Nvidia appears to be more resilient than the market thinks.
NVIDIA (NVDA -0.03%) Stock prices dominated the stock market earlier this year, but now they are subject to large swings on seemingly small news stories.
A $200 billion market cap swing in a single session is unusual, but it’s to be expected for a stock with a market capitalization of nearly $3 trillion. Nvidia shares have risen or fallen more than 5% in 15 sessions since hitting an all-time high on June 20, reflecting investor uncertainty about the company’s direction.
The artificial intelligence (AI) superstar has also shown that it is particularly attuned to macroeconomic data and predictions about interest rates and the overall direction of the economy. For example, on August 23, when Federal Reserve Chairman Jerome Powell said “it’s time to lower interest rates,” Nvidia’s shares rose 4.5%. On September 6, sluggish unemployment numbers sparked concerns about the economy, and the stock fell 4%. Then, on September 11, the stock rose 8% as a weaker-than-expected inflation rate boosted confidence in an interest rate cut next week.
Clearly, Nvidia is sensitive to economic trends, and fears of a recession have threatened its stock price in recent months as unemployment rises and consumer demand is weak.
So what will happen to Nvidia in a recession? The answer is more complicated than you might think.
Image source: Getty Images.
Nvidia and the Economic Cycle
Historically, the semiconductor industry has been highly cyclical: demand for semiconductors goes through boom and bust cycles in response to the economy and new technologies, and inventories can quickly fluctuate from shortage to surplus, affecting prices and demand.
The broader semiconductor industry is finally emerging from a slump caused by an oversupply of memory chips and other products for the PC market after sales of devices surged and then fell during the pandemic.
Nvidia itself has seen boom-and-bust cycles before: Its shares soared during the pandemic because the company’s chips were popular for cryptocurrency mining, but as bitcoin prices plummeted and tech stocks entered a bear market, Nvidia’s shares fell about 70% from their 2021 peak to their late 2022 trough.
The company’s stock underwent a similar cycle in 2018 and 2019, falling nearly 60%.
Why is this time different?
Nvidia has been experiencing unprecedented performance in recent quarters, with revenue more than tripling over the past four quarters and profits soaring as margins expanded to more than 60%.
The company’s components, which are powering the AI revolution, are in demand by nearly every cloud infrastructure company and AI startup. Alphabet co-founder Larry Page has reportedly said he would be willing to bankrupt his company to win the AI race, and Tesla CEO Elon Musk has also paid tribute to Nvidia, saying it is essential for his company to maintain a supply of Nvidia GPUs.
In other words, demand for Nvidia’s products is so high, and the companies buying them are so wealthy, that business should thrive even in a recession. It would likely take a severe economic collapse to put a pause on the AI race.
NVIDIA CEO Jensen Huang also acknowledged this trend during a recent investor conference. Huang was asked at the Goldman Sachs Communacopia and Technology Conference what he was most worried about. Most CEOs would answer competition, macroeconomics, innovation, or something similar. But instead of discussing potential threats to NVIDIA, he went in the opposite direction, stating:
We have a lot of people, and they all depend on us, and the demand is so great that our delivery of parts, technology, infrastructure, and software is very emotional because it directly impacts people’s bottom lines; it directly impacts their competitiveness.
While most CEOs worry about demand, Nvidia has the opposite problem: Nearly two years after launching ChatGPT, the company is still struggling to meet overwhelming demand for parts. The high stakes in the AI race have made Nvidia’s products extremely valuable, and Huang worries about satisfying customers and the pressure it puts on his company to perform.
What it means for Nvidia stock
Despite the company’s strong business, investors are not treating Nvidia any differently than a typical semiconductor stock. Judging by the company’s stock price movement, investors continue to believe that the company is highly sensitive to macroeconomic and potential recessions, but given the imbalance between supply and demand, the company’s rapid revenue growth, and comments from top CEOs like Meta Platforms’ Mark Zuckerberg (who said underinvesting in AI is much riskier than overinvesting), this doesn’t seem to be the case for Nvidia at this point.
Investors can’t control whether Nvidia’s stock price will fall on news of an economic downturn, but they have another way to play: They can exploit the mismatch between the strength of the company’s business and its stock price volatility and buy the dip if Nvidia’s stock price falls on recession fears.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and public relations at Facebook and sister of Meta Platform CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Jeremy Bowman has invested in Meta Platform. The Motley Fool has invested in and recommends Alphabet, Bitcoin, Goldman Sachs Group, Meta Platform, Nvidia, and Tesla. The Motley Fool has a disclosure policy.
