Nvidia (NASDAQ:NVDA) has been on fire, surging from the depths of the novel coronavirus selloff. At last week’s high (on July 13th), NVDA stock was up 139% from the lows.
Not only does that crush its peers like Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) — which are up 60.5% and 50% from the March low to the post-selloff high — but it crushes the overall market too.
In the same span, the S&P 500 and Nasdaq are up 48% and 63%, respectively, as the latter has hit new all-time highs. However, after such a big run, the question among investors seems to be shifting from “how high can Nvidia go” to “when will shares pull back?”
Let’s look.
Trading NVDA Stock
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The past few months have been a dream come true for both investors and traders. At least, when it comes to the price action in Nvidia.
Shares have continued to trend higher and higher, grinding up along the 10-day and 20-day moving averages. The latest push sent shares to $431.69, before dipping back to these key short-term moving averages. All I know is, Nvidia was a steal below $200. Above $400, not as much.
While it appears Nvidia stock is stretched, the current price action remains constructive. The stock was modestly overbought during the push to new highs, but then gently pulled back before firming up again.
Now traders will be looking for Nvidia to maintain follow-through. That will occur if shares can push through the $425 to $427 area. Above that puts the prior 52-week high in play and gives shares a chance to break out to new highs.
If Nvidia stock does push through and make new highs, it will have investors looking at a possible run to $450. Near that mark the stock will find its two-times range extension at $451.38. With earnings in early August, traders may try to accomplish this feat ahead of the print.
On the flip side, investors should keep an eye on last week’s low at $391.42. A rotation below that level saps some of the stock’s bullish momentum and gives bears a chance to squeeze the stock lower, potentially to the 50-day moving average.
To be honest, a dip of this magnitude would be a win for longer-term investors too, as it is healthy price action to get decent dips amid a larger uptrend. I would consider a dip into the $340 to $350 area healthy as well.
Is Nvidia Overvalued?
Of course, when a stock runs more than 100% in just a few months, the valuation becomes a concern. Nvidia is facing that issue right now.
The stock has almost always carried a premium valuation, simply because it’s a premium company. Current forecasts call for 40% earnings growth this year to $8.14 per share. However, that leaves shares trading at 50 times this year’s earnings.
One could argue that that valuation is too high for a stock, particularly one that has averaged a forward price-earnings ratio of 32x. On essentially every metric — price to book, price to free cash flow, price to sales, etc. — Nvidia stock is well ahead of its five-year averages.
Let’s remember too, it’s not as if Nvidia has had a quiet five-year stretch. Even with 2018’s nasty pullback and its subpar start to 2019, shares are up almost 2,000% during that time.
But here’s the thing: Nvidia is in perfect position for the current environment. That is, it’s taking advantage of both short- and long-term trends.
Certain trends — like autonomous vehicles and data center revenue — are long-term trends. They continue to grow as demand increases from its end users. Shorter term trends — like gaming — were doing well, but are now seeing explosive growth thanks to Covid-19. Some of its longer-term trends are accelerating too.
In others words, this growth isn’t a short-term pop thanks to the coronavirus. While there will be dips along the way and this rally will eventually end, Nvidia is in solid position for long-term growth. Finally, it will remain a pillar in tech.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Kenwell is long NVDA.
