Another month, another round of bad news for Nvidia (NVDA +1.63%). Shares of the top semiconductor company are now down nearly 60% from all-time highs as of this writing after it was revealed that the U.S. government has restricted the company from selling some of its most advanced AI chip designs to China. Nvidia said this could hurt its sales by $400 million next quarter, adding yet another headwind to the cyclical downturn Nvidia is experiencing.
NASDAQ: NVDA
Key Data Points
Let's talk about that cyclical downturn because Nvidia is historically just that: a cyclical business. Not for the first time, the company is up against a decline in sales -- some of it driven by chip industry issues and some of it internal as Nvidia revamps its product lineup. With this downturn just getting started, how much lower can Nvidia stock go? Let's look at the possibilities.
More downside ahead?
Nvidia's woes right now are significant, perhaps even more pronounced than during the last downturn in 2018 and 2019. Recent news isn't just a second shoe dropping, it's more like another set of shoes dropping as Nvidia faces a run of bad press. Here's the list of headwinds it's dealing with now that it also faced a few years ago:
- A general downturn in chip industry sales is starting
- A U.S. trade war with China is compounding a normal chip industry sales downcycle
- Markets are dealing with a cryptocurrency crash (lower crypto prices can reduce demand for chips used to manage a crypto network)
But there are additional problems cropping up for Nvidia this time that didn't exist back in 2018 and 2019:
- COVID-19 lockdowns in China are hurting demand, especially in gaming chips
- Nvidia has suspended sales to Russia due to the war in Ukraine
- Ethereum, the second-largest crypto network, is migrating to a new operational structure that will eliminate the need for advanced semiconductors
With this whole deck of cards stacked against it, it's no wonder Nvidia's stock is down so much. And some investors are calling for more downside ahead. After all, Nvidia's shares trade for more than 56 times its enterprise value to trailing-12-month free cash flow. It's a valuation that could get worse before it gets better, with sales and profits getting ready to fall.
How low can this stock go?
Issues loom for Nvidia, but the fact remains that semiconductor sales are likely headed much higher over the next decade. Estimates point toward global chip sales reaching $1 trillion a year by 2030, up from about $600 billion expected in 2022. Nvidia is a leader in high-end computing, and it's gobbling up market share as it expands its designs to encompass new end uses (data center construction and AI; automobiles and robotics; and software built atop its hardware). Nvidia has tremendous promise ahead, despite the near-term pain.
But is Nvidia a buy right now after falling so far from its 2021 peak? Though shares are down nearly 60% from that high-water mark, some market pundits point to the fact that Nvidia stock had an epic run-up from its trough in December 2018 to its peak in November 2021. Some would argue this points to the further downside ahead.
However, by comparison, Nvidia's previous run-up lasted from late 2013 to late 2018 and resulted in a more than 1,800% return, before leading to a drawdown of over 50% from late 2018 through mid-2019.
Data by YCharts.
In other words, I wouldn't try to draw present conclusions from past results. Past run-ups in stock price don't really have a bearing on how far a stock will fall from here. Markets value a company based on future potential, not the past.
Now, given how many punches Nvidia is absorbing right now and its high valuation (which still surpasses where it was at the start of previous downturns), I think this stock could indeed fall further depending on how much its sales and earnings tumble.
Data by YCharts.
But there's a reason for optimism. Nvidia's data-center sales are by far its biggest segment now, which wasn't the case a few years ago. And while data-center revenue might face a big slowdown due to the ban on some China chip sales, this segment was still firing on all cylinders and was up 61% year over year in Q2 fiscal 2023 (the three-month period ended in July 2022).
With or without China being able to buy all of Nvidia's data center and AI technology, its new chips could be a big tailwind. Plus, Nvidia's new high-end video gaming chips are coming, which could put a floor under that flagging segment (gaming fell 33% in Q2).
There are so many variables affecting Nvidia's business right now that it's hard to predict where the stock will bottom. I wouldn't be surprised at all if there's some more downside as more details emerge about limits placed on sales to China. However, I think those limits are already being priced in to some extent. Even a little positive news on this front could send Nvidia stock rallying from here.
And if you believe data centers, AI, autonomous vehicles, and the like will keep rising over the next decade, trying to call a bottom is a fool's errand. Now looks like as good a time as any to start buying again if you're a long-term investor and are able to dollar-cost average into this volatile but high-growth semiconductor business.
