What happened
Nvidia (NVDA 3.71%) stock rose 19.7% in March after the company announced important developments in the data center market. The stock also benefited from renewed optimism in the semiconductor industry as analysts and investors speculated that the market was pivoting to a cyclical growth period.
So what
Nvidia has been on a tear in recent months, rising more than 120% since October. This marks an impressive recovery following its collapse earlier last year. Rising interest rates crushed growth stock valuations, while semiconductor demand evaporated due to weakness in consumer electronics and cryptocurrency mining. This was a potent one-two punch to both Nvidia's financial results and its stock price.
Image source: Getty Images.
Semiconductors are a cyclical and ever-evolving industry, though, and new long-term catalysts have emerged to reignite optimism in Nvidia. Investors have high hopes for big growth in the data center market, with Nvidia positioned to be a leader. At an investor event in March, the company outlined its progress in the data center space and reinforced investor expectations about growth potential. Nvidia is rolling out new products and has strong relationships with all the largest cloud service providers.
Those factors have been driving a recovery over the past six months, and it continued in March thanks to commentary from Nvidia's rivals.
- Micron Technologies (MU -0.18%) surged higher after the company suggested that inventories had peaked and that the cycle was turning upward.
- Intel (INTC 1.77%) climbed 31% after that company provided positive commentary on AI and data center markets.
- AMD (AMD 1.33%) rose 25% amid all this industry optimism and bullish commentary from high-profile analysts.
We might not have gotten a ton of news about Nvidia specifically in March, but we saw a deluge of important industry information. It seems that the short-term hurdles in the industry are dissipating, and a handful of companies are making moves to reap rewards in the long term.
Now what
Nvidia's rebound has been sharp even though the current financial results are suffering from cyclically weak demand. The company's revenue dropped 21% last quarter, but that was expected. Investors have now shifted focus to the next few years, and the stock's valuation has been soaring. Its forward PE ratio and price-to-sales ratio both nearly doubled over the past six months.
NVDA PE Ratio (Forward) data by YCharts.
Nvidia's long-term growth potential is undeniable thanks to its leadership position in growth markets such as data centers. However, the recent valuation run-up has changed the stock's risk profile. With a forward PE ratio of around 60, Nvidia has to meet high expectations, and it has some obstacles to navigate along the way. A recession seems likely in the short term, and long-term opportunities will always be jeopardized by competition.
