There is no doubt on Wall Street that Nvidia (NASDAQ:NVDA) it is setting the pace among chip stocks. We saw proof of this just yesterday when we learned that they are buying chip maker ARM from SoftBank. NVDA stock popped 6% on the headline even though the rumor was already milling for months. Nevertheless, it shows that this management team is on point. The stock is a buy on any weakness.
As stocks were falling last week, Nvidia was on my list of the stocks to buy on the dip. Despite Monday’s pop, I still want to temper my enthusiasm for two reasons.
The first is that I don’t like to chase headlines. Second is that the markets are still way too high for the conditions we have. The good news is that the online revolution will keep demand on chip stocks strong in spite of correction on Wall Street.
Furthermore, the field of suppliers is a small split made up of the big three: Nvidia, Advanced Micro Devices (NASDAQ:AMD), and Intel (NASDAQ:INTC). Between them they provide all the computer brains that will power the world into the new normal. It’s no surprise that NVDA stock is still up almost 120% year-to-date even after this correction.
Don’t Wait for the Perfect Entry into NVDA Stock
Finding the perfect entry point into stocks is difficult enough. Doing it successfully for companies whose stock prices move this fast is near impossible. The goal is not to find the perfect bottom but to get long when it’s not an obvious mistake. Chasing recently at the top was clearly not an obvious point of entry, yet the experts on Wall Street told you do that anyway. Conversely, when it fell 20% last week, not many were pounding the table to buy NVDA stock.
My point today is not to call the bottom but rather to say the correction brought the stock price into a zone where it made sense to add it to the portfolio. The door could still be open, especially if it gives back some this headline pop. There are still concerns from outside risk factors like weak macro economic conditions, so I don’t take full-sized positions. On paper NVDA stock is expensive but that is always the case for these growth stocks. They must be expensive so they can deliver the potential.
Nevertheless even on a relative term NVDA has a lot of froth it can potentially shed quickly. Its high price-to-earnings ratio is not a deal breaker. More importantly its price-to-sales is 40% more expensive than AMD on that front. Intel is clearly the bargain of the three, but that’s because management has lost its way and don’t deserve the credit there yet.
Nvidia Has Support Even at These Altitudes
Technically the chart has good news for the bulls. Even though it seemed like it was falling into an abyss last week, the bulls retained control of the action. The higher-low trend remains intact so under normal circumstances they will buy dips.
The area round $460 per share served as the base for the last 30% rally, so it should be support if the selling persists. I am, however, a little concerned as to how that rally ended with a very disappointing Sept. 2 candle. These sometimes are omens for bigger downside momentum. At the very least they all but guarantee resistance on the bounce back to them. For that reason, investors should temper their enthusiasm now as NVDA stock works off the effect of the headline.
The message today is simple. This company is a winner and its stock should be part of every shopping list. This rally is not a call to go all in even though there is upside potential. The rocket ride that happened already was one of a kind and I expect more rational rallies from here. It took markets 20 years to have an encore for the dot-com bubble. It could be another 20 to repeat this performance.
This stock has support nearby, and if it falls further it would make for an even better buy at $430, $400 and $360. I am not calling for the correction to continue for another 8% to 25%. But if it does investors should buy into the weakness, not flee from it.
Profits don’t usually come overnight and giant bursts are unsustainable. History has shown that rallies should unfold in a reasonable ramp. Exponential ones are vulnerable and make for terrible bases. As they say, “easy come easy go” and that’s true here on Wall Street.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
