Amid the turmoil surrounding the U.S.-China trade dispute, Nvidia (NASDAQ:) stock is again declining. With the company’s prospects in China in question, Nvidia stock will struggle to gain traction in the short-term.
Nvidia’s move into tech’s most important sectors has bolstered Nvidia stock price in recent years. As a result, the long-term outlook of Nvidia stock remains solid. However, Nvidia stock price probably won;t rise much in the near-term without an event or a meaningful drop in its price-earnings multiples.
Put simply, Nvidia is a long-term buy because NVDA has arguably become the most important chip company. In the PC era, that title belonged to Intel (NASDAQ:). However, applications more prevalent in today’s tech world — such as artificial intelligence (AI), virtual reality (VR), data centers, and deep learning — depend on Nvidia’s chips. Intel has made some headway against Nvidia in the data-center sector and AMD (NASDAQ:) has become a threat in other tech sectors. Nonetheless, Nvidia leads the way overall.
Look for Changes in Valuation
Moreover, the PE ratio of Nvidia stock, like that of other semiconductor stocks, will fluctuate tremendously based on changes in investors’ sentiment. At first glance, that may not appear profound, as the PE multiples of most stocks fluctuate. However, few stocks’ multiples have shifted as much as those of NVDA stock or of those of its peers, such as Intel and AMD.
In the early part of the decade,the PE ratio of Nvidia stock often fell into the teens. At that time, traders saw Nvidia as a dying PC stock. However, optimism began to turn in 2015, when Nvidia became a leading player in several emerging tech sectors. As a result, the multiple of NVDA stock often exceeded 50 until the market-wide selloff began of last fall. As a result, investors can expect Nvidia stock price to fluctuate between about 13 and around 55 times NVDA’s earnings.
How to Play Nvidia
Today’s valuation of about 29 times earnings (and 20 times the consensus forward earnings estimate) is just below the middle of the historical range. Before the multiple of NVDA stock could near 55 again, the trade war would have to end and crypto currencies would have to recover.
With bitcoin back above $8,000, a partial crypto recovery could occur. However, it’s more difficult to predict when the trade war will end. Moreover, Nvidia stock price may fall further if no agreement is made soon.
For these reasons, I would wait for awhile before buying NVDA stock. However, I would buy NVDA stock in the near-term if the trade war ends or if the forward PE of NVDA drops below 20, which occurred in December. If the trade war ends, I think Nvidia will rise for multiple days, taking the multiple much closer to the 55 level we saw before the selloff in late 2018.
The Bottom Line on Nvidia Stock
Investors should buy Nvidia stock, but only after prompted by an event or a meaningful decline in its valuation . Nvidia leads the way in powering tech’s latest applications. In my view, this makes NVDA the most crucial chip stock, and it means that NVDA is a long-term buy.
However, with the trade war still being waged, buying Nvidia for the short-term is risky. Moreover, competition from Intel and AMD makes the outlook of NVDA stock more uncertain. Still, if traders can buy Nvidia at a discount, or if market conditions begin to justify a higher PE ratio, NVDA will become attractive for short-term and long-term investors.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can at @HealyWriting.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.