Although Nvidia (NASDAQ:NVDA) stock has moved higher in the past month, inflation, higher interest rates and recession worries are certainly continuing to put pressure it.
But that’s not all. Industry-specific developments are also hurting its near-term performance. Namely, the CHIPS Act, which recently made its way through Congress.
This bill, which will provide subsidies to the U.S. semiconductor manufacturing industry, is seen as good news for chip makers who produce their own chips, but bad news for “fabless” chip companies like Nvidia, which outsource production.
However, even if rivals stand to benefit from billions in government largesse, that doesn’t mean this purveyor of GPUs and CPUs stands to see zero benefit. Let’s dive in, and see why the CHIPS Act doesn’t change my view on Nvidia’s long-term prospects.
NVDA Stock and the CHIPS Act
Before exploring the possible impact of the CHIPS Act on Nvidia, we’ll first take a look at this legislation itself. U.S. politicians (both Democrats and Republicans) are looking to bring more chip production back to the United States.
Largely, this is due to national security worries. With the U.S. dependent on chips manufactured in Asia, there’s concern that this leaves America in a vulnerable position. To promote reshoring of chip production, the CHIPS Act provides $52.7 billion in subsidies for new U.S. chip fabrication facilities. It also provides around $24 billion in related tax incentives.
On July 27, the U.S. Senate approved the bill, which is officially known as the CHIPS and Science Act of 2022. Then, the House of Representatives passed it and President Joe Biden is ready to sign it into law. Again, this bill is seen as bad news for NVDA stock, as it disproportionately benefits its rivals, like Intel (NASDAQ:INTC).
Even so, taking a closer look suggests that the opposite instead may be true. That is, instead of being a major negative, this legislation ends up being a modest positive for the company.
Why This Bill Doesn’t Change the Story With Nvidia
To some, the CHIPS Act may seem like a case of the U.S. government picking winners and losers. Yet while Nvidia isn’t directly “winning” from this bill, it’s not exactly “losing” either. Why? Two reasons.
First, federal support of the U.S. chip manufacturing industry could be a small positive for the company. It may reduce its dependence on Asian production facilities. This could limit future supply disruptions.
Second, although the CHIPS Act gives an edge to Intel in production, it does little to give Intel a leg up in chip design and innovation. That continues to be one of Nvidia’s key areas of strength. That’s why it continues to dominate the discrete GPU market, with 78% market share.
It’s also why it continues to see robust demand for its GPUs among end-user areas like cloud computing and gaming. Not to mention, it’s the reason why the company is well-positioned to dominate in emerging areas like self-driving vehicles and the metaverse. Doing little to affect its main strength, this bill will not change the story with NVDA stock.
My view on shares remains unchanged. Nvidia stock continues to earn a B rating in my Portfolio Grader. That’s not to say concerns about this bill will no longer have an impact on its stock price. We could see more volatility due to this bill. The uncertainties that have affected Nvidia’s price performance this year could also continue to put pressure on it.
Even so, that’s not a reason to skip on it. In the months ahead, it could become clear that demand in areas like cloud computing could outweigh a drop in demand due to a recession, such as with gaming chips. Put simply, the market is overly pessimistic about how it will fare under more challenging economic conditions.
The same may apply here, with the market’s view on the CHIPS Act. If you’ve been looking to buy NVDA stock, take advantage of a possible overreaction to this development.
On the date of publication, Louis Navellier had a long position in NVDA. Louis Navellier did not have (either directly or indirectly) any other positions in the securities mentioned in this article. InvestorPlace Research Staff member primarily responsible for this article did not hold (either directly or indirectly) any positions in the securities mentioned in this article.