Is Nvidia Stock Recession-Proof? The answer may surprise you.

Nvidia (NASDAQ: NVDA ) The stock has seen a back-and-forth whiplash on seemingly minor news items, from blowing out the stock market in the first half of the year.

It's unusual for a $200 billion dollar swing in market value to be added or removed in just one session. That's life for a stock worth nearly $3 trillion, though. Since Nvidia's stock hit an all-time high on June 20, it has moved up or down 5% or more in 15 sessions, reflecting the stock's own volatility and investor uncertainty around where Nvidia is headed.

The artificial intelligence (AI) superstar has also shown itself to be particularly sensitive to macroeconomic data, as well as bets on the direction of interest rates and the broader economy. For example, Nvidia stock jumped 4.5% on August 23 after Federal Reserve Chair Jerome Powell said “the time has come” to cut interest rates. On September 6, the stock retreated 4% on a weak unemployment report, which raised concerns about the economy, and on September 11 it jumped 8% as a cooler-than-expected inflation report bolstered confidence about an interest rate cut next week.

Clearly, Nvidia is 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 weakens.

So, how will Nvidia fare in the recession? The answer is more complicated than you might think.

Nvidia and the economic cycle

Historically, the semiconductor sector has been highly cyclical. Demand for chips goes through boom and bust cycles in line with the economy or a new type of technology, and inventory can quickly go from short to sticky, affecting prices and demand.

The broader semiconductor sector is just emerging from a slowdown caused by an oversupply of memory chips and others for the PC market as device sales surged during the height of the pandemic and then fell back.

Nvidia itself has gone through boom and bust cycles before. The stock rose during the pandemic because its chips were popular for crypto mining, but Bitcoin Prices fell and tech stocks entered a bear market, with Nvidia stock down nearly 70% from its 2021 peak to its late 2022 trough.

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

Why this time may be different

Nvidia has delivered phenomenal results in recent quarters and revenue has more than tripled in all four quarters, and profits are up as Nvidia's profit margins expand to more than 60%.

Its components, which are powering the AI ​​revolution, are in demand from virtually every cloud infrastructure company and AI start-up. the alphabet Co-founder Larry Page has said he's willing to bankrupt the company to win the AI ​​race, and Tesla CEO Elon Musk also tipped his cap to Nvidia, saying it's important for the company to maintain a supply of Nvidia GPUs.

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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 just fine in a recession — it seems like it would take a serious economic crash to stop the AI ​​race.

Even Nvidia's own CEO, Jensen Huang, acknowledged this dynamic at a recent investor conference. Huang A was asked Goldman Sachs He was most concerned about communicopia and technology conferences. Most CEOs will probably say competition, macroeconomics, innovation or something to that effect. Instead of discussing Nvidia's potential threat, he went in the opposite direction, saying:

Instead of worrying about demand like most CEOs, Nvidia has the opposite problem. It is still struggling to meet the overwhelming demand for its components almost two years after ChatGPT was launched. Huang is worried about pleasing his customers and putting pressure on his company that Nvidia products have become so valuable because the AI ​​race is so hot.

What this means for Nvidia stock

Despite the business's strong position, investors aren't treating Nvidia any differently than typical semiconductor stocks. Based on its price action, they continue to believe that it is highly sensitive to the macro-level economy and a potential recession, but that doesn't seem to be true of the business right now, given the imbalance between supply and demand, the company's growing revenue growth. , and like comments from top CEOs Meta platform’ Mark Zuckerberg, who says the risk of underinvesting in AI is far greater than overinvesting.

Investors can't control whether Nvidia falls on bad economic news, but they can do something else: take advantage of the confusion between business strength and stock volatility, and buy dips in Nvidia when bearish fears return.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randy Zuckerberg, former director of market development and Facebook spokesperson and sister of Meta platform CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Jeremy Bowman has a position on the Meta platform. The Motley Fool has positions in and recommends Alphabet, Bitcoin, Goldman Sachs Group, Meta Platforms, Nvidia, and Tesla. Motley Fool has a revealing policy.

Is Nvidia Stock Recession-Proof? The answer may surprise you. Originally published by The Motley Fool