Let’s start this write up off on a good note by saying that Nvidia (NASDAQ:NVDA) is a winner for the long term and that the NVDA stock is a buy, especially on dips. If you believe the rhetoric, they will achieve world domination soon.
This extreme sentiment makes investing in NVDA stock tricky because it makes it hard to find entry points that make sense. If the goal is to own it for a decade, then it is less important to fret over a few bucks above or below current levels. But for most traders, it is prudent to try and find buying opportunities that are not fraught with risk.
The scene is set and it favors technology stocks like this. It is not a coincidence that the Nasdaq is at all-time highs even this morning after the quarantine crash. The global shelter-in-place order jump-started the digitization process as it set the fire under the stragglers among us to join the new world order. Going online suddenly cannot wait any longer, so businesses and people alike are scampering to function almost entirely in cyber space. While I have been on the forefront of tech so far, I too find myself opting out of all in-person visits whenever possible.
This trend is not a fad and its ramp just got so much steeper. This will sustain demand on NVDA products and service as well as its two main competitors Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD) for years to come. The prevailing theme on Wall Street is that Nvidia has the edge going forward.
CNBC’s Jim Cramer goes as far as calling the company CEO Jensen Huang “the Einstein of our era.” Although I like the company, I reserve the right to wait a few decades before blessing him with that label. Nevertheless, the popularity of this stock has never been stronger.
Investing in NVDA Stock Requires Patience
I am not one that enjoys chasing all-time highs. At some point investors need to accept the fact that they missed a trade. This is an essential discipline for avoiding mistakes. NVDA stock is up 200% since the 2018 Christmas bottom and 100% just since March. Clearly there is a lot of hopium already baked into the price at these levels.
Valuation doesn’t scare me, at least not from the traditional sense. This is a growth stock and it needs to spend to grow. The price-to-earnings ratio is 70 and while that sounds high, it is 40% lower than AMD’s. In either case that is not an alarming stat. When evaluating growth stocks I don’t look for cheap.
But what does worry me is the amount of hope that is baked into it. Its stock price is 21 times its full year sales. That is more than double that of AMD and five times more than Intel. Managements can solve profitability issues with spending control, but it is much harder to fix a sales problem. This is not to say that NVDA lacks sale, but rather that the Wall Street expectations could be out of whack up at these levels.
Nvidia Leading the Pack
To use consensus, Nvidia is the clear winner in the sector because the stock is up 61% year-to-date versus AMD’s 19%. Intel stock remains in the penalty box flat-to-down this year. If you believe the expert opinions, Nvidia seems the have the edge. It’s all about doing more, faster and more efficiently and they tick all the boxes. The company successfully acquired Mellanox so now they have the AI, the number crunching ability and the platforms to share them.
When it comes to finding entry point, I know investors are not supposed to fish for a perfect entry. But it is against my DNA to chase at all-time highs, especially inside a troubled economy. I don’t want it to collapse, but I do need to see some reversions to means because I prefer to start trades green. Often when we chase we leave portfolios vulnerable to quick disappointments.
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.
