Here’s Why NVIDIA Made the Shorts Run for Cover Dear Louis, I’m going to let you in on a little secret… I loathe short sellers.
Short sellers are those who essentially bet that a stock will go down. They will borrow shares and then sell them on the open market - this is what it means to be “short” the stock. And if the stock falls, the short seller will then buy the stock to "cover" their position – hopefully at a lower price, making a tidy profit in the process.
When there are a lot of short sellers shorting a stock, it can cause the stock to pull back sharply. I should also add that some have no problem playing dirty by spreading nasty rumors to scare everyday investors out of a stock.
This is exactly what happened to NVIDIA Corporation (NVDA).
NVDA had been on a tear for much of the year – up more than 46% by February 16. However, on Tuesday, February 20, the day before NVIDIA’s all-important fiscal fourth-quarter earnings report, the stock dropped as much as 6.7% on above-average volume on no major news. But the reality is that over the weekend, rumors of NVIDIA “round-tripping” resurfaced.
Round-tripping is when a company pads its numbers by selling an asset to another company, only to buy it back at a similar price later on. That is a serious accusation because it is considered to be unethical and even illegal.
In the case of NVIDIA, it invested $872 million in 38 startups through the first nine months of 2023. This compares to $83 million invested in the first nine months in 2022. But it was believed that NVIDIA invested to ultimately benefit itself, according to The Information: These deals help Nvidia earn loyalty from leading AI companies, and, because most of them are Nvidia customers, the company stands to earn back the capital. Critics have described the way firms like Nvidia account for revenue from these startups as “round tripping.”
Startups don’t mind. They need the cash – and even more, they need the chips. And there’s a bonus: The halo effect around Nvidia helps them capture other investors’ interest because everyone in AI wants to play nice with Nvidia. Now, during a CNBC International interview last Tuesday, I was asked if there was any truth to the rumors.  This was my response… [NVIDIA] is a real company. It keeps guiding higher. Their backlog for chips keeps getting bigger. I have no evidence of them padding anything… These short sellers are scum. If you really want to get your ratings up, I’ll have to be in studio with a short seller, and we’ll be on the ground when we’re done with that session. These are scummy, nasty people, and I don’t appreciate them taking great stocks and ruining the party. Well, as we now know following NVIDIA’s phenomenal earnings results, its growth is quite real: - Fourth-quarter revenue soared 265% year-over-year to a record $22.1 billion.
- Fourth-quarter earnings jumped 486.4% year-over-year to $5.16 per share.
- Total revenue for fiscal year 2024 was $60.9 billion, or 126% annual revenue growth.
- Fiscal year 2024 earnings came in at $12.96 per share, or 288% annual earnings growth.
Ahead of NVIDIA's earnings report, short interest stood at a whopping $18.3 billion, making the AI chip manufacturer the most heavily shorted stock in the semiconductor sector.
But the short sellers couldn’t have been more wrong – and that triggered a major short squeeze in the stock. So, in today’s Market 360, I’ll review what a short squeeze is and how it impacted NVIDIA’s share price. I’ll also explain why short sellers should never bet against a fundamentally superior stock, and where you can find the most superior stocks. What Is a Short Squeeze? A short squeeze is essentially when traders who were betting that a stock was going to drop are “squeezed out” of the trade if the stock moves higher. In order to short the stock, they had to essentially borrow the shares on margin, and then sell them to someone else. If the stock goes too far up - and their positions go too far in the red - their brokers will come knocking to collect on this “loan.”
As a result, the short sellers are forced to close out of their positions and buy the stock, which drives the stock price even higher. Think of it like shaking a can of soda and then opening it – the soda practically spurts out and makes a huge mess!
Short squeezes tend to be triggered by good news, like a strong earnings report, which is what we saw with NVIDIA. Thanks to the results, short sellers had to cover their positions and take a beating in the process. They lost nearly $3 billion when shares of NVIDIA swung up 15% on Thursday, according to S3 Partners. I’ll admit, there is nothing more pleasurable in life for me other than squeezing shorts. Not to be too dramatic, but I want to destroy every single one of them, and I hope they go out of business.
The reason why is simple. Other than a few risk-taking individual investors, short sellers are often well-heeled hedge funds. And sometimes an easy way for them to make money is to scare regular investors out of a stock. However, earnings season can throw a wrench in their plans, because this is when a company – like NVIDIA – can prove that it does have the numbers to justify its rapid growth. Investors then know that there was no truth to the rumors and may jump back into the stock. Where to Park Your Hard-Earned Money The bottom line: Never bet against a fundamentally superior stock… especially during earnings season. Earnings will come out and bury all the short sellers.
It’s why I only invest in healthy companies with strong underlying fundamentals, sales and earnings that will drive them higher over time.
And that’s exactly what I do in Growth Investor.
My Growth Investor companies are all fundamentally superior, and when they report earnings, they usually jump because there is significant future upside and not because short sellers are simply running for cover.
It’s why my Growth Investor stocks continue to dramatically outpace the S&P 500. In the past three months, my average Growth Investor stock has surged 29.7%, while the S&P 500 has gained 14.6%. I should also add that my average Growth Investor stock posted an average earnings surprise of 8.9% after posting 17.9% average sales growth and 147.5% earnings growth. And yet, my Growth Investor stocks trade at only 18.3 times median forecasted earnings. So, they are not overvalued, which means they should continue to appreciate in value.
Institutional investors are now aggressively accumulating my Growth Investor stocks, which is why my stocks beat the S&P 500 by over 2-to-1 in the past three months.
To further position my Growth Investor Buy Lists for profits, I am adding four new stocks – three high-growth companies and one dividend play – in tomorrow’s Growth Investor Monthly Issue for March.
Join me at Growth Investor today so you can receive my newest recommendations as soon as they’re published. Once you sign up, you’ll have full access to all my Monthly Issues, Weekly Updates, Special Market Podcasts – and more!
Become a member of Growth Investor now.
(Already a Growth Investor member? Click here to log in to the members-only website now.) Sincerely, |
| Louis Navellier
Editor, Market 360
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
NVIDIA Corporation (NVDA)
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