Nvidia stock has fallen in recent months. Investors should hold on.
Nvidia's (NVDA.O) stock price has fallen to $116, down 14% from its all-time high of $135 in June. During the summer decline, the stock price fell to as low as $98, a 38% drop. Despite this, the stock price has risen nearly tenfold in the past five years.
But investors shouldn't rush to sell: Research shows that such declines are normal and expected for a stock like Nvidia, given the exponential growth its share price has experienced.
A combination of factors led to the decline in the AI leader's stock price. When Nvidia's stock price reached $135, investors locked in profits by selling. Emerging competition from chipmakers such as Advanced Micro Devices (AMD.O) threatened some of Nvidia's sales, making the relatively smaller AMD a more attractive option at this time. At the same time, while demand for AI chips is growing rapidly, everyone knows that growth for all chipmakers will slow in the next few years.
This isn’t the end of Nvidia’s stellar journey. It’s perfectly normal for those rare stocks that experience explosive growth to experience periodic sharp declines. According to Trivariate Research’s analysis of 84 stocks that grew tenfold in five years, historically, the average maximum drawdown for these stocks was 48%.
The worst sell-offs aren’t worrisome. Of the 84 stocks identified by Trivariate, the biggest retracement was GameStop’s (GME.N) 89% over more than three years. But the stock is a special case; GameStop’s gains weren’t due to company fundamentals. In fact, its gains have been shrinking, and its 10-fold return in early 2021 was driven by Reddit (RDDT.N) and the meme stock craze.
Nvidia is nothing like GameStop. Analysts still expect the chip company to post double-digit annual earnings growth over the next few years, according to FactSet. Nvidia's stock currently trades at a low multiple of near-term earnings estimates, so continued earnings growth could drive the stock higher.
Such prospects make Nvidia more like Tesla (TSLA.O). In the five years ending in May 2017, Tesla's stock price rose more than tenfold. Demand for electric vehicles, like demand for chips today, was exploding. The biggest drawdown in Tesla's stock price during that five-year period was 50%, which lasted a year and a half until February 2016. Since then, the stock price has risen another 20 times. Yes, electric vehicle competition has emerged, but overall industry growth still favors Tesla.
Perhaps Nvidia has a similar future. Just hold on patiently and wait for the long-term rewards.
The article is forwarded from: Jinshi Data
