Our Analysis of NVIDIA Corporation (NVDA)

Last week, we shared our "Quantamental" analysis of Tesla Inc.'s (NASDAQ: TSLA) stock.

This approach combines "quantitative" analysis, which consists mostly of technical analysis, with "fundamental" analysis of the company's operating metrics.

We developed this approach in our thirty years as professional investors.

We have simplified our approach to three simple analyses that we think can cover 90% of the analysis of any individual stock.

We will apply this analysis to one of the most popular stocks each week in HX Daily.

This week, we are going to discuss what has certainly been the most popular stock in the last year: NVIDIA Corporation (NASDAQ: NVDA).

Our analysis below is not a formal recommendation on the stock. Based on our analysis, we are giving our views of what is most likely to happen from here.

Here is the analysis…

1. Technical Analysis

Last week with TSLA, we just looked at the RSI analysis, but our technical analysis really focused on two factors: long-term trends and short-term overbought vs. oversold.

Had we included the trend analysis on TSLA stock, it would have been a "neutral" conclusion. Over the long term, the stock has had a great run—it is one of the best stocks of the last decade. In the intermediate term, it has been terrible!

Overall, TSLA lacks a trend right now. This rally looks like it may establish a broad range for the stock.

The same is NOT true for NVDA stock at all. This one has one hell of a trend!

First, here is the long-term chart of the stock across the last five years…

There is no doubt that this stock has a well-established upward trend. That is a bullish signal for us.

We want to buy stocks whose charts are up and to the right. Over the last five years, the stock has gone from less than $4 a share to about $130, or an incredible +4500% return!

One interesting thing to note is that most of that move has only really happened in the last eighteen months. At the end of 2022, the stock was around $20 per share, so still +500%, but the massive move has happened more recently.

Here is a shorter-term chart and the “relative strength index” or “RSI” data…

The stock is up a lot and had recently been very overbought on an RSI basis, but it has now corrected some and consolidated. The current RSI reading is 57, which is a "neutral" reading to us.

Our one note of caution is that the stock is quite extended from the moving averages. Now, it is almost 12% above the 50-day moving average and 23% above the 100-day moving average.

The last time the stock consolidated in April, it did so by retreating by -20% and meeting the rising moving average. Currently, the stock is only -3% off the recent high.

We think the stock could see a similar period of consolidation. This means there could be another -10% to -15% downside from current levels.

Given the volatility of the stock, that is normal.

Overall, the technical picture of NVDA stock is constructive. One should own the stock but be ready for some consolidation.

TECHNICAL ANALYSIS = HOLD.

2. Earnings Revisions

As we said in last week's analysis, revisions of financial metrics are the most powerful driver of stock prices.

We refer to them as “earnings” revisions, but they can also be revenue revisions. We usually look at not only the most popular measure—earnings Per Share (EPS)—but also other measures, such as Earnings Before Interest, Depreciation, and Amortization (EBITDA).

For NVDA, the EPS revisions are most important, and here is the chart of those estimates…

This chart is AMAZING!

Earnings estimates have gone from less than $0.60 for the full year 2024 a year ago to more than $2.70 now. That is an incredible move higher, especially for a company this big.

We have been vocal in this newsletter and social media, explaining that THIS is why the stock has had such a massive run.

Incredibly, the stock's valuation has not moved much higher, as it has simply kept up with the incredible rise in EPS.

This has been accompanied by them blowing away the individual earnings reports. Here is that table…

The company has been handily beating numbers.

Interestingly, the "beats" have become smaller since the initial ones that propelled the stock a year ago.

This is normal. Eventually, Wall Street analysts catch up with the fundamentals of the company.

Now, we know that this data is backward-looking, but our experience is that when companies show this kind of momentum it c, it continues. We believe that you bet on that momentum until it stops.

Our view on NVDA earnings revisions is the same as ours on the TSLA earnings revisions from last week.

Until we see a trend change, we expect the current trend to continue.

We have a note of caution here, though: It does look like the analysts are catching up. At some point, the stock will be vulnerable to a "disappointment" if it only beats by a certain amount.

We are still determining when that will happen, though, and we are willing to hold the stock until it does.

EARNINGS REVISIONS = BUY

3. Earnings Growth

The final measure we focus on is the actual growth in the revenue and earnings.

As we showed with the EARNINGS REVISIONS, the data EARNINGS GROWTH for NVDA is fantastic. Here is that table for EPS…

The company has gone from earning $0.04 a share a decade ago to earning $2.60 this year, a stunning 65x growth in EPS!

As we said before, given the company's size, we have rarely – if ever – seen growth of this magnitude in a public company.

This is why it has been such an incredible stock.

Again, though, this data is backward-looking. What do we think about the future?

One concern is that analysts are predicting a deceleration in earnings growth, given the stock's momentum, which could be an issue and contribute to volatility.

Some investors like to buy stocks that beat numbers by a significant amount and grow triple digits. Given the growth that has already happened, it is likely that NVDA stock will soon not be that kind of stock.

That means those investors will move on to other stocks.

There are some interesting offsets as NVDA is now such a sizable portion of the stock indices that professional investors who are measured against the index need to own it.

Deceleration in growth – and the size of the market capitalization and overall earnings – argue that the stock has less upside than before. This is just math.

However, we have more significant concerns based on our long time in the stock market and our following technology.

We are currently in a period of hoarding of the NVDA chips.

We saw a story that leading venture capital firm a16z is buying up a store of NVDA chips to use for their portfolio companies. They believe this will give them an advantage in getting deals and helping these companies.

There is nothing wrong with this idea.

However, we remember similar activity during the Internet Bubble, when companies hoarded Cisco networking equipment and Corning fiber optic cable.

Both those companies—Cisco and Corning—saw real growth in earnings. All that equipment eventually powered the Internet we know today.

The problem ended up being two-fold.

First, many of the companies that were buying the equipment could have been more profitable. That is less of an issue with AI chips, but it is still a concern.

Second – and a more significant concern – is the natural economic reaction of supply and demand. NVDA and all its competitors are building more capacity to service this demand.

This means that there will be more supply, which will impact pricing at some point.

Do we reach a point where – even if it is momentarily – there are too many chips, and near-term demand goes down?

It is impossible to predict, but we will share that this has happened in EVERY SINGLE OTHER similar situation.

At some point, it WILL happen with NVDA.

In the meantime, though, the outlook for earnings growth remains positive.

EARNINGS GROWTH – BUY

Conclusion

Like TSLA stock, we have a nuanced view of NVDA stock.

We think that it is an excellent stock to own right now. The stock could consolidate some (and present an even better buying opportunity), but the earnings momentum should continue.

Other factors create demand for the stock, like the index demand.

If the company continues to beat numbers, earnings revisions go higher, and they continue to grow – we think NVDA will go higher.

It will not be like it was before, but it will go higher. In our view, the stock is a BUY.

HOWEVER – this is a stock where we would use a very tight “operational” stop-loss.

We are less concerned about stock price corrections, but if (when) the company misses expectations, we will quickly exit the stock.

We think NVDA will continue to be one of the leading technology companies in the world, but we expect earnings to go down during this period. You do NOT want to own the stock then.