3 Forces That Could Shake Nvidia Stock

NVIDIA (NVDA) has faced challenges in the past. Its stock has dropped over 30% within less than 2 months on 8 occasions in various years, erasing billions in market value and eliminating substantial gains in a single correction. If past performance is any indicator, NVIDIA (NVDA) stock is not shielded from abrupt, steep declines.

Although NVIDIA’s stock has skyrocketed due to the unwavering demand for its AI hardware, elevating its market valuation to record levels, this very momentum also introduces new risks. The relentless demand for AI chips has sparked increased competition from rivals and even its top cloud clients who are designing their own proprietary silicon, while ongoing geopolitical issues highlight the fragility of its vital supply chains, suggesting that even with market leadership, there can be underlying uncertainties.

What Could Cause The Stock To Plunge?

• China Market Decline: U.S. export restrictions and rising domestic competition from companies like Huawei are expected to decrease NVIDIA’s AI chip market share in China, which would affect a substantial market opportunity.
• Custom AI Chips: Major hyperscalers (Google, Amazon, Meta) are increasingly creating their own custom AI chips, including Google’s Ironwood TPUs, to lower dependence on NVIDIA and optimize for particular workloads, especially in the rapidly growing inference sector.
• Competitor Chip Advancement: AMD’s Instinct MI300X series, with the MI350X, along with Intel’s Gaudi 3, are gaining traction in AI accelerators. AMD recently provided a long-term outlook, noting that it expects revenue growth to average over 35% over the next three to five years, with AI data center revenue rising by an average of 80% over the same period.

Are Risks Apparent In The Financials Yet?

Let’s examine the fundamentals.

• Revenue Growth: 71.6% LTM and 92.0% over the last 3-year average.
• Cash Generation: Approximately 43.6% free cash flow margin and 58.1% operating margin LTM.
• Valuation: NVIDIA stock currently has a P/E ratio of 52.6.

If you’re seeking more information, read Buy or Sell NVDA Stock. However, consider this question – Is holding NVDA stock risky? Absolutely it is. High Quality Portfolio can help mitigate that risk.

What’s The Worst That Could Occur?

A review of NVIDIA’s performance during market downturns indicates that significant risks remain despite its strengths. The stock experienced a decline of approximately 85% during the Global Financial Crisis and 68% during the Dot-Com crash. The sell-off in 2018 and the inflation shock both witnessed drops exceeding 55%, with the latter around 66%. Even the Covid dip, which was relatively short-lived, caused the stock to drop nearly 38%. Strong fundamentals are important, but when the market shifts, NVDA is not immune to rapid declines.

However, risks are not confined to significant market crashes. Stocks can fall even in good market conditions – considering events such as earnings releases, business updates, and changes in outlook. Review NVDA Dip Buyer Analyses to see how the stock has bounced back from sharp declines previously.

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