Nvidia Is Worth the Wait, but It Is Too Hot Right Now

Today’s write-up about Nvidia (NASDAQ:NVDA) stock might sound a bit bearish at times. Ignore that because I’m a big fan of the company and the comments here are all about timing.

An Nvidia (NVDA) semiconductor chip on a black background.
Source: Hairem / Shutterstock.com

Investors have different timelines, so there isn’t one entry point or decision to fit everyone the same.

My beef with it now is that the stock has been so relentless for too long. The easy bullish setup is over, and this week’s burst sealed the deal. Advanced Micro Devices (NASDAQ:AMD) stock price range makes more sense.

Today I am calling for a bit of self-control. Investors that are not yet long NVDA stock should know that they missed the easy trade. The hard part is to be patient for re-entry lower.

This doesn’t mean that I can short it, but I must temper my enthusiasm for new positions. I completely understand long-term investors not caring so much about timing. If that’s the case then waiting a few more ticks shouldn’t matter either. My main concern is first to avoid potentially bad entries. An incline as steep as this one qualifies as a potential trap.

When great stocks spike their relative valuation changes with extreme altitudes. Currently, Nvidia management placed itself in a leading role among the top three chip manufacturers. AMD comes in a close second and Intel (NASDAQ:INTC) is dragging third. This affords NVDA stock a premium but the differential has grown way too big.

Relative Value to AMD Makes NVDA Expensive

When I say expensive, I don’t mean that I want it to be cheap. This is a growth company so value is not what I seek. However, NVDA now has a hefty 60 price-to-sales ratio, three times more expensive than AMD, and they are both delivering the same growth.

If you force me to chose which to buy, I would opt for AMD for that reason. The easiest way to say it is that this is not an obvious point of entry in NVDA stock.

There is also risk from the overall market. The indices are still breaking records but largely thanks to artificial infusions from the government. The Federal Reserve has had the spigots open full-bore for years. This week they hinted at the possibility of winding it down.

When that happens it will leave a void worth $1.4 trillion a year from asset purchases. The White House stimuli that are three times bigger are also winding down.

The reflation efforts have goosed the stock market and created hyperinflation situations. I use this “hyperinflation” term on purpose because it recently made headlines on CNBC. I’m not from Wall Street, yet my measurement of inflation is certainly more accurate than the CPI they publish.

I know the carton of milk I buy at Costco is 50% more expensive than it was pre-pandemic. Almost everything now has never been more expensive. Houses, cars and even food. Fed Chairman Jerome Powell called it “transitory” and I’d like to see what would unwind it lower.

Circling back to NVDA it is definitely a BUY in my book but on dips. It broke out from $650 per share. Arguably this even started $50 lower, but the target is closer to $800 per share.

Investors who have missed the entry here should set their alerts to buy the dip when it happens. I am confident that this year we will have that chance. A general correction of equities will drag down the good stocks too. Those that have rallied this far have the most to give back.

There Are Better Levels for NVDA Stock Buys

Nvidia (NVDA) Stock Chart Showing Extended Run
Source: Charts by TradingView

After a breakout, stock prices often revisit the necklines. For NVDA that’s at or below $625 per share. There should be very strong support waiting for it there.

The stock has consolidated in a very wide range since last September. Those who want to short the stock now should book profits quickly. I don’t see a scenario where this stock completely falls apart alone. If the market crashes massively, then the gift of the century would be to by it below $480.

If I can’t wait that long then I can do it now with options. Instead of buying shares I can sell the NVDA December $480 put and collect $8 per contract. This means that the stock can fall 35% and I can still profit.

Committing to owning shares that much lower is safer than risking $746 per share right here. Regardless of the method, investors should only take partial positions so they can manage the risk over time.

I will end this how I started by saying that I am a fan of the company. But I don’t like chasing it at these altitudes even if I miss some upside. Patience will reward investors in the long run.

On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Nicolas Chahine is the managing director of SellSpreads.com.


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