To shamelessly borrow from all other analysts, Nvidia Corporation (NASDAQ:NVDA) is simply on fire this year. After a blowout 2016, in which NVDA returned over 230%, shares are still burning hot. Year-to-date, the innovative chipmaker is up over 84%, and momentum is seemingly only growing faster. While that’s great news for early investors, worries about an overheated situation abounds.
For starters, the NVDA stock price has barely budged for the last several days. Ironically, the company’s prior market successes hinder future progress. With shares flirting with the $200 level, it takes a lot more impetus to drive NVDA meaningfully higher, percentage-wise. From an investor’s point-of-view, this point is significant, because successful trades are judged through percentages, not nominal prices.
Furthermore, the NVDA news cycle all points toward the bullish argument. This broad consensus may offer psychological security for some, but astute market participants interpret the common accord differently. As InvestorPlace contributor Will Healy warns, potential buyers should beware the “herd mentality.”
The NVDA stock price today, though nominally elevated, isn’t completely unjustified. In fact, plenty of internal and external fundamentals support its dramatic and extended rally. Healy, though, writes:
Still, as famed investor Jim Rogers said, “nearly every time I’ve strayed from the herd, I’ve made a lot of money.” The herd is definitely on the buy side. Therefore, NVDA stock looks to be one that should be purchased with one’s gambling fund. Given the 250 PE [price-earnings] ratios of stocks such as Amazon.com, Inc. (NASDAQ:AMZN) or Netflix, Inc. (NASDAQ:NFLX), NVDA could easily match that PE.
The issue is that nobody wants to buy anything at a premium if they can avoid it. Based on the NVDA news that constantly pumps out bullish arguments, is now the time to go contrarian?
NVDA stock must Overcome significant Resistance
The NVDA stock price today certainly gives value investors some pause. Currently, the semiconductor firm trades at over 56 times trailing earnings, or 147% higher than the industry median. Cheap, Nvidia shares are not.
It’s at this juncture that the investing public starts to scrutinize overheated companies. Two pieces of evidence suggest that NVDA could be due for a nearer-term pullback.
First, Serge Berger, our chief technical analyst, warned that Nvidia has entered into overbought territory. The most obvious gauge is the relative strength indicator (RSI), which flashed “overbought” for the third time this year. Back when shares sustained their extreme bullishness in May and June, NVDA eventually corrected sharply. Possibly, a similar outcome may occur soon.
In addition, Berger successfully called upside movements since Nvidia broke above the $174 level. But he also issued his overbought warning after shares breached $190. Using the NVDA stock price today as a barometer, shares have gained less than 4% since Berger’s cautionary note.
The second piece of evidence is Nvidia’s historical inability to “follow-through” on a prior year’s massive performance. The average response in the year following NVDA returning triple-digit profits is an ugly 20% loss.
This year’s an anomaly, as Nvidia will likely set a company record for the strongest response after a triple-digit performance. The current record is a 40% gain, set in 2000, after the stock returned over 138% in 1999.
However, most companies just can’t keep putting up monster numbers year after year and Nvidia is no exception. Add the fact that the NVDA news stream is largely bullish, and you have a recipe for a contrarian play.
Also, bear in mind that analysts fully expect a beat for the upcoming third quarter NVDA earnings report. If it doesn’t happen, expect shares to get pummeled.
Don’t Miss the Forest for the Trees
I completely respect the bearish argument; indeed, I fully expect shares to be lower over the next few weeks compared to where the NVDA stock price today is. But to go decisively into the other side of the trade? That, to me, is crazy talk.
While you want to be smart about your entry points, you don’t want to punish great companies for being successful. Sure, Nvidia is no longer the sexy stock pick that it was, but, now at least, the company is realizing the potential that early speculators believed in two years ago.
Whether it’s smart cars or cryptocurrencies, Nvidia is levered toward the industries in which you absolutely want leverage. It’s not just about where NVDA is right now, it’s also about where the company will be.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
