Is Nvidia stock recession proof? The answer might surprise you.

Nvidia (NVDA -0.03%) stocks have gone from blowing up the stock market in the first half of the year on seemingly little news.

It is unusual to see changes amounting to $200 billion in market value added or removed in a single session. Still, that’s life for a stock worth nearly $3 trillion. Since Nvidia shares hit an all-time high on June 20, they have risen or fallen 5% or more in 15 sessions, a reflection of the stock’s own volatility and investor uncertainty about where Nvidia is headed.

The artificial intelligence (AI) superstar has also proven to be particularly sensitive to macroeconomic data, as well as bets on the direction of interest rates and the larger economy. For example, Nvidia shares rose 4.5% on August 23 when Federal Reserve Chairman Jerome Powell said “the time has come” to cut interest rates. On September 6, the stock market fell 4% on a weak unemployment report, raising concerns about the economy, and rose 8% on September 11 as a cooler-than-expected inflation report bolstered confidence in an interest rate cut next week. .

Nvidia is clearly sensitive to the direction of the economy, and fears of a recession have threatened the stock in recent months as the unemployment rate rises and consumer demand is weak.

So how would Nvidia fare in a recession? The answer is more complicated than you might think.

Image source: Getty Images.

Nvidia and the business cycle

Historically, the semiconductor sector is highly cyclical. Demand for chips goes through cycles of expansion and contraction in accordance with the economy or a new type of technology, and stocks can quickly go from a shortage to a surplus, influencing price and demand.

The broader semiconductor sector is just emerging from a recession caused by an oversupply of memory chips and others for the PC market, as sales of devices surged at the peak of the pandemic and then retreated.

Nvidia itself has gone through boom and bust cycles before. The stock soared during the pandemic as its chips were popular for crypto mining, but ca Bitcoin prices fell and tech stocks entered a bear market, with Nvidia shares down nearly 70% from their 2021 peak to their late-2022 low.

The stock went through a similar cycle in 2018 and 2019, falling nearly 60%.

Why this time could be different

Nvidia has delivered unprecedented results in recent quarters, with revenue tripling over four quarters and profits rising as Nvidia’s profit margins expanded to more than 60 percent.

Its components, which power the AI ​​revolution, are in demand by almost every cloud infrastructure company and AI start-up. Alphabet co-founder Larry Page said he was willing to bankrupt the company to win the AI ​​race and adze CEO Elon Musk also tipped the cap for Nvidia, saying it’s vital for the company to maintain its supply of Nvidia GPUs.

In other words, demand for Nvidia’s products is so strong, and the companies that buy them are so rich, that the business should do well in a recession—it seems like it would take a severe economic crash to break the bank. AI.

Even Nvidia CEO Jensen Huang acknowledged this dynamic at a recent investor conference. Huang was asked at Goldman Sachs Communacopia and Technology conference what he was most worried about. Most CEOs would probably say competition, macroeconomics, innovation, or something along those lines. Instead of discussing potential threats to Nvidia, he went in the opposite direction, saying:

We have a lot of people on our shoulders and everyone is counting on us. The demand is so high that the delivery of our components, our technology, infrastructure and software is really exciting for people because it directly affects their income. It directly affects their competitiveness.

Instead of worrying about demand, as most CEOs might, Nvidia has the opposite problem. It is still struggling to meet the overwhelming demand for its components nearly two years after ChatGPT launched. Huang is worried about satisfying his customers and the pressure on his company to deliver because Nvidia’s products have become so precious because the stakes are so high in the AI ​​race.

What it means for Nvidia stock

Despite the business’ strong position, investors treat Nvidia no differently than a typical semiconductor stock. Based on its price action, they continue to believe that it is highly sensitive to the macro economy and a possible recession, but this does not seem to be true for business at the moment given the imbalance between supply and demand, skyrocketing income the company. , and comments from top CEOs like Meta platformsMark Zuckerberg, who said that the risk of underinvesting in AI is much greater than overinvesting.

Investors can’t control whether Nvidia falls on bad economic news, but they can do something else: Take advantage of the misalignment between business strength and stock volatility and buy Nvidia’s dip if it backs off recession fears. .