NVIDIA’s (NVDA) stock price has soared by almost 600% in the last six months, making it one of the most talked about companies on Wall Street. While its short-term growth has been remarkable, it’s reckoning it could be just around the corner.
The company is set to report earnings this February 21st in what could be a make-or-break event for investors and the market as a whole. This could be DiCaprio’s Titanic moment for NVIDIA. The spotlight is on, and everyone is eager to know whether NVIDIA will sink like Jack or rise like Leonardo.
As the investment geeks we are, we couldn’t pass up on the opportunity to unveil what exactly is driving the stock’s parabolic growth and if it’s sustainable or not. So, we pooled our best resources and skimmed through dozens of reports on a quest to uncover if NVIDIA’s elevator has reached the penthouse floor.
Why Is NVIDIA Going Up?
Last week, news broke out about NVIDIA dethroning Amazon (AMZN) and Google (GOOG) to become the third most valuable company in the United States. A move that shocked non-believers.
To their credit, the stock’s rapid growth has been nothing short of spectacular. While tech stocks are no strangers to hypergrowth, things are a little different when a mega-cap as large as NVIDIA grows this much in such a short time. NVIDIA is not a penny stock or a crypto token. This is one of the largest companies by market cap in the world. When it moves fast and hard, its effects ripple across the markets.
A $1.5 trillion surge in market cap tells a tale of fortunes being forged. One of millionaires and perhaps even possible billionaires in the making. Inevitably it raises eyebrows and makes us wonder which forces are funding the expansion.
A perfect storm of trend investing, outstanding earnings performance, and excellent market positioning appear to be the fuel feeding NVIDIA’s euphoria.
After the release of Chat GPT, generative AI has taken the spotlight on Wall Street with NVIDIA serving as the poster child of the AI frenzy. Major consulting and research firms are projecting that the industry could be worth trillions of dollars once it matures. This has set the perfect stage for an AI investment gold rush that Wall Street doesn’t seem to get enough of.
According to analysts, NVIDIA controls as much as 80% of the generative AI chip market, making it the go-to hardware for AI products. This explains a lot. AI is flourishing as a new business sector and is expected to disrupt nearly every industry under the sun.
The need and demand for GPUs that can handle generative AI and train AI models could boom over the next decade. This unique positioning makes the company one of the most attractive investments in the AI industry today.
Is Nvidia Expected to Beat Earnings?
To say NVIDIA’s fiscal fourth-quarter earnings report next Wednesday will be closely watched would be an understatement. NVIDIA investors are eagerly waiting to see if the AI chip maker continues its reporting strike.
NVIDIA bulls have more than AI market projections to justify their case. The company’s earnings report history is one to envy. The company has reported better-than-expected EPS over the last twelve reporting periods.
Overall, the market consensus appears to be mostly positive for the upcoming earnings release. Analysts’ earnings per share (EPS) estimates oscillate between $4 per share on the low end and $5 per share on the high end. Even at the lower end, the estimate would represent nearly fivefold growth YoY for the company’s earnings.
For context, NVIDIA’s EPS in the same quarter last year was $0.88. In the previous quarter, the company reported EPS of $4.02, where the general consensus estimate was $3.03.
If the chip manufacturer lives up to expectations, they could close the year with a gold ribbon by reporting a ballpark of $20 billion in revenue for the last fiscal quarter. That would make this the third consecutive quarter of triple-digit percentage growth in earnings for the company.
Wall Street’s NVIDIA Fever
To get to the bottom of the NVIDIA case, we had to peek behind the curtain and see who was buying and selling the stock. What we found was enlightening.
13F filings from the last quarter of 2023 show that a few heavy-weight investors are jumping on the NVIDIA bandwagon. Some of the most notable filings include:
- Bridgewater Associates, Ray Dalio’s hedge fund, increased their holdings by more than 450% to $133 million.
- Investment Corp, Paul Tudor Jones hedge fund, increased their holdings by 810% to $65 million.
- Fisher Investments, Kenneth Fisher’s hedge fund, increased its holdings by $800 million to $4.4 billion.
However, not everyone was bullish. Bearish bets were also part of the fillings, including trimming positions by investors like David Tepper, Jim Chanos, and Steve Cohen.
But the data that impacted us the most was that of Ark Invest. Cathie Wood’s fund is best known for its passion for high-tech and disruptive innovation. We were surprised to find out that Ark sold NVIDIA shares last quarter in a transaction worth nearly $3.5 million.
The shares were traded by two of Ark’s flagship ETFs, Ark’s Autonomous Technology & Robotics ETF (BATS: ARKQ) and the ARK Genomic Revolution ETF (BATS: ARKG).
