"Nvidia Is Down 27% From Its Peak. History Says This Is What Happens Next."

Nvidia's stock has taken a significant hit, dropping 27% from its peak. This decline has left many investors wondering if this is a buying opportunity or if the stock is headed much lower. Let's dive into the factors driving this downturn and what history tells us about Nvidia's potential recovery.

First, let's look at the key factors driving the recent decline. The primary reason for the current downturn is the emergence of DeepSeek, a Chinese AI start-up that has released a model similar to ChatGPT. DeepSeek claims to have trained its model on older, less sophisticated chipware from nvidia, which has raised questions about the value of Nvidia's newer architecture. This has led to a days-long downward spiral in Nvidia's stock, with the company's market capitalization dropping by as much as $600 billion. As a result, Nvidia's forward price-to-earnings (P/E) multiple has contracted to 30.1, which is in line with where it was a year ago. However, this time around, Wall Street analysts are expecting Nvidia's earnings to double, which could call into question the relevance of the forward P/E ratio.

In contrast, previous downturns in Nvidia's stock have been driven by factors such as transition issues with its latest Blackwell chip and international restrictions. For example, the company reported better-than-expected earnings, but the stock has declined over 13% since its earnings report, closing at a six-month low. Market concerns include potential further export limits on chips to China, which could significantly impact Nvidia's revenue. Additionally, Nvidia's stock is now trading at a slight premium to the S&P 500, its lowest since 2016, and below parity versus the PHLX Semiconductor Index, nearing decade lows. The stock trades at 25 times forward earnings, the lowest multiple in a year. Historically, purchasing Nvidia at this valuation has proven profitable for investors.

Now, let's look at what history tells us about Nvidia's potential recovery. The last time Nvidia's forward P/E hovered around 30 was last January. This is important to note because back in January 2024, Nvidia's market cap was $1.5 trillion -- approximately half of what it is today. Given the parity between the company's forward P/E between now and a year ago, you might be inclined to think Nvidia stock will soar higher -- as was the case throughout 2024. While such dynamics are what history suggests could happen, there is some important nuance to consider this time around.

Pay attention to this nuance: Since Nvidia's current forward P/E multiple is in line with where it was a year ago despite the company's market value doubling, this implies that Wall Street analysts are also expecting Nvidia's earnings to double. Looked at a different way, if Nvidia's market cap had doubled, but the company's earnings didn't accelerate at a commensurate pace, then Nvidia's forward P/E would have widened. This is a concept known as valuation expansion. But as I pointed out in the intro, the DeepSeek storyline is calling into question what demand trends are going to look like for AI infrastructure -- especially graphics processing units (GPU), which are Nvidia's bread and butter.

Candidly, I would not be surprised to see some analysts begin haircutting their revenue and earnings projections for Nvidia. While this does not mean Nvidia should be seen as overvalued, I think investors need to let industry experts digest the DeepSeek news and refine their models accordingly. In other words, Nvidia's current forward P/E being nearly identical to where it was ago could be seen as a bit of coincidence, as earnings estimates are almost certainly going to change -- thereby calling into question how relevant the forward P/E ratio is right now.



At a broader level, though, I'm confident Nvidia will remain a leader in the AI race as its GPUs should continue playing an important role in the technology's development going forward. Just how much? That's the billion-dollar question. So while history may suggest Nvidia's value could double this year, I'd think twice about that. In the long-run, I do think there's still a lot of value to be recognized investing in Nvidia stock. I just don't think shares are going to double again in 2025.

In conclusion, while the current market sentiment towards Nvidia's stock is characterized by a significant decline, historical data suggests that the company has the potential to recover and even surpass its previous highs. However, investors should consider ongoing challenges, such as regulatory risks and market volatility, before making investment decisions. Given the current valuation metrics and the company's strong position in the AI market, Nvidia's stock has the potential for long-term growth. Analysts like Stacy Rasgon suggest that Nvidia's stock is increasingly attractive due to its price-to-earnings (P/E) ratio of 26 times forward earnings, which is more attractive relative to the average Nasdaq-listed company. Additionally, the company's strong position in the AI market, where the demand for AI inference and more sophisticated applications is rising, positions Nvidia for growth. Jensen Huang, Nvidia's CEO, emphasized that "the rising demand for AI inference and more sophisticated applications would actually increase the need for advanced computing power, positioning Nvidia for growth." However, potential investors should consider ongoing challenges, such as regulatory risks and market volatility, before making investment decisions. For instance, market concerns include potential further export limits on chips to China, which could significantly impact Nvidia's revenue. Additionally, the recent challenges faced by Nvidia, including transition issues with its latest Blackwell chip and international restrictions, highlight the potential risks associated with investing in the company. Furthermore, the emergence of DeepSeek's cost-effective AI model initially worried investors about a potential decrease in demand for Nvidia's high-end chips, although Nvidia's CEO Jensen Huang emphasized that the rising demand for AI inference and more sophisticated applications would actually increase the need for advanced computing power, positioning Nvidia for growth.