Nvidia.
After conducting research for this article, however, I’m starting to believe that there’s a greater-than-50% chance of the deal being vetoed by regulators.
China, which may not want to give a top American chip maker any help, is delaying its decision on the deal, suggesting that Beijing may decide to torpedo the acquisition. Meanwhile, indicating that ARM itself may be growing pessimistic about the deal going through, The Telegraph reported that ARM may launch an IPO if the acquisition is canceled. The U.K. company denied the report, but there could still be some truth to it.
Although Wall Street is skeptical about the deal’s chances of being approved, NVDA stock is likely to pull back to a certain extent if the acquisition is ultimately nixed.
Nvidia’s Long-Term Outlook Remains Strong
I have previously been bullish on Nvidia’s opportunity in AI, and another InvestorPlace columnist, Vandita Jadeja, recently provided updated information on a number of the company’s opportunities involving the technology. Specifically, she cited the company’s Base Command Platform, which she described as “an AI development hub that will provide enterprises with instant access to computing infrastructure, irrespective of where the data is placed. ”
In April, Nvidia launched new AI tools for datacenters, which are using the technology more and more. Nvidia says that its AI technology for data centers is superior to that of Intel (NASDAQ:INTC), which has become a leader in the field of AI for data centers. And Nvidia touts that its new data processing units seamlessly take over tasks from CPUs, allowing the latter chips to dedicate more of their capacity to other tasks.
Finally, I remain upbeat on Nvidia’s long-term opportunity in automobiles in general and autonomous vehicles in particular.
Nevertheless, investors should stay away from Nvidia’s shares ahead of its potential pullback. But, given the company’s rosy future, they should be ready to add NVDA stock on significant pullbacks.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Larry Ramer 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. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer.