For those currently holding Nvidia (NASDAQ:NVDA), especially those who bought NVDA stock near its highs (just over $500 per share), it may seem like the beginning of the end for this AI chip stock’s hot run.
The generative artificial intelligence mega-trend resulted in shares more than tripling in price between January and August.
In recent weeks, however, bullishness for this “Magnificent Seven” component has cooled down in a big way.
Chalk this up to reasons that are company-specific, as well as those more macro-related in nature. If you currently own NVDA, it may not be time to take profits and/or cut your losses.
Shares could remain on their current trajectory longer than you think. That said, if you don’t own the stock, instead of being a reason to stay away, this recent slump may work in your favor. Here’s why.
Why NVDA Stock is No Longer ‘Too Hot to Touch’
A few months back, Nvidia shares appeared unsinkable and unstoppable. At first rising because of the initial hype surrounding the emergence of the generative AI trend, the stock kept climbing. The company demonstrated that skyrocketing demand for AI chips was having an immediate impact on the bottom line.
Flash forward to now and shares have pulled back for more than one reason. For instance, many market participants are likely coming to the same conclusion InvestorPlace’s Luke Lango has come to lately regarding Nvidia.
As InvestorPlace’s Samuel O’Brient reported Sep. 20, Lango is concerned that the company’s super-charged growth is on the verge of petering out. Other analysts and commentators have voiced similar worries.
Besides the perceived risk of less-impressive results ahead, the latest on macro factors like inflation, interest rates, and economic growth are weighing on shares as well.
These company and macro-related uncertainties could continue to dampen sentiment for Nvidia in the near-term. That may be a reason to sell if you own the stock, yet if you currently do not hold a position, a golden opportunity to buy could arise.
After the Dust Settles, a Rebound May be Swift
Earlier this month, I discussed how the aforementioned sentiment shift may push NVDA stock back down to $400 per share. Now, not only do I believe that a drop to this price level is likely; a fall to even lower prices may be within the realm of possibility.
Nvidia has its next quarterly earnings release in November. If the results and updates suggest AI chip growth is slowing down, shares may be vulnerable to a further de-rating by the market.
Even if results remain strong, there’s one macro factor that could keep negatively affecting NVDA’s near-term performance: interest rates. The latest from the Federal Reserve signals that the Central Bank will keep rates “higher for longer.”
After bidding up tech stocks, to some extent due to the view that rates would come down next year, even the “Magnificent Seven” could experience multiple compression, as investors come to terms with the fact that high interest rates are here to stay.
So, in this scenario, where is the silver lining? After the dust settles, a rebound may be swift.
If You’ve Yet to Buy, Wait for This to Happen
After going overboard with bullishness for NVDA, the market may soon overreact in the other direction. Investors could take any negative change to the overall story, from a slight earnings miss to the prospect of interest rates staying high into 2024, as an excuse to make an exit.
I’m not saying that you’ll soon be able to buy Nvidia at the same price it was trading for before the phrase ChatGPT entered the public consciousness. However, shares could fall down to prices moderately below current levels.
Down the road, macro issues will normalize. Growth forecasts from analysts and management could be walked back to where the company can handily beat them.
After another sell-off, the stock could go from “priced for perfection” to “wonderful company at a more-than-fair price.”
NVDA stock hasn’t reached that point, but once it does, consider it time to buy.
On the date of publication, Thomas Niel did not hold (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.
