Nvidia: Volatility in the Stock Market and Long-Term Perspectives

The Nvidia stock has shown remarkable volatility this year, triggered by seemingly trivial news. It is unusual for the market value to change by up to $200 billion within a single session. However, this is the reality for a company with a market value of nearly $3 trillion. Since Nvidia reached an all-time high on June 20, the stock has fluctuated by 5% or more in 15 sessions. This reflects both the volatility of the stock and the uncertainty among investors regarding Nvidia's future development. The artificial intelligence (AI) star is particularly sensitive to macroeconomic data as well as speculation about interest rate directions and the general economic situation. For instance, Nvidia's stock jumped by 4.5% on August 23 when Federal Reserve Chair Jerome Powell announced that the time had come to lower interest rates. On September 6, the stock pulled back by 4% due to a weak labor market report, causing concerns about the economy. On September 11, the stock gained 8% as a cooler-than-expected inflation report bolstered confidence in an interest rate cut the following week. It is unmistakable that Nvidia is sensitive to economic developments, and recession fears have weighed on the stock in recent months as the unemployment rate rises and consumer demand remains weak. However, how would Nvidia fare in a recession? The answer to that is more complex than one might think. Historically, the semiconductor industry has been highly cyclical. Demand for chips runs through boom and bust cycles that move in sync with the economy or new technologies, and inventory can quickly shift from shortage to surplus, affecting price and demand. The broader semiconductor industry is currently recovering from a downturn triggered by an oversupply of memory chips and other semiconductors for the PC market, as device sales boomed during the pandemic and then receded. Nvidia itself has already experienced such boom and bust cycles. During the pandemic, the stock soared as its chips were in demand for crypto mining. However, when Bitcoin prices plummeted and tech stocks entered a bear market, Nvidia's stock fell by nearly 70% from its 2021 peak to its trough at the end of 2022. A similar cycle occurred in 2018 and 2019 when the stock fell by nearly 60%. In recent quarters, Nvidia has delivered unprecedented results, with revenue more than tripling over four quarters and profit gains based on expanding profit margins exceeding 60%. The company's components driving the AI revolution are in demand by virtually every cloud infrastructure company and AI start-up. Larry Page, co-founder of Alphabet, reportedly said he was willing to bankrupt the company to win the AI race, and Elon Musk of Tesla has also called Nvidia crucial for maintaining his company's GPU supply. In other words, demand for Nvidia's products is so strong, and the companies purchasing them are so affluent, that the business should perform well in a recession—it would seem to take a severe economic collapse to pause the AI race. Even Jensen Huang, Nvidia's CEO, acknowledged this dynamic at a recent investor conference. Instead of discussing potential threats to Nvidia, he said the company is more concerned about meeting the overwhelming customer demand. Despite the strong market position, investors continue to treat Nvidia like a typical semiconductor stock: they believe it is highly sensitive to the macroeconomic environment and a potential recession. However, the imbalance between supply and demand, strong revenue growth, and comments from top CEOs like Mark Zuckerberg of Meta Platforms suggest that the risk of underinvesting in AI is much greater than the risk of overinvesting. Investors cannot control whether Nvidia falls due to negative economic news, but they can do something else: exploit the discrepancy between the strength of the business and the stock's volatility by buying Nvidia stock cheaply when it declines due to recession fears.