This is the craziest market I’ve ever seen. We now have conditions like we’ve never traded through before. Most notably is how big a role the U.S. Federal Reserve is playing in equity markets. They have developed a third unofficial mandate to also prop equity markets. As a result, the indices won’t quit rallying, even when it feels like a bearish day. One sector rests and another one makes a new high. Nvidia (NASDAQ:NVDA) stock is one of the stars up 100% in a year.
That’s twice as much as its main rival Advanced Micro Devices (NASDAQ:AMD). Intel (NASDAQ:INTC) is the third rival languishing red for the same period.
Critics complain about Nvidia’s traditional fundamental metrics being too high. They probably feel a bit vindicated since it has sharply corrected since mid-April. In total, it fell 14% from high to this week’s low. Nevertheless, it is still holding well enough, so there is no need to sound panic alarms yet.
I get it. These persistent altitudes make it difficult to invest with confidence. On long-term charts, it still looks too high to inspire bullish appetites. Therefore, any upside bets right now should come with moderate conviction at best.
Having said that, betting against it is absolute lunacy. NVDA stock spent eight months consolidating below $560 per share. As long as price is above that, the whole zone is excellent support.
Moreover, the company’s fundamentals are an even better defense for the stock price. This is not a not a cheap company by any means. But that’s not an attribute I look for in one that grows this fast. The value of this stock lies in the company’s incredible performance. They are reinventing the way the world computes, which can’t come cheap.
A Lot Going for NVDA Stock
Nvidia has a P/E of 85 and a price-to-sales of 22. That’s almost three times more expensive than AMD and widening. They are both champions among the chip companies. “Cheap” is not always smart because you get what you pay for. Those who chose Intel stock at a bargain literally got nothing for it in a year. Conversely, NVDA stock delivered a double win during the same time.
Strategically, the experts agree that they now have a material advantage, so it has a position of power. They are driving the trends of computer brain-power and everyone else is following. Gone are the days of it being a graphics card company.
Management will report earnings in a few weeks, so we will learn more about their progress. I am very confident that they will deliver excellent numbers. I am also equally as confident that we won’t know which way the stock will go that morning. The price driver on the headline comes from human emotions not facts. Case in point, Amazon (NASDAQ:AMZN) reported its best quarter ever and the stock fell 10%.
Emotions Are Running High
Investors are more emotional these days than ever. Maybe this comes from the ongoing battle between Wall Street and Main Street on Reddit. There is a new breed of trader mentality that is relentless in the pursuit of their stocks. This is exaggerating the rotation between the Nasdaq and the small-cap stocks. The point is that NVDA stock falls through no fault of its own. It moves with the prevailing meme, not from fundamental reasons.
Value is not a problem and dips to $550 per share are buying opportunities. This was a level I marked as pivotal on the chart back in December. If the markets correct sharply, buying Nvidia stock at $480 will be a gift for a generation. If 2020 taught us anything it is to expect the impossible, so remain humble with the opinions. Back in 2018, Nvidia fell 50% from $280 per share. The more surprising part was that it couldn’t find buyers even at $120 per share.
At $280 the experts were absolutely sure that it was a buy. Yet, it lost half its value and there were no loud calls to step in at the bottom. Even if we know the value of something it doesn’t mean that its price will appreciate. At these heights, it is a good idea to limit our conviction levels.
To put it simply, leave room for error.
The biggest price driver for stocks is the Fed’s QE. This could come to a screeching halt if we continue to have strong jobs reports. Fed Chairman Jerome Powell last week told us he needed loose monetary policy to create jobs. Well, if we get the jobs, then the reason goes away – and the taper comes. We all remember what happens when the market throws a taper tantrum.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.