Will Higher-for-Longer Rates Kill Nvidia (NVDA) Stock?


  • Shares of tech giant Nvidia (NVDA) have struggled amid the broader tech selloff.
  • Fears of a monetary policy pivot to a hawkish stance raises concerns.
  • NVDA stock also suffers from an AI blind spot that warrants attention.
NVDA stock - Will Higher-for-Longer Rates Kill Nvidia (NVDA) Stock?

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Although technology juggernaut Nvidia (NASDAQ:NVDA) continues to astound the market, rising fears exist that the party may be coming to an end for the night. During Friday’s afternoon session, NVDA stock suffered a loss of around 6.5%. Major questions surround a possible pivot in monetary policy. However, it’s the blind spot in artificial intelligence (AI) that could be the real story.

Taking up the spotlight, though, is the Federal Reserve. Late last year, anticipation ran high for the possibility of a dovish approach to monetary policy. Per a CNBC report, the central bank set the table for multiple rate cuts for 2024 and beyond. Coincidentally, growth-oriented investments like NVDA stock took off in the first quarter.

However, the issue eventually turned to the resilience and robustness of the labor market. In March, the economy added 303,000 nonfarm payrolls, beating the expected forecast by more than 100,000 jobs. Logically speaking, this dynamic translates to more dollars chasing after fewer goods, which is inherently inflationary.

Adding to the pressure of accelerated consumer prices is the geopolitical flashpoint in the Middle East. With Iran launching missiles and drones against Israel for an attack on its embassy in Syria (which it blames Israel for), Israel, in turn, recently responded with a strike of its own.

A key concern is potential disruption to global oil supply chains if tensions keep escalating. One of the culprits of the recent inflationary pressure is the spike in energy costs. Should they continue rising, the Fed would have little incentive to lower rates.

Potential Lateral Movements Cloud the Case for NVDA Stock

Concerns undergirding NVDA stock go beyond just the interest rate itself. Rather, the prospect of higher borrowing costs shines a glaring spotlight on Nvidia’s steep multiples. Currently, NVDA trades for 67.61x trailing-year earnings. It also trades at 33x trailing-year revenue. Both stats are well above the median values for the semiconductor industry.

Of course, the justification for NVDA stock carrying such lofty premiums focused on the potential of generative AI. As InvestorPlace’s Louis Navellier mentioned, the AI gold rush is still in full swing. To use his analogy, it’s the one selling the picks and shovels — at least the picks and shovels that seemingly most enterprise-level clients want.

McKinsey & Company bolsters Navellier’s argument. It states that generative AI protocols can be an economic force multiplier due to foundation models — a segment of the broader deep learning innovation that can process extremely large and varied sets of unstructured data. Its research suggests that digital intelligence could add the equivalent of $2.6 trillion to $4.4 trillion annually to the global economy.

However, the challenge is that without trust, most of the progress in generative AI could be lateral. As in football, there’s a difference between running for 20 yards versus gaining 20 yards.

According to Macquarie University’s educational blog Teche, a research experiment discovered that five out of six references generated by popular chatbot ChatGPT were fake. Therefore, even if generative AI becomes more advanced and capable of processing greater volumes of data, the yards run may not move the sticks.

In other words, if generative AI’s accuracy is less than 17%, it’s simply not a useful technology.

Why It Matters

It’s likely imperative for NVDA stock that the underlying company produces a strong earnings report and guidance. For the upcoming fiscal first-quarter report, analysts expect earnings per share to hit $5.53 on revenue of $24.4 billion. However, that’s a big leap from the year-ago quarter’s actual results of earnings of $1.09 per share on sales of $7.19 billion.

On the date of publication, Josh Enomoto 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.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.

Article printed from InvestorPlace Media, https://investorplace.com/2024/04/will-higher-for-longer-rates-kill-nvidia-nvda-stock/.

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