Nvidia Analysis

Nvidia Analysis

Chart done on hourly timeframe. Nvidia’s stock volatility recently ticked up after the stock shed nearly 500B worth of market cap in a matter of a few days. The strong pull back that started last week forced the stock down to correction territory, but as expected, buyers were quick to get in on the dip. The pull back was quickly bought back up because of so many folks waiting on the sidelines for a chance to finally get in, but in the reality of things, the 5% decline it faced didn’t eliminate the risks that accompanies the investment at such levels. 

Nvidia’s massive rally to the $3 trillion valuation was a result of the combination of their phenomenal numbers growth and excitement around artificial intelligence. Although their current revenue doesn’t justify the valuation, it’s the future expectations that are driving the stock higher. Revenue trends suggest that the company will more than double its revenue AGAIN in the coming three years, defying odds of normal growth. 

The growth in artificial intelligence has become a slippery slope for the market, with nearly every single company trying to jump on board the fast changing environment. This is causing CEOs to order hundreds, some even thousands, of processors and chips from none other than Nvidia. 

So for now, the sky seems to be the limit for the company, and surprisingly enough its price to earnings ratio is technically “cheaper” than it was a year ago. Nvidia’s P/E was above 100x a year ago, but its profits have grown so exponentially that its P/E has declined to 69, despite the stock’s rally. We typically see the P/E ratio increase as a stock rallies, and eventually it becomes too expensive so investors sell; however this is part of the phenomenon that keeps investors hooked on this stock. If Nvidia can continue delivering on their earnings outlook, that P/E is projected to continue declining, making it even more attractive. 

So at this point, the market has already reacted to what Nvidia has done, which means their future relies on their ability to deliver on its promises. Nvidia is in a position where it absolutely CANNOT afford to show any weakness or miss on any earnings projections. At such levels, markets will be quick to look the other way if uncertainty rises, and buyers will run for the door as they did in the last three days after just one bad day. 

Can the stock go higher?

In the short term, we expect Nvidia to range trade. Its current range is 115.00-141.00, which would be the best area the consolidate for buyers before it attempts another leg up. However if it fails at 115.00 then there’s a high probability that Nvidia will fall to the 97.00-100.00 mark. We’d expect buyers to step in at that point and begin a rally back up.