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Nvidia Has Been Conducting Heat, But Is It Time to Buy?

Investors in Nvidia (NASDAQ:NVDA) have had a strong 2020. Right now, NVDA stock is up over over 130% year-to-date (YTD). However, after hitting an all-time high of just over $589 on Sept. 2, the shares came under pressure and fell as low as $468 on Sept. 8. Now in early December, they are currently around $542.

Nvidia (NVDA) logo displayed on phone screen
Source: rafapress /

McKinsey & Company recently reported on the semiconductor field in general. They noted, “Semiconductor companies may also emerge stronger from the COVID-19 crisis if they take a strategic, systematic approach to investment and divestment.”

As such, Nvidia’s proactive management is likely to drive the company forward in 2021 and beyond. Therefore, long-term investors in the stock will possibly enjoy increasing shareholder value for many years to come.

However, in the short-term, it’s important to remember how volatile this name can be, like most other tech shares. So, high intraday volatility is a fact of life for NVDA traders. But investors may regard any drop toward the $500 level or below as an opportunity to go long. Here’s why.

NVDA Stock Is Leading the Chip Space

Semiconductor stocks have been among the top catalysts of the broader tech sector’s upside over the impressive bull market of the past decade. Yet, NVDA stock is among the names that stand out in that top class. With a market capitalization above $336 billion, the company is one of the largest domestic semiconductor names and still has plenty of room to grow.

Despite the health and economic effects of the pandemic, semiconductor stocks have also done extremely well in 2020. For example, the widely used industry benchmark iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is up over 47% YTD. For Nvidia, the work-from-home trend has translated into increased demand for its chips, especially in data centers and the video-gaming space.

Additionally, when the company released Q3 results in mid-November, it announced record revenue of $4.73 billion, up 57% year-over-year (YOY). The company also saw gaming revenue of $2.27 billion and data center revenue of $1.9 billion, up 37% and 162% respectively YOY. But these weren’t just sudden improvements for the quarter. In Q2 of this year, revenue had been substantial at $3.87 billion.

Put another way, management has delivered well. However, as questions about the state of global economies linger, it may not be possible to expect such stellar returns quarter after quarter. 

Investors may also want to pay attention to Nvidia’s current valuation levels. For example, NVDA stock is currently trading at a forward price-earnings ratio of 46.95. Additionally, its price-sales ratio stands at 22.43. In comparison, Intel (NASDAQ:INTC) stock’s forward price-earnings and price-sales ratios currently stand at 9.78 and 2.61, respectively.

On the other hand, Advanced Micro Devices (NASDAQ:AMD) stock — which is up over 106% YTD — has forward price-earnings and price-sales ratios of 52.91 and 12.81 each. These metrics mean that Intel may be the cheapest option from a valuation standpoint. 

So, could there be short-term price-taking in Nvidia shares around the corner?

Bottom Line

When we analyze a chip darling like NVDA stock, we also have to remember how far broader markets like tech stocks have gone up since early spring. For instance, the company’s 52-week range has been $180.68 to $589.07.

As a result — unless a given company has constant positive news —  short-term profit-taking is likely to put pressure on tech shares. Therefore, there may be choppiness on the horizon. NVDA could possibly trade in a range between $500 and $550.

So, those investors wanting to enter Nvidia may consider any brief decline as a good opportunity to buy.

And if you are already an NVDA shareholder, you may want to hedge your long position with a covered call that expires on Jan. 15. It would offer a degree of downside protection while also allowing you to participate in a potential upward move.

Alternatively, investors who are ready to commit to the stock should also consider buying an exchange-traded fund (ETF) instead. Many ETFs already have the company as a holding. Examples include the iShares Core S&P 500 ETF (NYSEARCA:IVV), the iShares PHLX Semiconductor ETF, the SPDR S&P Kensho Smart Mobility ETF (NYSEARCA:HAIL) and the VanEck Vectors Video Gaming and eSports ETF (NASDAQ:ESPO).

On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.

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