With Nvidia estimated to control over 80% of the global market for chips (needed to run AI applications), it’s difficult to find any bear case for the stock. Furthermore, with one analyst upgrade after another fueled by a booming AI market, it’s no wonder that Nvidia was very much the “poster stock” of 2023.
“During the quarter, major cloud service providers announced massive NVIDIA H100 AI infrastructures … Leading enterprise IT system[s] and software providers announced partnerships to bring NVIDIA AI to every industry. The race is on to adopt generative AI.”
Jensen Huang, Nvidia’s CEO on Nvidia Q2 Earning Press Release
Yet, despite impressive revenue growth and more than eager enterprise customers waiting to get their hands on Nvidia’s chips, the company continues to navigate complex macroeconomic challenges that have proved to be detrimental to both its sales and production.
In this article, I’ll be exploring some of the headwinds that Nvdia will face in 2024 (both economic and regulatory) along with my thoughts on both their fundamentals and technicals.
Regulatory Headwinds : US vs China
Given the prevailing regulatory environment, NVIDIA expects a significant decrease in sales within regions affected by current export control measures in the upcoming quarter. As the United States increases its enforcement of export controls, NVIDIA is actively working to create chips specifically tailored for the Chinese market.
However, it is important to acknowledge that the U.S. is poised to further tighten these controls, aiming to curb advancements in new technologies that could potentially benefit Beijing.
TLDR : US will not allow Nvidia to sell to China given that what is being produced in the US is “suppose to be” for the good of America. While this makes complete sense, this overarching agenda may deteriorate in 2024 given that not just companies but eventually countries would be racing to get their hands on such chips. Should the US decide to increase the intensity of such regulations, this may cause further instability in Taiwan as 90% of Nvidia’s chips come from Taiwan via TSMC. I reserve my opinion with regard to what may happen next.
The bright side to this is that we now see Nvidia making attempts to further diversify its production away from the US and Taiwan. I would like to think that Jensen’s trips to Asia aren’t exactly for leisure, despite photos of him enjoying Vietnamese street food surfacing on the internet.
TLDR : Jenson MUST diversify Nvdia’s production. If he is able to sell China chips which are produced in Vietnam etc. Nvidia will be able to continue growing.
Economic Headwinds : Stock Market Rotation
I strongly believe that we have a stock marketing rotation on the horizon. Simply put, 2023 was a year of increased interest rates. As a result, investors took refuge in large cap tech stocks (Magnificent 7, MATANA etc.) whose earnings and moats were seen as inflation proof.
However, with the latest Fed meeting, interest rate increases have been halted and there are indications that the rate of interest rate increases may reverse in the near future. This signals a possible shift in market dynamics and raises the possibility of interest rates starting to decline once again.
Simply put, the investing theme in 2023 may not be the same in 2024 as investors may seek to rotate back to higher risk non-profitable growth stocks (CHPT, U, SHOP etc.).
Industry Headwinds : Chips are Cyclical
The chip business is a cyclical one. Upturns occur during period of high demand, which is what we are going through now. Such upturns allow for companies like Nvidia to have relatively higher pricing power due to the lack of supply. But let’s take a moment to look back to just a year ago when Nvidia faced surplus inventory.
As a keen observer in this industry, I remember the high and lows of companies such as Nvidia, where less than a year ago, they were the unwanted stock in the corner. While they are in the spotlight now, it is likely that history would repeat itself, and once again, we’ll see headlines go along the the lines of the following.
Catalyst Await : Nvidia’s Valuation
Despite the bear cases presented above, there are also positive catalyst for Nvidia in terms of its fundamentals.
Nvidia’s current price-to-earnings (P/E) ratio stands at 61, slightly below the 62 multiple recorded at the end of 2022 and significantly under its five-year average of 77. Given Nvidia’s historical growth and its performance in the current fiscal year, investors may argue that the stock is still “under-valued” to some extent.
Catalyst Await : Stock Split
Nvidia has experienced five stock splits, the most recent being a four-for-one split in July 2021, which proved to be successful. The announcement was made when shares were valued at $560, and shortly thereafter, NVDA stock soared beyond $800 the following month. Two years later, Nvidia shares rebounded to exceed $400, reaching over $500 per share just a few months ago.
While it can be premature to say that every stock split results in a rally, one can only look back at Nvidia’s share price today to reflect on the reality behind stock splits.
Be cautious, rely on technicals.
Reference to the chart above, we can see that the bull rally is still very much intact for Nvidia. Since forming the golden cross (Indicated by the Green Circle) back in January 2023 the stock has literally been on a rocketship right up till now. The strength of this rally is also prevalent given the gap between the 50 Day Moving average and the 200 Day Moving average. Theoritically, the larger the gap, the stronger the rally.
Given the volatility, we will be able to get a better picture of their technicals based on the price action of Nvidia after their Q1 Earnings. This also happens to be the time when their stock gapped up by 25% overnight due to the stellar earnings.
With the chart above, everything becomes a tad clearer as we’re able to identify potential entry and exit points for the stock. The Key Resistance level of Nvidia currently sits at exactly $500. This should come as no surprise given that its also a psychological price point to take profit. For those new to technical analysis, I always believe that psychology plays a huge part in trading. Hence support/resistance levels always tend to be at whole numbers such as $100,$200 etc. In this case, the charts prove my point where Nivida traded down after hitting $500 twice.
Likewise for key support levels, we see support range between $380 to $400, where in this case, we see the stock bouncing 4 times after hitting the support level of $400+. Once again, mind over matter, where traders seem to align towards buying into Nvidia at $400.
For those looking for an entry point into Nvidia, the $400+ zone would appear to be compelling given that it has repeatedly been an attractive entry point for the market as a whole.
2024 and beyond
From its low of $120 in late October last year, Nvidia has returned shareholders almost 4 fold this year as it currently trades at $488. Such a return is commendable in a high-interest rate environment. Given the tightening of regulations, it is likely that Nvidia will still face challenges to its topline; hence it is unlikely that the stock will continue to deliver the same massive returns in 2024. While I remain bullish on Nvidia and its dominance in the longer term, I warmly welcome a much needed correction for the stock in 2024.