What To Make of NVIDIA

Have you heard about this stock NVIDIA? Ha ha!

We are joking, but just about anyone doing anything in stocks has now heard about NVIDIA Corporation (NVDA)!

We have followed this company since it came public in January 1999. At the time – and for many years afterward – the company was known for its video game chip business.

They were the best at making the graphics chips to create leading-edge video games and continue to hold that title. It was across these last two decades that they leveraged this skill into creating the most advanced chips in the world…

NVIDIA has been an incredible success story as a company and a stock.

As a company, the earnings growth has been incredible. Here is a table of the earnings growth in the last decade…

The company had an admirable record of growing EPS from 2014 until 2022, but then the earnings growth went wild!

This occurred as the demand for artificial intelligence chips exploded. This was NOT expected!

Here is a chart of analyst expectations for 2024 earnings across the last few years….

Ten months ago, estimates were for $6 of 2024 EPS to $24 or up four-fold in less than one year!

That is incredible performance for a company the size of Nvidia – which was already a $250 billion company BEFORE this happened.

Readers of HX Research know that our view is that the single, most potent driver of stock price performance is earnings growth.

If you find a company where you think earnings will go from $1 to $10, the stock will likely go up a lot! It could go up more than the earnings or less than the earnings, but that stock IS going up.

In this case, the earnings went from $5.50 to $24, and (as you know) here is what the stock did…

Last week was probably the most “important” week ever for the stock.

The company posted earnings and blew away the numbers. That part, you know…

Why do we say "important" in quotation marks?

The truth is that this particular earnings report doesn't make or break Nvidia's long-term outlook. It was just another quarter. One where they continued to show the strong momentum they had demonstrated in the last few quarters.

The numbers were awe-inspiring but – at this point – less surprising than they were a year ago. Expectations for the company have risen along with the stock price.

We say “important” because there was a perception that the fate of the entire stock market hung on the outcome with NVIDIA.

We have been an active market participant for over three decades, and seldom have we seen THIS level of focus on the earnings of a single company. That is saying something…

Did the earnings report REALLY matter to the markets?

In the very short-term – maybe.

We have entered a seasonally weak period (more on this in another upcoming HX Daily) after the stock market had a massive run and is quite extended from the moving averages. We also had seen a nasty day earlier in the week.

The stock market needed a breather and had the equivalent of being punched in the face. Suppose the NVIDIA report turned out to disappoint relative to expectations. In that case, we could have easily seen this market continue to correct.

That didn't happen, though; we have gone to new highs.

How much does NVIDIA matter NOW for the stock market?

Not so much in our view. The fact is that it is still just one stock. One colossal market capitalization stock at almost $2 trillion, making it 4.5% of the S&P 500 and the third largest component. Still, though, it is just one stock.

Look at the stock of the second most significant component of the S&P – Apple Inc. (NASDAQ: AAPL). It is over 6% of the S&P 500, and the stock has done nothing since June last year. Despite that, the S&P 500 has managed to hit new all-time highs.

The big question we get – is, what do you do with NVIDIA stock from here?

Based on decades of experience and similar situations, our view is nothing.

That's right. Nothing. The best idea is to sit on the sidelines.

How can you do that? How can you afford to miss NVIDIA?

If you are buying it today, you have already missed it! Or at least the first +400%.

We are a big proponent of the idea that for a stock to go up ten times, it has to go up four times first.

With NVIDIA, though, we are now talking about a VERY large company. A $2 trillion company.

For it to go up another +400%, you must believe it can become an $8 trillion company. This would make it the most valuable company in the world by far…

Remember how it reached this point also – the earnings estimates went up +400%. Do we think earnings estimates for next year will go from $24 to $100?

Hmm, we don't see either one of those as high-probability bets!

Another factor to consider is the technical. 

The stock is extended from its 50-day moving average with an exceptionally high "relative strength index" or "RSI."

This shows that investor enthusiasm is at rare levels. Again, go back to the degree of the overall market focus on this single company's earnings report.

Does this mean shorting the stock? Absolutely NOT!

Stocks that get this overbought initially are more likely a buy. That bet, though, is not a great one. 

As time passes and the stock stays overbought, the likelihood that it consolidates to its moving average increases. For NVIDIA, that is around $600 or -25 % of the current levels.

There are two ways it can get there.

It can go down and meet the moving average. Alternatively, it can churn sideways until the moving average meets the stock price.

Neither of those options is going higher.

The last element is sentiment.

In our experience, when a stock (or an asset) becomes this much of a focal point, it is due for a breather, at least for a while.

We don’t think NVIDIA is going to be any different!

What do YOU think investors should be doing with NVDA stock right now? Let us know in the comment section below.

Our view is to sit on the sidelines and wait for a better opportunity

Check out Enrique Abeyta’s conversation with Whitney Tilson on the HX Podcast.