Is Nvidia Stock a Buy or Sell? Biden, Game, Datacenter.

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Answering the question: Is Nvidia Stock a Buy or Sell? Shortly, we will say that it is “hold”. We even consider adding our holding. Today is a difficult situation for Nvidia due to Biden’s policy to strict further chip export to China. For us, it is a silver lining in the dark cloud. This circumstance offers an attractive price for us to increase our investment in the best chipmaker in the world.

Let us clear the issue one by one to get a better insight.

Why is NVIDIA stock so low? Is Nvidia stock expected to rise?
It depends on the time frame. In the short run, Biden’s policy will hurt.

Nvidia has several problems that justify its decline. They are:

  1. The President and his administration strict the sales of sophisticated chips made by US companies to China companies. Biden fears that the chip will be exploited by China’s military to strengthen its power. As a result, Nvidia and AMD are highly impacted. In response to this policy, Nvidia’s side says that this sales restriction will reduce its revenue by up to 400 million.
  2. Another problem is slowing chip demand. People are no longer quarantined and playing games. Also, higher rates and inflation come up. You will not spend much money on gaming gear when your daily bills soar.

Under these circumstances, it is difficult to see Nvidia stock will rise in the near term. But in the long run, it would be a different case.

Is NVDA a good stock to buy right now? Is it good to invest in Nvidia?
Intuitively no is the answer to the question: Is Nvidia Stock a Buy or Sell? But let’s calculate.

To measure how bad the situation is, let us quantify the case.

The China Confusion. How China ban affect our answer to the question: Is Nvidia Stock a Buy or Sell

As you can see in the Instagram feed that we set at the top, the sales to China seem not affected by Biden’s policy. In the first half of 2021, the sales to China is $3.1 billion. In 2022, for the same period, Nvidia sales reached almost $3.7 billion. We didn’t see the 400 million sales loss here.

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But let’s say that we lost it.

The Money Game. How the pandemics blur the reality.

The gaming segment is more worrisome. Look at the third slide in the Instagram feed above, the gaming sector declined by about 200 million for the first half of 2022 compared to the same period in 2021. If this trend continues, Nvidia could lose almost 2 billion. Much worse than Biden’s policy.

This could be explained by spiking demand when pandemics hit the planet. Gaming becomes the most convenient pleasure as your home is locked down. 2 years after the pandemic, revenue from the gaming segment grow from $5.5 billion in 2019 to galactic $12.5 billion in 2021.

What if, the world after pandemics brings the honeymoon of the gaming sector to the end?

Nvidia experienced this situation in 2018, the gaming segment deliver 6.2 billion in revenue but then collapse in the next year with just 5.5 billion. A 700 million loss. Will Nvidia see this nightmare again? Could be. Taking the worst case, Nvidia could lose 2 billion in revenue for gaming.

Calculation: The Market response.

So, the worst case is, Nvidia will lose $2.5 billion in revenue. How bad? In the fiscal year that ended January 2022, Nvidia’s revenue is almost $27 billion. Losing $2.5 billion means losing almost 10% of revenue. It is hurt actually. But, How does the market respond to that potential 10% loss?

Since its peak in November 2021, Nvidia lost more than 65% market value till today (12 October 2022). A potential loss of 10% was punished by a 65% decline in the market. We would like to say that it is a little bit overreacted. Oversold may be.

But the oversold does necessarily mean the stock price will rise soon. We need to have a solid reason why we see it as a bargain.

Is NVIDIA a good long-term investment? Where will Nvidia stock be in 5 years?
Based on its competitive advantage, Nvidia is a good investment.

Again, from the Instagram feed, in the fourth slide, as you can see, Nvidia not only depends on the gaming business. it also has a data center as a top revenue contributor. And this segment does extremely well.

Is Nvidia Stock a Buy or Sell? We need to examine Nvidia's business model.
Nvidia business model

The data center is GPU for cloud services. Nvidia sells GPU for cloud providers like Microsft (Azure), Amazon (AWS), and Google (cloud). Moving away from Nvidia to another vendor is extremely difficult since the customer needs to rewrite the cloud code and make painful rebuilding. It is safe to say that this segment is almost untouchable.

This is a switching cost.

Moreover, it also provides growth. In 2017, this hot sector only delivered 1.9 billion in revenue. In 2021, it goes monstrous to $10.6 billion.

So, our position is like this: If everything same and Nvidia’s revenue is down by 10%, we still buy. If Nvidia still grows due to its data center segment, it will be a bonus and gives us more margin of safety.