Nvidia Corporation’s (NASDAQ:NVDA) has had a rough two months. After setting record highs in September, Nvidia stock has fallen over 50%. About 30% of NVDA’s tumble was along with the October market-wide correction, but the rest is from a hideous reaction to Nvidia’s earnings report.
NVDA earnings were a serious disappointment. It wasn’t so much that Nvidia is losing its edge, but rather that there was too much hopium built into Nvidia stock coming into the call. Expectations were too high, but the punishment was also too harsh.
Nvidia stock bottomed on Tuesday and has since rallied 14%. The question from here is if this is a dead-cat bounce or is it safe to wade back into Nvidia stock for a sustained rebound. In essence, this could be a chance to pick the falling knife up off the floor after it already hit the ground.
Risks Still Exist for Nvidia Stock
Tentatively the answer is yes. NVDA should have a real chance at a nice rebound. But it will need the market’s help.
Long gone are the days of BTFD. Instead of buying the dips, investors are now selling the rips.
Equity markets are already nervous about U.S.-China tariff war — something that politicians never want us to forget. Just yesterday and after a strong rally, the Wall Street Journal released a new version of an old headline. President Trump reminded investors that he is ready to add more tariff into the mix if they don’t come to terms at the G20.
Traders immediately sold the headline after hours, most notably hitting Apple (NASDAQ:AAPL). President Trump specifically mentioned potential iPhone tariffs. AAPL could become a special weapon in the tariff war. And it is a heavyweight. As the largest (or second largest) company by market cap, AAPL weigh the markets down on its own, which in turn is an indirect threat to NVDA.
Nvidia stock also needs U.S. Federal Reserve Chairman Jerome Powell to soften his tone about 2019 aggressive rate hikes, or else stocks will be swimming upstream and sellers will continue to be in charge.
This is all to say that the risks that brought NVDA from its highs before the earnings are still here. So sentiment is still bearish and the bears have the upper hand for now.
Positives for NVDA
This week could be a sentiment game changer if we get a dovish statement from Powell and if the G20 meetings go as planned. While I don’t expect an earth shattering deal, I do believe that cooler heads will prevail. I am not so sure about the timing, however. In the end, all sides have too much at stake.
Experts on Wall Street are split on Nvidia stock between BUY and HOLD ratings and it is trading well below all their price targets. So the longer NVDA stays this low, the higher are the odds of a bearish surprise headline to reduce targets.
Nevertheless, last week I started a long position — but through NVDA options. I am more confident in the support below than in the risk appetite on Wall Street. My trade doesn’t need a rally to profit so it’s a bet that the low was already set.
So far the trade is profitable from the bounce off the floor but I really want to eventually bet on the upside potential. If markets stabilize, then it’s time for those who missed the NVDA stock mega rally the first time to get in on it. But this time the rally will be more realistic. Bulls have been stung and their feeding frenzy will be more muted this time.
Nvidia is a momentum stock. So it is always difficult to trade with confidence even without the threat of combative tweets. NVDA moves fast in both directions and almost never gives traders clear entry signs.
At some point the fundamentals will matter, and investors will overcome the fear impulse from headlines. NVDA is a worthy risk even in a conservative portfolio. The company is in the right areas and have great technologies.
Also now that the bloom fell off the bitcoin bud there is less froth in NVDA stock from that perspective. More downside from here will require serious bad Nvidia news that I just don’t think is there.
Valuation is not all that matters, of course. But after this tremendous dip, it now sells at a reasonable 20 P/E ratio. This is cheaper than Alphabet (NASDAQ:GOOGL) but still is relatively expensive relative to Nvidia’s direct competitors.
In the end, winners will go back to winning and NVDA still is one to watch. Even after its recent woes, it is still up 73% in two years which is stronger than most other tech companies and double that of the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH).
Click here for more of my market thesis and get an ongoing free copy of my weekly newsletters. Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.
