Is NVIDIA a safe stock in a recession? | The Motley Fool

NVIDIA (NVDA -4.80%) The company has delivered incredible returns to investors in recent years. The stock price is up nearly 2,000% since 2020. The company just released another stellar earnings report, more than doubling revenue year over year. There’s a lot of optimism about the future, and it will likely remain a top artificial intelligence (AI) stock to own for years to come.

But what if there’s a recession next year? Will an economic slowdown hurt this seemingly unstoppable stock, or is it still a stock worth owning even in a downturn?

What happened to Nvidia during the last Great Recession

The last major market downturn was over 15 years ago. The Great Recession began in late 2007 and ended in June 2009. S&P 500 It fell 38%. Nvidia, which was still in the early stages of growth at the time, lost 64% in value over the same period.

Looking ahead to 2022, we’re seeing a similar trend as rising interest rates have made investors bearish on the market. That year, the S&P 500 fell 19%, and Nvidia suffered an even bigger loss of 50%. This doesn’t mean that AI stocks are likely to underperform a more diverse index every time there’s a downturn, but there are reasons why they could be especially vulnerable in a downturn.

Why Nvidia will struggle with the economy

The main reason to invest in Nvidia is the company’s promising growth prospects. Many companies are looking to develop AI models and next-generation products and services, which is driving demand for AI chips and servers, which is helping Nvidia grow. However, with the economy slowing, companies may significantly scale back their spending and investments.

As a result, Nvidia’s growth rate may start to slow, which will impact future growth projections. And it is these projections that justify why Nvidia remains a great growth stock even today. While the stock is trading at 56 times its trailing year earnings, if investors and analysts are expecting significant earnings growth (i.e., 60%+ over the long term), then a price-to-earnings-growth (PEG) multiple of roughly 1 or less means it’s a great growth stock to buy for the long term.

But if those expectations fall, it will be harder to justify paying such a high price for Nvidia. That’s why owning Nvidia during a downturn can be especially risky, because the company’s valuation is held up high by sky-high expectations for future growth.

But if spending on AI slows and companies no longer see it as a good investment, or if competition simply increases, either factor could impact the company’s growth prospects and lead to a lower stock price premium, which could lead to a sell-off.

Of course, investors should always be prepared for other surprises, such as the recently announced Department of Justice antitrust investigation.

Is Nvidia stock still worth buying?

NVIDIA is a leader in the AI ​​chip market and is a worthwhile investment to hold for the long term. However, investors need to prepare for the reality that in a downturn, it could perform much worse than the market. Highly priced stocks are usually the most at risk during downturns, and NVIDIA is no exception. Although it has performed well, this is by no means a foolproof stock. With perfection priced into its valuation, investors need to be aware that a sell-off could occur if the economy goes into a downturn.

You can still make a nice profit by buying Nvidia stock today, but you need to be prepared to hold onto it for the long term and prepare for the possibility of a downturn in performance.