Nvidia’s stock (NVDA 1.03%) has continued to suffer. The company’s stock is now down over 40% from all-time highs achieved in late 2021 as of this writing. Nvidia, the semiconductor industry, and technology, in general, are all under siege right now due to a number of issues: The Federal Reserve’s hawkish rate-hike stance, calls for a decline in consumer spending, and the potential loss of demand for GPU chips (used in cryptocurrency mining) were all factors.
Nvidia has already faced challenges comparable to this. It previously overcame them, but what about now?
Nvidia is a cyclical stock
Every business is in a state of constant change for one reason or another, which means that its cycle waxes and wanes according to supply and demand as well as other economic factors. The cyclicality of Nvidia’s business, in general, comes from the rate at which hardware is purchased. Chip stocks drop every few years as demand for computing hardware slows and as corporations wait for purchasing to resume. Chip shares rebound when indications suggest that buying activity will resume in the future.
In 2018, Nvidia’s fortunes took a turn for the worse. GPU purchases plummeted (as did cryptocurrency demand, owing to the market collapse and the U.S.-China trade war), and Nvidia’s stock tumbled. But then, in 2019, it began an incredible run as a new generation of video gaming chips, data-center processors, and AI processors emerged.
Is the present scenario a simple replay of history? Most likely not. Nvidia is a different firm than it was four years ago. It’s grown more diversified since then, with other chips beyond its GPU bread-and-butter product.
Plus, despite falling 40% in recent months, the stock is still valued at 60 times trailing-twelve-month free cash flow and 28 times forward-looking one-year earnings. This isn’t a cheap stock by any means.
The case for Nvidia as a $1 trillion company
Despite the fact that Nvidia is already a large company in the tech sector, it’s possible that its diversification today is beneficial in the long run. More than simply a semiconductor manufacturer like many of its competitors, this is a complete technology platform. Nvidia is working on hardware and software that will allow all industries to utilize AI, from healthcare to the automotive sector, as well as other IT businesses.
These are strong secular growth drivers that, if successful, could propel Nvidia for years to come. For what it’s worth, some market experts believe that Nvidia’s revenue will increase more than twofold to over $65 billion in five years (compared to $26.9 billion in sales during the recently completed financial year ended in January 2022). If Nvidia fulfills those high expectations, a $1 trillion market capitalization appears realistic (as of this writing, the company’s enterprise value is $489 billion).
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