Why Nvidia Stock Dropped Today
What happened
After initially trading up on generalized enthusiasm or tech stocks (in the wake of yesterday's Microsoft-Activision Blizzard merger announcement), shares of semiconductor giant Nvidia (NASDAQ: NVDA) took a turn for the worse Wednesday, and are now down 2.6% as of 11:30 a.m. ET.
Why did that happen?
Image source: Getty Images.
So what
There's no one obvious answer to that question. In fact, there doesn't appear to be any news specifically relating to Nvidia on the wires today -- but here's one theory:
At its current valuation of 93 times trailing earnings, Nvidia is one very pricy stock. The average valuation of stocks on the S&P 500, for example, is just 26 times earnings, meaning Nvidia shares cost more than three times the average.
Granted, there's a reason Nvidia shares cost so much: Over the past five years, Nvidia has been a terrific growth stock, posting compound annual revenue growth north of 31%, and better than 46% annual growth in earnings. Many investors expect this growth to continue, albeit at a slightly reduced clip. According to data collected by S&P Global Market Intelligence, the average projection among analysts who follow Nvidia stock is that the company will grow earnings at better than 25% over the next five years -- nearly twice as fast as the average S&P 500 stock.
Now what
But here's the thing: In order to deserve its high valuation, Nvidia must actually achieve those growth projections -- and some news out of Europe yesterday suggests that at least one growth path for Nvidia may be closing.
As ScienceBusiness.net reports, French Minister for the Economy Bruno Le Maire has declared a "battle for the semiconductors" market. Citing the clear need for French companies to have secure access to semiconductor chips to make their products, and the fact that currently, Europe produces less than 10% of all chips sold for use within the European Union, Le Maire called for increased government subsidies for Europe's chipmakers, with the aim of growing locally produced semiconductors by "a factor of five."
Sadly, less than 2% of Nvidia's assets are located in Europe. Thus, little if any of the envisioned European subsidies would benefit the company. To the contrary, if Europe's plan comes to pass, Europe could soon be making half the chips used in Europe, which would logically diminish demand for chips made by Nvidia -- and cut off one path to growth for Nvidia.
Mind you, this isn't a huge concern. Sales to Europe currently account for less than 7% of Nvidia's annual revenue. Still, it could be a big enough concern to explain today's falling share price.
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