Often investor become so obsessed with finding the perfect entry point into a stock that they miss a bunch of good trades. Like when Nvidia (NASDAQ:NVDA) fell 40% to $181 in under a month, pundits in the media were not recommending to buy it for fear of further downside. But remember — when it’s perfectly “safe” to enter a trade, the reward isn’t that great. The relentless pursuit of the perfect bottom will more often result in missed opportunities. So today, let’s see if there is more upside to NVDA stock after the 50% rally off the lows.
The short answer is yes, there is upside … but that depends on the individual investor’s time frames. The easy gains from the March crater are done. From here, the upside potential becomes less obvious and more laborious.
Let’s start with the fundamentals, since this is what most investors need. Value is not usually the forte of chip stocks — they tend to be fast movers, especially Nvidia. This is evident from the stock’s wild peaks and valleys of the last two years. Most recently, it rallied 80% then crashed 40% in just six months.
So far it has already recovered more than half of the Covid-19 crash. Yesterday alone it rallied 10%, which may have technically triggered another leg higher.
NVDA Stock Is A Buy Especially On Such Big Dips
In hindsight, the correct thing to do was to buy the dip, but that time has gone. So from here, the bullish bets will need specific triggers like the one from yesterday. The opportunity to catch the falling knife has passed, as the knife has already hit the floor and bounced.
Fundamentally Nvidia stock is not cheap because it still sports a 53x price-earnings ratio and it sells at a whopping 14 times its full-year sales. This is twice as expensive as Advanced Micro Devices (NASDAQ:AMD) and five times as expensive as Intel (NASDAQ:INTC) .
Value alone is not a reason to short either. It just means that Nvidia investors require a strong appetite for risk. Long term it is still a viable bullish thesis because the demand for better faster technology is not a fad but an exponential trend.
Nvidia is one of the leaders that will provide the brains to do that and there is room for it and the other two Intel and AMD to prosper. Current consensus is that NVDA has the technology that will be relevant for years to come. Buying it for the long term makes a lot of sense even now because time of entry is not as sensitive over time. But for trading perspective it would be best to buy it on dips and not chase it up on 10%-gain days.
The Nvidia Chart Has Clues
As big as the last few days have been, NVDA stock sits just below further triggers. If the bulls can break out from $272 then $275 per share, they can lay a path to set new all-time highs. For that they will also need the general market help. At this point, the overall investor sentiment is still badly bruised because people are still stuck at home and out of work. While the Monday spike in the indices was perhaps fueled by speculation that the sickness statistics are improving, we still have no actual proof of it.
I am optimistic that this too shall pass so I would not short the stock based on this point alone.
Even though buying it for the long term makes sense, there still is short-term trading risk specifically from two open gaps that could be potholes. On a bad day it could fall to $245 or perhaps $215, but either of those dips are buy-able without new shoes to drop.
My base case is that markets have already bottomed, but it is an ongoing process. The pundits in the news insist that we will make new lows and that would be okay as well. I don’t claim to know the exact value that will turn out to be the bottom, but I do know that with a little bit of homework like this, investors can find levels that makes sense in individual stock even if not perfect.
NVDA Stock Will Lead The Global Reboot
The biggest near-term uncertainty still lies in how quickly we can restart the world and get back to business. The American tech companies like Nvidia are growth stocks, and they will likely carry the indices back from this giant hole they fell into. The good news is that they are not directly sensitive to the consumer spending like a restaurant would be. Since most of us don’t upgrade computers or peripherals more than once every few years, the individual buy cycle tends to be a bit longer and much less frequent than eating out.
At the first sign that we are beating the virus, these technology stocks should rally earliest and hardest.
That’s why the long-term bearish thesis here is risky, thereby making it almost a default buy decision for NVDA stock. But the equity bulls have to respect the risk that is still at hand. In the past two weeks, around 10 million Americans filed for unemployment and that is terrible news. Taking full size positions all at once is reckless but nibbling while we form this correction trough makes sense for a lot of people.
Risk appetites vary among investors, and Nvidia ranks at the top of the echelon of it. When momentum stocks like this and AMD rally, they don’t leave obvious point of entry, thereby leaving a lot of traders out of them. The alternate way to trade them is indirectly through the use an exchange-traded fund. The Invesco QQQ Trust (NASDAQ:QQQ) would move in tandem with the chip sector without being too exposed to a downturn in it. The QQQ also has other mega-caps like Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) in it which tend to move a little bit slower than chips but with the same direction and timing.
Buy-The-Dip Still Applies
Regardless of the style of trading, this correction was the fastest ever from high too low. The statistics were simply astonishing, and if there’s any truth to the saying that investors should buy the dip, this was your chance. There’s a reason why Warren Buffett, who I think is the best investor of all time, says to be greedy when others are fearful, because it works. The U.S. is going into an election cycle so the White House is committed to use every incentive it can to the restart the economy. And the opposition cannot stand in the way even if they want to, because then they would then seem like they are taking away money from the people.
This almost guarantees a positive outcome for the incumbent and Wall Street will like that because they hate change.
This too shall pass — I’ve said it before and I believe it more now.