Will Nvidia Shares Continue to Rise?
In a report by McKinsey titled “The economic potential of generative AI,” the consulting firm shares the mind-boggling potential of the generative AI industry. The report claims that the AI industry “could add trillions of dollars in value to the global economy.” Between $2 and $4 trillion annually, to be exact.
Considering these claims, it’s not difficult to see why speculators are raving about NVIDIA. Their GPUs enjoy little competition and are critical for developing a multi-trillion-dollar industry. Chips aren’t like USB flash drives that can be easily manufactured and replicated. These are some of the most complex pieces of technological hardware available today.
New market players would require large capital investment and many years of advanced research in order to catch up. In other words, competition is not exactly creeping around the corner.
Nonetheless, while it’s not impossible for NVIDIA to keep this pace, it might be difficult for investors to justify buying the stock at these prices.
As of the time of this writing, the company is trading at a Price-to-Earnings ratio of 97 multiples. In other words, if earnings revenue were used for funding, the company would take 97 years to buy itself.
Despite its future potential, NVIDIA’s current P/E ratio can be perceived as too high, even by chip-maker standards, which tend to be much higher than those of its peers.
The average P/E ratio for the semiconductor industry is around 36 times the value of their earnings. That makes NVIDIA’s current valuation nearly three times higher than its industry average—a fair value for its unique positioning. You tell me.
Compared to its mega-cap neighbors, NVIDIA’s valuation still seems utterly absurd. Microsoft’s P/E ratio is 36 multiples, Apple’s is 28 multiples, and Google’s is 26 multiples.
Some analysts have suggested that this does not necessarily mean the company’s rally will come to an end. Their arguments include a comparison to companies at the top of the dot-com boom, which had P/E ratios as high as 250 times their earnings.
The argument is valid, but that doesn’t make it a sound investment strategy. Let’s not forget that not too long ago, Tesla bulls called for the stock to continue rallying to $ 5,000 per share. As of this writing, the carmaker is struggling to stay above the $200 mark.
Market euphoria can cloud the judgment of even the best analysts. Nonetheless, history has proven that markets can stay irrational longer than one can stay solvent. Therefore, it’s always wise to proceed with caution if one chooses to be a contrarian.
Nvidia’s Technical Analysis
Looking at a chart can tell us a lot about market psychology. But one doesn’t need to be an expert in technical analysis to recognize the emotions driving NVIDIA’s price action.
NVIDIA’s shares have risen parabolically, ascending practically in a straight line upward. A sign that the bubble could soon burst and bring the stock price back down to earth. Looking closely, the first signs of a slowdown or a pivot might be starting to show. For the first time since early January, the stock closed in the red for two consecutive days.
Nvidia’s share price also appears to be facing resistance near the $740 level, where it has struggled to make a new high over the past five trading days.
We plotted a Fibonacci Retracement from the November 2021 peak all the way down to the October 2022 lows to find out if $740 was a significant resistance level. Fibonacci retracements are a valuable instrument in a technical analyst’s toolbox. The model is based on the idea that markets will retrace a predictable portion of a move.
Technical analysts typically use this tool to determine profit-taking levels when a stock continues to set all-time highs. The retracement showed the 2.618 Fibonacci line at the $740 mark. The 2.618 level represents a critical level of profit-taking, confirming this could be an area where the stock price could pivot or retract.
If that’s the case, bears could enjoy as much as 33% downside before reaching the next significant level of support. In contrast, the next Fibonacci resistance line is only 25% away from the current price. This gives bears the upper hand when it comes to risk and reward.
Pushing through the $740 mark to the next Fibonacci level would require serious efforts from the bulls. Reaching the next Fibonacci line would require the company’s market cap to soar by another 25% or $450 billion.
Does the market have another $450 billion to pour into NVIDIA soon? Only time will tell.
Is Nvidia Still a Buy?
While NVIDIA does have a lot of potential, it’s uncertain whether the stock will be able to continue its dramatic rally. Nonetheless, its future outlook looks promising.
The stock received at least three buy ratings from Goldman, UBS, and Loop Capital in February. The institutions changed their price targets to between $800 and $1200 from $500 and $600.
In the short term, there appears to be a lot of mixed signals. Indecision could lead to profit-taking, range trading, or even a full-price pivot. However, its future still appears bright, and its long-term growth potential remains attractive.
If the NVIDIA bubble bursts, the impact of the move will echo across the markets. Now a nearly two trillion dollar market cap stock, NVIDIA can single-handedly pull indices like the Nasdaq down with it. For the sake of the markets, let’s hope for blue skies ahead or, at the very least, a soft landing.
One thing is certain. We’ll keep NVIDIA on our watch list.