What to Make of the Supercharged NVDA Stock Price Run
Editor's Note: A version of this story first appeared in Jason Bodner's Power Trends.
Nvidia Corp. (NVDA) achieved two awe-inspiring feats in one swoop last week:
A near 25% surge in its share price.
Getting close to joining an elite club of tech giants.
The chipmaker experienced its meteoric single-day jump thanks to the twin infusions of strong earnings reported on May 24 and a strong dose of investor interest in artificial intelligence (AI).
The value of the company soared from $755.2 billion to $940 billion in a single day.
It's great for investors who already owned the stock.
It's great for the entire tech sector — the strongest sector in my Quantum Edge system here in May.
And it's great for semiconductor stocks, which have already rallied big since October.
But here's the thing…
A lot of investors who jumped into Nvidia last week did so out of emotion. FOMO, or “fear of missing out,” is a powerful force…
One that causes folks to fall into the trap of buying high.
And that's why I worry some folks might have overpaid.
Let me give you some more detail in what I'm seeing with Nvidia, as well as provide an alternative AI opportunity that's flashing on my radar.
It is a bona fide “outlier” in my Quantum Edge system. It has seen a whopping 151 Big Money buy signals over the last nine years — more than one per month. Those buy signals are the footprints I track of unusual activity that Big Money tries to keep quiet.
The green bars on the chart below mark those signals, and you can see a lot of buying early in the year that cooled off a bit and has picked back up recently.
NVDA has also been on my Top 20 list 71 times. This is a weekly list of the top stocks in my system. And hedge funds and institutions pay a lot of money for this insight. NVDA has gained nearly 12,000% in the nine years since it first appeared on that elite list.
Nvidia made its name as the leader in graphics processing units (GPUs), which redefined computer graphics and displays and sparked massive growth in video games.
Today, NVDA is considered a leader in chips for AI applications, and that's largely what brought in last week's maniacal buyers.
The company earned 18% more per share than expected, and sales were 10% above estimates. But it was expectations for the current quarter that made everyone crazy. Management guided for sales of $11 billion this quarter, a full 50% above Wall Street estimates.
That's right: Nvidia said revenue (not profits) would soar 50% from last quarter — not from last year.
CEO Jensen Huang attributed that ramped-up guidance to a shift to “accelerated computing.” Translation: Demand for AI-related chips is off the hook.
“A trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process,” he said. If anybody had doubts that artificial intelligence is the hottest investing trend around, they shouldn't anymore.
But after last week's massive jump, don't be surprised if people start profit-taking from NVDA and the price starts to dip.
Huge moves in either direction are almost always followed by some kind of reversion. I've seen it more times than I can count — some air almost always comes out of a stock after it rockets higher.
That's borne out in my data as well.
In school, a score of 100 signified perfection — and is what we all coveted. Not so when it comes to buying stocks.
In my system, if a stock's Technical Score is 100, we know there is nowhere to go but down. That level of buying is unsustainable. And that means a pullback is in the cards.
Even before today's pop, NVDA's Technical Score was 91.2, which is close to being overheated. It will be even higher tomorrow, after my computers crunch all of today's trading data.
It also echoes a concern I had before NVDA's earnings, which I mentioned previously in Power Trends. The stock's valuation was already rich before its last earnings report.
In one of my recent reports, I said that shares were trading at 63.7 times expected future earnings. That will change some as estimates will surely rise, but it's undoubtedly an expensive stock right now. I don't mind paying up for a lot of growth, but that valuation is pushing it.
The only other red flag in my system is the company's relatively high debt level at 54.4% of equity. But given the high growth rate and strong revenue bump, I would be willing to look past that at a little bit lower valuation.
And that's why — if you want to own NVDA — I'd wait for a pullback. I have it on my watchlist as well.
But that doesn't mean there aren't other AI investment plays out there worth considering.
Thanks to AI, economists from MIT, Harvard, and Boston College believe that we are about to witness the explosion of the biggest wealth gap we've ever seen. And with what AI can do, who can disagree with them?
But fortunately for retirees, there is a way to profit from all of it.
I mentioned Advanced Micro Devices (AMD) previously.
As a competitor in the AI market, AMD has a powerful ally on its side: Microsoft Corp. (MSFT), which is reportedly helping AMD expand into artificial intelligence processors. With the backing of this tech behemoth, AMD will be better equipped to grow the AI side of its business.
Morgan Stanley analyst Joseph Moore originally estimated that AMD would bring in $100 million in AI revenue in 2024, but now he believes “the opportunity in formation is materially larger,” bumping up his outlook to $400 million and noting that $1.2 billion is attainable in an optimal situation.
Shares have soared nearly 30% in less than two months since I recommended AMD in Quantum Edge Trader.
The stock's Technical Score is also high at 86.2, but it's not quite as overheated as NVDA's. AMD also posts a higher — and outstanding — Fundamental Score (83.4 versus 62.5 for NVDA), and Big Money has been buying a lot over the last week.
AMD trades at 38 times expected earnings, which is a less frothy valuation and not the potential drag that Nvidia's forward price-to-earnings ratio is. I have a buy-up-to limit for AMD for the members of Quantum Edge Trader, which they can access here.
The Bottom Line
NVDA is a great company and a great stock. I'm thrilled that it did so well and guided so much higher. The company is a semiconductor bellwether, and in one earnings report it may have bolstered sentiment toward the entire industry.
We knew the trend was toward AI chips, and NVDA helped investors realize the transformation is happening.
NVDA should definitely be on your radar, but again, you need to be cautious.
As I've shown with AMD, there are other opportunities out there, with several companies lighting up my Quantum Edge screens at the moment, showing the fundamental strength, technical strength, and Big Money support that indicates more gains are ahead.
TradeSmith is not registered as an investment adviser and operates under the publishers' exemption of the Investment Advisers Act of 1940. The investments and strategies discussed in TradeSmith's content do not constitute personalized investment advice. Any trading or investment decisions you take are in reliance on your own analysis and judgment and not in reliance on TradeSmith. There are risks inherent in investing and past investment performance is not indicative of future results.
Post a Comment
Post a Comment