The past several days have been particularly good ones for NVIDIA Corporation (NASDAQ:NVDA) shareholders. The NVDA stock price today is right around $197, well up from September’s close of around $179, largely driven by upgrades and upped price targets.
Mizuho Securities, for instance, recently reiterated its “Buy” rating on NVDA and raised its target to $220. Shortly before that, Needham reiterated its “Buy” opinion as well, upping its price target primarily because it sees Nvidia as the primary beneficiary of the advent of artificial intelligence.
The bullish arguments make sense. The NVDA news headlines make it pretty clear that the company is leaving rival Advanced Micro Devices, Inc. (NASDAQ:AMD) behind on the A.I. front and, though each cryptocurrency could collapse at any given time, the cryptocurrency mining industry itself isn’t going away anytime soon (if ever).
Nvidia is one of the centerpieces of that movement too.
The sentiment tide has turned extremely optimistic of late, however, with a slew of analysts piling on with raised opinions and raised targets, touting the same bullish case as one another — and the same bullish case each of them has made in the past.
Might all this table-pounding quietly hint that a top — even just a short-term one — is nigh?
In a word, yes.
Giving full credit where it’s due, this idea comes from Bruce Kamich of Real Money fame. He suggested on Monday that the recent wave of raised price targets for NVDA indicated “crowd behavior,” where one analyst simply follows the lead of another and then another analyst feels obligated to chime in with more optimism of his/her own, prompting another analyst to do the same… and so on and so on.
Such developments are dangerous because they’re not rooted in the fundamentals. They’re psychologically driven, with the analytical community creating the very stock-driving NVDA news they believe will prod Nvidia shares higher.
It works, but only for a while. Sooner or later, investors look back and see how far they’ve come, and realize the run-up wasn’t justified by any plausible NVDA earnings outlook.
And that’s when the pendulum for story stocks like Nvidia can turn the other direction, and make a return stroke larger than most everyone was expecting.
It’s not just in your (or my) head either. The upgrades, raised price targets and general table-pounding have been coming fast and furious in just the past few days.
- 10/16/17 – Muzuho raised price target to $220.
- 10/13/17 – Needham ups price target to $250
- 10/12/17 – RBC Capital Markets raised price target to $220.
- 10/12/17 – Goldman Sachs increase price target from $193 to $217.
- 10/11/17 – B Riley reiterated its “Buy” rating and $200 price target.
That’s an awful lot of cheering in a short period of time, most of which was gratuitous.
Don’t misread the message. Nvidia is a solid company with a fantastic future. It really is the heart and soul of the artificial intelligence movement thus far, and its graphics cards are always cutting edge, whether they’re being used to mine cryptocurrencies or simply play video games.
Calling a spade a spade though, the biggest reason Nvidia shares are moving higher now is because they’re moving higher. It’s not a recipe for long-term success and once traders realize that the current price targets well in excess of $200 also translate into a frothy forward-looking price/earnings ratio of around 55 (and that’s based on 2019’s earnings outlook), the market may adjust the stock’s price accordingly.
Bottom Line on NVDA Stock
The tricky part is figuring out when this right-pricing may occur, and that’s if it occurs; traders have a penchant for defying the odds and defying logic for long periods of time. As long as the market wants to buy into the rhetoric and ignore Nvidia’s valuation, NVDA stock will remain overpriced.
Of course, with the spring coiled as tightly as it is and confidence in the stock reaching unrealistic levels, NVDA is anything but a name you can afford to take your eyes off of, even for just a second.
As they say, expect it when you least expect. Story stocks that live by the sentiment sword also die by the sentiment sword.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter.