Over the past year, Nvidia (NASDAQ:NVDA) has certainly been among the top semiconductor chip makers investors are intently focused on. The company’s high-performance GPUs are nicely complimented by a growing suite of software services. Importantly, both businesses carry incredibly high margins, supported by impressive pricing power tied to demand tailwinds that don’t seem to be close to abating.

Since the beginning of the year, Nvidia is up a whopping 105% at the time of writing. Of course, this number would have been higher at the stock’s recent pick, with a sharp downturn seen among many mega-cap tech names that have gone on a nice run so far this year.

Now, the question is building around whether macroeconomic headwinds will derail Nvidia’s growth trajectory (and they have in the past), or if AI demand will be extremely consistent, recession or not.

Key Points About This Article:

• Nvidia’s status as a leading chip maker for high-performance computing applications in the AI and data center world have earned this stock an incredible valuation.
• This year, the revenue growth acceleration Nvidia has seen appears to be sustainable, but questions are starting to brew about a potential rotation underway.
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Is a Rotation Underway?

 

An intriguing trend has begun to take place in the investing world. A number of top Magnificent 7 stocks, Nvidia included, have begun to see sharp outflows, with other non-NASDAQ stocks seeing sharp gains in recent weeks as a rotation appears to be building.

For many investors, it appears a rotation away from hyper growth stocks and into more value-oriented names is the prudent move right now. Of course, many are starting to feel the recessionary headwinds blow (this week’s yen carry trade blowup was something to behold, the yield curve just re-inverted, and the Sahm rule and other recession indicators are flashing red). That may mean that value could outperform growth for the first time in a long time. If that’s the case, Nvidia could be poised for more downside.

There are some fundamental reasons for this pessimism as well. If a slowdown in economic activity follows the jobs market (with recent reports suggesting a bearish future ahead), then chip demand could decrease. Yes, companies will still spend on AI and innovation through the next phase of this cycle. But the degree to which they do so may be called into question. And there’s the pesky idea in the back of many investors’ minds that a significant amount of future demand has already been pulled forward.

If a rotation takes a more firm hold, a recession becomes inevitable, or a number of factors outside of Nvidia’s control take over, a bumpy ride could be ahead.

The Bull Case

That’s a lot of ifs. Indeed, there are still plenty of investors out there who may believe (and probably rightly so) that a lot would need to go wrong to derail Nvidia’s current growth trajectory. The idea that companies could or would shutter their AI projects or slow spending in the face of rising competition is laughable now. But we’ll see.

Nvidia’s past results are no guarantee of future performance, but they have been rock solid. The company’s 262% revenue growth this past quarter, driven by data center chip sales (up more than five-fold over the past year), is incredible. At roughly 57-times earnings, that’s not an expensive price to pay for triple-digit growth that appears likely to continue. Thus, so long as this growth train remains on the tracks, Nvidia looks like a mega-cap tech stock that could have plenty of room to run from here, particularly considering its recent decline.

The Bottom Line

I think recessionary red flags have become a cause for concern for the market, and Nvidia’s recent drop certainly makes sense. That said, I also have to acknowledge that this mega-cap growth stock has more than doubled this year for a reason. Investors love Nvidia for its dominant market position, pricing power, margins, and relatively cheap valuation, to say nothing of its eye-watering growth and future potential.

Over the long-term, I have no doubt Nvidia will prove to be a winner. Over the next year or two, that projection becomes a bit more difficult.

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