Nvidia Corporation (NASDAQ:NVDA) climbed more than 45% in almost unfettered fashion from Jan. 1 through Friday’s open. Even after the opening bell, NVDA stock seemed destined to keep scrawling out all-time highs as it jumped another 2% or so.
And then, Citron Research went full buzzkill.
Citron’s Andrew Left — known for high-profile short calls against the likes of Nu Skin Enterprises, Inc. (NYSE:NUS) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX) — sees Nvidia stock dropping to $130, or about 15% lower than current prices. He referred to it as a “casino stock” and said to head to greener pastures:
“Take your profits and move on to Google (Alphabet). Exposure to the identical array of ‘sexy businesses’ with less risk on the downside. In the recent frenzy in NVIDIA shares, it has added more to its market cap than the total valuation of its competitor AMD. Now it is fueled by an irresponsibly bullish number from Citi.”
We did a bit of analysis on NVDA stock last week in which we said a pullback would be beneficial. As much fun as perpetual rallies might be, that’s not healthy price action.
Well, we might have gotten it.
$130 Before $180?
Citigroup analysts have a $180 price target for NVDA — the exact price target Citron refuted in its note, with Left saying there was a better chance Nvidia stock would hit $130 before it hit $180.
Of course, Citigroup also made a “blue sky” case for $300. The ultra-bullish case rests on multiple expansion, autos and data center.
That higher valuation seems awfully farfetched. NVDA stock already trades at 12 times sales and 45 next year’s earnings estimates. Granted, those profits are forecast to grow 20% this year and 13% in 2018 — and Nvidia has a track record of topping estimates — that’s still awfully frothy.
Up until today, however, most investors ignored it.
But Isn’t Nvidia a Great Company?
Nvidia has transformed from a boring, low-margin chipmaker to virtually a tech necessity, with products that power the cloud, datacenters, autonomous driving, gaming and artificial intelligence/deep learning.
Those industries aren’t going to cool off. Consider conference calls and numerous interviews with the management at CyrusOne Inc (NASDAQ:CONE) — top dividend picks last month — who says they can barely keep pace with datacenter expansions. Consider increased VR product offerings from the likes of Facebook Inc (NASDAQ:FB) and Samsung Electronics (OTCMKTS:SSNLF).
Mark Cuban has gone uber-bullish on the space, saying the world’s first trillionaire will be an entrepreneur in artificial intelligence. AI is an emerging technology that everyone from International Business Machines Corp. (NYSE:IBM) to Amazon.com, Inc. (NASDAQ:AMZN) is working on. This channel has immense growth opportunities over the next decade. That’s huge for Nvidia, whose Tesla GPU accelerators help power the cloud offerings of China’s Tencent Holdings (OTCMKTS:TCEHY). Those Tesla products are built on Nvidia’s recently unleashed next-gen GPU architecture, Volta, which is featured in Microsoft Corporation (NASDAQ:MSFT) Azure NC-Series virtual machines.
And by being properly positioned in self-driving cars, Nvidia can again take advantage of another huge growth opportunity over the coming decades. Funnily enough, autonomous driving is one of the reasons Citron calls BlackBerry Ltd (NASDAQ:BBRY) the next Nvidia.
It’s usually enough to have your foot in one growth door. Nvidia has both feet, its hands and its neck jammed in tight. NVDA hasn’t more than tripled in the past year for nothing.
What to Do With NVDA Stock Now
Nvidia stock has to deal with an ugly, ugly turn of events. But it’s not all bad.
Some “dark cloud cover” has emerged on Nvidia’s stock chart, after a solid open turned into a far more drastic reversal. Of course, we’ll need a couple days’ worth of confirmation before we can really call it a reversal, but the setup is there. MACD (shown below) has been indicating a pause, too.
After blasting through $120 resistance, NVDA stock now finds itself trading near $153. The stock has long been overbought — per the Relative Strength Index — since early May. Today’s selloff, though, is helping to cut into that overbought reading, which eventually should help Nvidia when it’s ready to recover.
So, what should longs be looking for at this point?
It might be a bit much to expect shares to simply recover come Monday and resume their wild climb higher. Instead, I’d like to see a pullback to the 20-day moving average around $141 (also the stock’s last base). Citron’s $130 target — 20% lower from Thursday’s closing price — would put NVDA stock in technical purgatory. My guess is if Nvidia collapses all the way to $130, it won’t stop there, and could continue to the 50-day MA around $120.
Daring short-sellers should keep a tight watch on Nvidia, as there could be plenty of buyers on the sidelines waiting to dive in at a (relative) bargain.
But ultimately, I believe Citron’s research merely was the spark for a long-overdue and healthy pullback. Interested buyers should wait for NVDA stock to at least hit the 20-day MA before going long.