Investors may think that the race between Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) is a close one. It is not. While the three companies are in fact competing against each other, NVDA stock is the winner this year. Shares are up 140% in 2020.
However, just because NVDA stock is leading the way does not mean AMD and INTC are bad. In fact, that is the spirit of my argument today.
For the last few years, the digitization trend had accelerated to the point that there was no turning back. Then came the quarantine, accelerating the trend even more. With people staying at home more than ever, technology became more necessary. All over the world folks were shopping, banking, learning, socializing, celebrating birthdays and graduating online.
This is a tailwind behind technology names like NVDA stock that will last for years. There will be enough business for all the providers to profit. In other words, NVDA and AMD will both win a percentage of the gigantic pie that awaits them.
NVDA Stock Does Not Need to Be Cheap
AMD and NVDA stock are fundamentally expensive. Nvidia has a lower price-earnings ratio, so in that sense, it is 30% cheaper than AMD. However, Nvidia has twice as much hope built into its stock. Its price-sales ratio is almost 30x, so buyers have priced in 30 years of income today.
That is a big goal for the future.
Needless to say that with three-digit P/E ratios, both are expensive. However, that is normal for growth stocks of their caliber. The only problem comes if the stock market corrects. Under duress, investors sell the froth first and fastest. Ignoring such a threat, we know Nvidia will be higher in the future as long as the bull market remains.
Under the leadership of CEO Jensen Huang, Wall Street believes that Nvidia has setup itself to profit from the dominant megatrends. What are these? For instance, market-moving forces currently include artificial intelligence, self-driving cars and powerful computer processors. Beyond these catalysts, Nvidia is also making bold moves, like acquiring chip maker ARM. It is a fierce competitor.
The Levels That Will Matter on the Charts This Year
Technically, the chart looks vulnerable as NVDA stock rests 7% below its all-time high. Moreover, the failure at $590 was violent, so bulls could face a wall moving forward. But that is the case with most tech plays. The pandemic lit a fire under the sector, so that alone is not a reason to short Nvidia. Besides, taking out the all-time high would be another big catalyst for shares to hit the moon.
Are you worried about the macroeconomic conditions weighing on the market? Wait out the outcome of the upcoming presidential election. You should also know that NVDA stock would be a much better buy at $520 or even $495 per share. Those who want to hold it for the long term should not worry about the share price moving a few dollars higher or lower.
Because I like NVDA but share those macroeconomic concerns, I find it best to use options.
I can sell puts below the current price to leave room for error, yet to be bullish right away. For example, I can sell the December NVDA $410 put and collect $5 for it right now. This makes it possible to own shares at a 26% discount from here — and get paid today. My break-even level on this trade is $405. If the stock rallies, then I do not own the shares. However, I still would have created income without any money out of pocket.
There Are Extrinsic Risk Factors
The future is uncertain from two perspectives. The first is the novel coronavirus, because we still do not have a vaccine for Covid-19. The second uncertainty comes from the election.
With this uncertain future, know one thing. If NVDA stock falls — for no fault of its own — there is a reason for you to catch the falling knife. I acted on this same argument earlier in September and saw shares rally almost 10%.
While so much negativity hangs on the world around us, it can be hard to be bullish. However, at least with Nvidia, the bulls are in charge and will keep buying the dip. Know that NVDA stock has solid support through $465 per share.
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.