Is Nvidia Stock Recession-Proof? The Answer Might Surprise You.

Nvidia (NVDA -0.03%) stock has gone from blowing away the stock market in the first half of the year to whipsawing back and forth on seemingly small news items.

It’s unusual to see swings that amount to $200 billion in market value being added or taken away in just a single 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’s moved up or down by 5% or more in 15 sessions, a reflection of the stock’s own volatility and investor uncertainty around where Nvidia is heading.

The artificial intelligence (AI) superstar has also shown itself to be particularly sensitive to macroeconomic data as well as bets about the direction of interest rates and the greater economy. For example, Nvidia stock jumped 4.5% on Aug. 23 when Federal Reserve Chair Jerome Powell said the “time had come” to lower interest rates. On Sept. 6, the stock pulled back 4% on a weak unemployment report, sparking concerns about the economy, and it jumped 8% on Sept. 11 as a cooler-than-expected inflation report reinforced confidence in an interest rate cut next week.

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

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

Nvidia and the economic cycle

Historically, the semiconductor sector is highly cyclical. Demand for chips goes through boom and bust cycles in line with the economy or a new kind of technology, and inventory can swing from a shortage to a glut quickly, influencing price and demand.

The broader semiconductor sector is just emerging from a downturn that was caused by oversupply of memory chips and others for the PC market as device sales boomed during the height of the pandemic and then pulled back.

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 as Bitcoin prices plunged and tech stocks entered a bear market, Nvidia stock fell nearly 70% from its peak in 2021 to its trough in late 2022.

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

Why this time could be different

Nvidia has put up unprecedented results in recent quarters with revenue more than tripling over four quarters, and profits soaring by as Nvidia’s profit margins have expanded to greater than 60%.

Its components, which are powering the AI revolution, are in demand from virtually every cloud infrastructure company and AI start-up. Alphabet co-founder Larry Page reportedly said he was willing to bankrupt the company to win the AI race, and Tesla CEO Elon Musk has also tipped his cap to Nvidia, saying it was 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 buying them are so rich that the business should do fine in a recession — it seems like it would take a severe economic crash to pause the AI race.

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

We have a lot of people on our shoulders, and everybody is counting on us. Demand is so great that delivery of our components, our technology, infrastructure, and software is really emotional for people because it directly affects their revenues. It directly affects their competitiveness.

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

What it means for Nvidia stock

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

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