Why NVIDIA Might Be Immune to the Semiconductor Sell-Off

It’s been an unforgiving past week for the iShares Semiconductor ETF (NASDAQ:SOXX), down just over 8%, even with the 3.6% bounce on Wednesday. Meanwhile, shares of Nvidia (NASDAQ:NVDA | NVDA Price Prediction) are up close to 6%, a stark contrast to the action we’ve seen in the semis of late.

In many ways, it feels like Nvidia trades more like a member of the Magnificent Seven than like just another semiconductor firm. Given its wide economic moat and opportunities that go far beyond chips, perhaps Nvidia deserves to rally on the up days for the semis while being mostly spared from the pain when the semis implode.

Since the start of the year, Nvidia hasn’t really traded closely with the hotter iShares Semiconductor ETF. With the GPU giant missing the boat on the way up, perhaps it should come as no surprise to see the firm being spared from the latest wave of selling that hit the semiconductor scene so suddenly.

Nvidia’s been surprisingly resilient amid the latest round of semi volatility

While it’s far too soon to tell if Nvidia is immune to the semiconductor sell-off, something I mentioned in passing in a prior piece covering the AI chip giant, I do think that the company is behaving more like a defensive play on the chip scene.

And once momentum does reverse course, I do view Nvidia as a firm that could outperform by losing less ground than its more cyclical peers that lack that software moat. Whether we’re talking about the CUDA lock-in or other profoundly powerful tools that enable new technological trends (think NVQLink), it’s clear that Nvidia is just a cut above many of the far-hotter DRAM or NAND makers.

Beyond its more magnificent attributes that go above the hardware layer, and its many partnerships with some of the best forces across the AI scene, Nvidia has arguably already paid its dues in the past six months, with shares dragging their feet not only relative to the red-hot semis, but the Nasdaq 100, the S&P 500, and even Coca-Cola (NYSE:KO), which posted is up 20% year to date.

Will Nvidia’s resilience continue if the semi sell-off gets really bad?

Just because Nvidia shares have been incredibly resilient thus far doesn’t mean they can’t suddenly fall in sympathy with the rest of the semi scene. But, unlike most other pricier semi plays, Nvidia has that lower valuation that it can fall back on.

The stock trades at just north of 31.0 times trailing price-to-earnings (P/E) while the iShares Semiconductor ETF goes for a closer to 40.0 times trailing P/E.

I don’t think it makes a lot of sense for Nvidia to go for a discount when it’s arguably the most dominant company in the semi waters, with a visionary leader in Jensen Huang whose leadership deserves to go for a big, fat premium to the industry, at least in my view.

With that lower valuation cushion and lots of earnings-growth fuel as the “Vera Rubin boom” arrives, I do think Nvidia might be the only semi stock to “safely” reach for at a time like this, when investors fear higher rates and a peaking out of the hyper-cylical chip plays.

The bear case is still quite scary for Nvidia shareholders

Where Nvidia’s relative resilience could collapse, though, is if hyperscalers hint at tying future CapEx to the ROIs that flow in.

Indeed, you don’t even need a hyperscaler to step up to the podium to announce that CapEx is coming down or staying at a ceiling for the semis, including Nvidia, to enter a vicious, panic-driven sell-off. I have no idea when or if the hyperscalers will start getting serious about monetization.

When the Fed started raising rates back in 2022, much of big tech looked to layoffs in what was a year of efficiency after overhiring in the years prior. Could the same happen to AI, especially now that they’ve cut costs elsewhere to keep their AI CapEx in a competitive spot? Time will tell.

Either way, a CapEx freeze from one hyperscaler, I think, might be enough to cause a panic and perhaps a violent rotation away from AI and towards less-CapEx-intensive businesses outside of tech. Over the long run, I expect CapEx to shoot higher.

But does that mean one “freeze” year is off the table? In my view, one AI winter might be the healthiest thing for the AI revolution from a long-term perspective.

The bottom line

So, in short, Nvidia looks immune this past week, and while it could continue to be a better chip stock to own amid volatility, I think all bets are off should a hyperscaler stop raising the bar on CapEx.

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