Is Nvidia a Safe Stock to Own During a Recession?
Nvidia (NASDAQ: NVDA) has generated phenomenal returns for investors in recent years. Since 2020, it's up around 2,000%. The company is coming off yet another fantastic earnings report where its sales more than doubled from the previous year. There's plenty of optimism for the future and for it to remain a top artificial intelligence (AI) stock to own for years.
But what if there's a recession next year? Could a slowdown in the economy hurt this seemingly unstoppable stock, or is it a good buy to hold even amid a downturn?
How Nvidia did during the last big recession
The last big recession in the markets took place more than 15 years ago. The Great Recession began in latter stages of 2007 and ended in June 2009. During that time, the S&P 500 crashed by 38%. Nvidia, which was still in the early stages of its growth at the time, incurred a mammoth 64% drop in value over the same time frame.
It's a similar trend looking back to 2022, when rising interest rates made investors bearish on the markets. That year, the S&P 500 fell by 19% and Nvidia also incurred a much heavier loss of 50%. This doesn't mean that it's likely to underperform the more diverse index every time there is a downturn, but there are reasons why the AI stock could be particularly vulnerable in a recession.
Why Nvidia may struggle along with the economy
The main reason to invest in Nvidia is for its promising growth prospects. With many businesses looking to develop AI models and next-gen products and services, there's a significant need for AI chips and servers, and that has been propelling Nvidia's growth. But in the midst of a slowdown in the economy, companies could significantly scale back their spending and investments.
That could result in Nvidia's growth rate starting to slow down, plus it would impact the forecasts for its future growth. And it's those expectations that help justify why Nvidia is still a good growth stock today. While it's trading at 56 times its trailing earnings, if investors and analysts are expecting significant revenue growth (i.e., more than 60% in the long run), then that would mean it has a price/earnings-to-growth (PEG) multiple of around 1 or less, making it a good growth stock to buy for the long haul.
But if those expectations come down, then it will become more difficult to justify paying such a high price for Nvidia. This is why Nvidia can be a particularly vulnerable stock to own during a recession as those sky-high expectations for future growth are allowing its valuation to remain high.
If, however, there's a slowdown in AI spending and companies do not see it as good investment, or even if there's just an increase in competition, either one of those factors could impact its growth prospects, and lead to a lower premium for the stock, resulting in a possible sell-off.
Of course, investors also always need to be at the ready for other surprises, such as the just-announced Department of Justice probe on antitrust matters.
Is Nvidia's stock still a good buy?
Nvidia is a leader in the AI chip market and it can still be a good investment to hang on to for the long term. In a recession, however, investors should brace for the reality that it could perform much worse than the market. High-valued stocks are usually the most at risk during a downturn, and Nvidia is no exception. Although it's doing well, this is not an infallible stock by any means and with perfection priced into its valuation, investors should be aware that a sell-off could happen if the economy falls into a recession.
You can still earn a good return from buying Nvidia's stock today, but you should be willing to hang on for the long haul and brace for the possibility of a bad performance during a recession.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool has a disclosure policy.
Is Nvidia a Safe Stock to Own During a Recession? was originally published by The Motley Fool