Wall Street loves Nvidia Corporation (NASDAQ:NVDA) and the stock’s almost 300% rally in the past year suggests long investors have made the right bet. But it’s worth asking how much more runway does NVDA stock have left? While I’m not ready to proclaim the downfall in Nvidia stock, I do wonder to what extent NVDA can live up to the already-high expectations it has created for itself.
Indeed, the Santa Clara, Calif.-based semiconductor company has executed to perfection. Nvidia’s entry into the realm of virtual and augmented reality, data centers and self-driving cars, among other growth markets, were well-timed moves, pushing it ahead of the likes of Intel Corporation (NASDAQ:INTC) and Qualcomm Inc. (NASDAQ:QCOM). But that’s now also an attractive short thesis in Nvidia stock.
Part of the reason had to do with a bearish call by Citron Research — the same firm which correctly predicted the decline of Valeant Pharmaceuticals Intl Inc (NYSE:VRX).
“Citron readers know we have long been fans of $NVDA, but now the mkt is disregarding headwinds. In 2017 we will see $NVDA head back to $90,” read the research note posted on Twitter. Citron noted that there are six risks that the market is currently ignoring. These include growth and market share, data center competition, intellectual property, Intel licensing revenue, gross margin sustainability and increased competition from custom silicon and GPU workarounds.
Nvidia stock closed Friday at $104.01, down 1.09%. Not only has the stock stumbled out of the gate in 2017, down about 1% year to date, the shares have fallen almost 12% from their 52-week high of $119.60 reached on Dec. 28. Assuming the NVDA stock does reach $90 that implies potential declines of near 15%.
Indeed, a 15% decline after almost 300% one-year returns is not a disaster. But Nvidia’s status as a momentum stock would hardly limit the decline to 15%.
And here’s the thing: From current levels, NVDA stock has more of a realistic shot to reach Citron’s $90 target than climbing to another 52-week high. Why? Again, after almost 300% returns over the past year, who’s left to buy the stock that have not already done so? There are — arguably — more sellers in Nvidia stock now than there are buyers. And with Nvidia needing to “crush” 2017 estimates just to “meet” expectations, there is too much pressure on the stock to go higher.
It would seem the short sellers picked up on this, as short interest in Nvidia stock grew from 44 million or so in late July to more than 71 million in mid-December. However, some of that short interest eased in late December, after NVDA peaked and lost some froth heading into the end of 2016. Short interest now sits at 55 million — still an uncomfortable 10% of the float.
The ride upward has been fun, but with short sellers now piling in — including professional short Citron — long investors should cash in their Nvidia chips and live to play again.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
