In one of the my most recent columns on on NVIDIA (NASDA:NVDA), I said it was one of the top “blood-in-the-street” opportunities. Not only did its relative strength index (RSI), and Williams’ %R metrics indicate that it was oversold, but it was severely undervalued at $243.48. That was on March 25. Since then, NVDA stock has more than doubled, closing at $536 yesterday.
While I believe NVIDIA could run to $600 in the longer-term, I’d avoid the stock for now for two reasons.
NVIDIA Stock Is Technically Stretched
The stock is technically overbought. For one, it’s showing signs of failure at its triple-top resistance level. Until it can break above $589.07, I’d avoid it.
Secondly, take a look at a two-year chart of Nvidia.
Each time the stock hits its upper Bollinger Band (2,20), while it’s technically overbought on relative strength (RSI) and Williams’ %R, the shares pull back. We’ve seen this happen in early August, in February, and in July of 2019. Again, while I’m a fan of Nvidia’s long-term outlook, I’d avoid it until it can break above its triple top.
NVIDIA May Be Fundamentally Stretched
As Investorplace contributor Mark R. Hake, CFA, recently noted, “analysts now put Nvidia stock on a multiple of 60 times earnings for this year ending January and 49 times earnings next year. This stratospheric valuation cannot continue much longer without a non-linear jump in the company’s earnings.”
In addition, New Street Research analyst Pierre Ferragu recently issued a “sell” recommendation on the stock with a one-year target of $400. While the company’s data center and gaming chipsets businesses have grown meaningfully, the demand for those units’ products could peak in the next six months, noted the analyst.
Ferragu added, “We should expect another strong quarter and guide, and after that, it is likely overheated expectations will lead to disappointment and a correction in the stock.”
Longer-Term, NVIDIA Has A Bright Future
NVIDIA and SoftBank Group just announced that Nvidia would acquire Softbank’s ARM Holdings in a deal valued at $40 billion. ARM’s AI computing platform will help push NVIDIA deeper into artificial intelligence.
After all, “AI is the most powerful technology force of our time and has launched a new wave of computing,” said Jensen Huang, founder and CEO of NVIDIA. “In the years ahead, trillions of computers running AI will create a new internet.”
Wedbush analyst Matt Bryson just raised his price target on NVIDIA to $600 from $525, citing the company’s fundamentals. And BMO Capital analyst Ambrish Srivastava raised the firm’s price target on the shares to $650 from $565.
We must also remember that the new gaming consoles from Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) could be a solid catalyst, too. As consoles and games get better, more processing power is required. That means Nvidia will need to develop even more chips. Remember, as CFO Collette Kress has said, “gaming is thriving.”
The Bottom Line on NVIDIA
While I said investors should buy a huge amount of the shares when they were trading at $243.48, I’m now saying to avoid the stock, at least for the near-term. Not only is it technically stretched, but it’s also becoming fundamentally overvalued. Once the shares pull back, investors can always reassess the situation. It just doesn’t pay, however, to buy the shares now.
I’d wait until after the company reports its third-quarter earnings on Wed., Nov. 18 after the closing bell before considering taking a position in the name.
On the date of publication, Ian Cooper did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Ian Cooper, an InvestorPlace.com contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.