Good stocks don’t suddenly become bad stocks. However, that doesn’t always prevent them from getting caught up in a market sell-off. That is my reasoning for being bullish about Nvidia (NASDAQ:NVDA) even though the stock recently fell into bear market territory.
Actually, I do have a less cheeky reason. It is possible that Nvidia investors got caught up in some “irrational exuberance.” From October of 2020 to October of 2021, NVDA stock was up over 80%. However, from the beginning of October to the end of November, the stock climbed an additional 60%.
And with a market that was already looking overvalued, Nvidia was due for a pullback. But does that mean that NVDA stock needed to give up all the gains it made from the beginning of October? I think not. As my InvestorPlace colleague Will Ashworth wrote recently, “Unless the economy goes completely off the rails, Nvidia is perfectly positioned to benefit from secular trends that continue to accelerate worldwide.”
I agree. Nvidia got oversold. And so do the analysts who forecast that NVDA stock will be right back at its 2021 highs at the end of 2022. However, if we are to do a fair analysis of NVDA, we have to consider the forces that are outside of the company’s control.
Never Say Never
At times, the 2020 presidential election seems like it happened a lifetime ago. At other times, it feels like it happened much more recently. But few can disagree that the nation looks very different today than it did just 14 months ago. And based on President Joe Biden’s approval numbers, most Americans don’t believe that it has changed for the better.
So, could the economy go off the rails? Inflation is still at record levels and interest rates are likely to go higher. For the middle and lower class, this combination is particularly challenging. Just as they’re adjusting to higher prices, the cost of credit will be going higher.
And while many analysts would agree that interest rates need to rise, there is legitimate concern about the U.S. Federal Reserve going too far too fast. Add in geopolitical tensions which could add additional energy stocks and you have more than enough reasons to believe the economy will continue to slow down.
Now, in 2022, the nation will hold the mid-term elections. That isn’t particularly bullish for stocks. Historically, stocks have had weaker performance in a mid-term election year with more volatility. Now, some investors may point out that stocks tend to perform well after the mid-terms. And they would be correct. The market likes certainty. However, there is little chance that this election will be as smooth as many hope. And that could make the current state of affairs look appealing.
So Many Ways to Win
Yes, the economy may not perform that well. But I simply don’t believe that will have a significant effect on Nvidia earnings and revenue. The company is simply too well positioned in every area of the economy that is growing (such as artificial intelligence, cryptocurrency and the metaverse). And in addition to posting strong earnings and revenue, it is also likely to continuing growing its free cash flow.
What about the company’s aborted acquisition of Arm Holdings? In all the reasons I’ve been bullish about Nvidia stock, I didn’t even give their potential acquisition of Arm a consideration. Maybe it is because it seemed to be doomed from the start. However, based on the reaction of investors on the day of the announcement, this seems like a non-event.
NVDA Stock is a Rare Certainty in the Tech Sector
After a sell-off in the tech sector, investors will be looking for growth wherever they can get it. Few tech stocks, or few stocks in general, can offer the certainty that NVDA stock can. Whether you’re buying it for the short term or the long term, Nvidia looks to offer investors clarity in a world that is anything but clear.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for eight years. He has been writing for InvestorPlace since 2019.
