Market Direction Will Drive the Next Move For Nvidia Stock

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As popular it may be, Nvidia (NASDAQ:NVDA) stock is not without its flaws.

Source: JHVEPhoto / Shutterstock.com

In recent years, the semiconductor giant posted impressive levels of growth. But already reflected in its valuation, shares could experience big declines if and when it starts to again fall short of expectations.

That won’t weigh on shares in the near term. Demand for its CPUs and GPUs remains strong. A strong crypto market also lowers worries about another crypto crash that negatively affected the stock in 2018 and 2019.

For now, until at least it next announces quarterly results (sometime in November), Nvidia’s prospects remain unchanged.

However, there is something else that could make or break the stock, as the rest of this year plays out. Unfortunately, it’s out of Nvidia’s control. I’m talking about the market’s next direction.

Following recent dovish speech from Federal Reserve Chairman Jerome Powell, tech stocks could move higher. Or, despite the post-speech rally, markets will still be volatile in the coming months. Even if higher interest rates are still far down the road, the risk of tapering happening fast rather than slowly is still on the table.

So, should you buy or take a more cautious approach? It mostly hinges on your personal view of where the overall market is headed next.

NVDA Stock: Underlying Business Remains Strong

When I last wrote about Nvidia on July 29, I discussed how its positives outweighed its negatives. More than a month later, that’s still the case. As seen in its most recent quarterly results, its underlying business remains strong.

Thanks to strong data center and gaming demand, sales in the quarter ending Aug. 1 were up 68% year-over-year and 15% sequentially (quarter-over-quarter). Non-GAAP earnings for NVDA stock were up 89% from last year and 14% from the previous quarter.

Not only that, crypto worries that were weighing on it before are now on the back burner. With Bitcoin (CCC:BTC-USD) making a comeback, there’s now less worries about a crypto crash and subsequent chip glut, which was seen a few years back.

As you likely know, crypto miners are big buyers of Nvidia’s chips. The company has tried to limit its exposure to this very cyclical market by coming out with a dedicated mining chip, and reduced the mining capacity of its GPUs to discourage their use for this purpose. With these preventive measures, plus the crypto price recovery, this summer’s concerns about the issue were likely overblown.

What The Fed’s Remarks Mean for Nvidia Shares

Company-specific factors may remain solid for NVDA stock. However, it’s not certain market conditions will continue to be on its side. On one hand, recent remarks from Powell point to tech stocks like this one continuing to perform well.

In his speech from Jackson Hole, Wyoming on Aug. 27, Powell conveyed his support for tapering of the central bank’s bond repurchase program, but indicated that interest rate increases will not be immediate. He’s also still of the opinion that today’s higher rates of inflation are “transitory.”

The market reacted positively to the speech, as it convinced investors that the Fed’s policies will stay as-is for at least the next few months.

In turn, investors started to jump back into tech stocks, as they’re less worried about interest rate increases. With a rotation back into tech plays, Nvidia could keep pushing higher. This may not result in NVDA stock, already up around 70% year-to-date, making it up to $300 per share to close out the year. But it may help its shares make a gradual climb from here.

On the other hand, Powell’s speech doesn’t guarantee the good times will keep on rolling. Much of his caution about tapering/raising rates has to do with his goal of getting to full employment. Upcoming jobs numbers could signal the Delta variant isn’t slowing down the post-Covid recovery. With this, the Fed could start tapering sooner than the end of the year. Treasury yields could also go up. Both these events happening would send tech stocks in the wrong direction.

Buying Now is a Bet on the Market’s Next Direction

Company-specific strengths along with market trends have helped Nvidia to keep on winning in 2021. As its underlying business remains strong, chances are it won’t underwhelm in the quarters ahead. With that, the future price direction of NVDA stock more largely hinges on which way the market’s going.

Your take on this should determine whether you should buy, sell, or hold.

Do you believe Powell’s statements signal “easy money” policies will continue into 2022? Buy NVDA stock, as it may have more near-term runway. If you think otherwise, you may want to avoid it until it pulls back.

On the date of publication, Thomas Niel held a long position in Bitcoin. He did not have (either directly or indirectly) any positions in any other securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.

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