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Nvidia shares are in the hands of supply and demand

Nvidia’s share price rose by 547% between March 2020 and November 2021 to $330 per share. But down 27.5% year-to-date, its trajectory remains uncertain.

Nvidia (NASDAQ: NVDA) share price has been one of the prime beneficiaries of the covid-19 pandemic, as demand for semiconductors soared on the cultural adoption of home working and cryptocurrency.

But Nvidia shares fell to $221 on 11 March, as its plans to acquire ARM collapsed and the Russia-Ukraine war shook market confidence. After recovering to $277 by 25 March, they have now fallen to $222 today.

Nvidia share price: 3 factors to consider

1) Analysts divided

Semiconductor demand may finally be slowing. Truist analyst Willian Stein has warned of ‘a sudden negative shift in demand signals from a wide swath of computer, consumer, and communications OEMs to at least some of their semi suppliers.’

Moreover, he’s concerned that ‘a combination of just enough demand destruction and just enough additional supply is leading to a traditional cyclical downturn.’ While keeping Nvidia shares at a buy, the analyst has cut his price target from $347 to $298.

Meanwhile, RW Baird has downgraded Nvidia from outperform to neutral and cut its price target from $360 to $225. The investment bank believes demand for Nvidia GPUs is likely to fall as they are no longer needed to mine Ethereum after the cryptocurrency’s hard fork.

On the other hand, Keybanc has a $310 target and an overweight rating. New Street Research has upgraded the stock from neutral to buy, with a $280 target. And Cowen has assigned Nvidia an outperform rating and a $350 target.

With Nvidia’s anticipated price range between $225 and $350, continued volatility seems certain.

2) Supply chain shocks

A potent cocktail of high demand and low supply has been key to driving Nvidia’s share price rally. If demand stays strong, this could be to Nvidia’s benefit. And the supply crunch could be about to worsen.

First, there’s the impact of the Russia-Ukraine war. The two countries are globally significant producers of semiconductor-critical materials including Palladium, Platinum, Nickel, Gold and Neon. All are at or close to record highs as exports collapse.

There’s also the resurgent pandemic in China to contend with, which saw Shanghai enter total lockdown. While restrictions are now easing, the busiest port in the world and global semiconductor centre is likely to minimise activity if Beijing continues with its ‘zero-covid’ policy.

Finally, there’s the 3M factory in Zwijndrecht, Belgium to consider. Responsible for 80% of global production of semiconductor coolant perfluoroalkyl (PFAS), the plant has been ‘closed indefinitely under tightened local environmental regulations’ since early March. The company says its PFAS stockpile will only last another one to three months.

3M is investing $163 million to improve its disposal of PFAS chemicals but says ‘the timeline to resolve the situation is uncertain and, in several aspects, not in 3M’s control.’

3) Long-term demand

Inevitably, the supply chain issues will eventually resolve. Therefore, the long-term investment case hinges on continued high demand.

But inflation in the US, Nvidia’s home market, has hit an astronomical 8.5%. And it’s expected to rise even further. Meanwhile, the Federal Reserve is widely expected to raise interest rates by 50 basis points in May.

Worryingly, Reserve member James Bullard has warned it’s ‘fantasy’ to believe such small rate rises will be enough. Medium-term US disposable income could soon come to a screeching halt.

But the far-flung future could be different. Almost every aspect of the tech revolution relies on semiconductors. Hybrid working requires many employees to maintain two sets of equipment. And the cars of the EV revolution need twice as many chips to function.

Then there’s the continued attempts to legitimise cryptocurrency, the drive for rearmament with modern weapons, and the continued race for the Metaverse. At current projections, Nvidia already expects Q1 revenue to increase by at least 43% year-over-year to $8.1 billion.

But with analysts in disagreement amid shifting supply and demand, Nvidia shares in the long-term can only promise volatility.

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