September brought about a 12% correction in Nvidia (NASDAQ:NVDA) stock. That merely reverted it back to the neckline from which it broke out a month ago. Overall, it is still outperforming its two major stock rivals. Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC) have already given back 20% from their recent highs.
My thesis today is that the bulls have a short-term opportunity. Also, that there is no need to panic out of NVDA stock for the long term. However, I acknowledge that it is occasionally vulnerable because of how fast it rallied to these levels.
Losing that much in NVDA stock does not guarantee it can’t fall further. The stock broke out in a 40% rally from June. Therefore, there’s still room to give back some, but not alone. I doubt that it will correct without the markets in general also faltering.
If the equity markets hold up, this one will continue to shine
Pace-Setter Role
Consensus is that fundamentally this is the pacesetter of the group. The whole sector is under pressure from supply constraints, yet the VanEck vectors semiconductor ETF (NASDAQ:SMH) is up almost 50% in one year. Nvidia stock constitutes 10% of the SMH and it’s up 20% more. AMD is also up but only half as much, like the S&P 500. INTC lags far behind in single digits.
Clearly, investors perceive NVDA as the cream of the crop. It makes for a long-term investment thesis but not with a full-size position starting now. Building it over time makes sense, or actively trading around the edges shorter term.
Both strategies work in spite of what some experts might try to tell you. In theory, buying and holding forever works. Don’t take my word for it, NVDA stock is up 1,400% in five years.
Since this is a momentum stock, skillful short-term investors have dozens of opportunities to profit from big rallies and corrections.
What makes sense is a strategy that blends both without taking obvious excessive risks. Chasing a rally late opens the investor to potential immediate losses. In this case, the stock has already given back the mid-August rally. The risk of being too late has greatly diminished. There is room for it to fall into $190, which would make for excellent starting zone throughout. These have served as baselines for two rallies of 15% or more.
Every prior breakout line presents an opportunity for the bulls to find support on the way down. There was a significant one in June but far below price at $160 per share. I never say never because stocks fall even if not through their own fault. Meaning it might be inconceivable for Nvidia stock to correct another 15%, but it could happen with the right circumstances.
NVDA Stock Thesis
My overall assumption is still bullish on the markets, so I expect Nvidia to find footing. My conviction level is medium just because of extrinsic reasons. I don’t believe that the world has a good handle on its current macroeconomic fundamentals. There are too many new situations, especially from experimental monetary policies.
In other words, the experts are not really that. They might know a lot, but no one has seen this scenario before. I am conscious that I don’t know what I don’t know, so I should be cautious. The cliche statement of “cautiously optimistic” fits perfectly here.
The recent round of earnings reports were mostly strong. The negative stock reactions came in spite of that because of unrealistic expectations. The ongoing correction in the markets is somewhat worrisome, but it’s not yet an absolute top yet.
With so much stimulus money floating around, it will continue to work for a while longer past the Federal Reserve’s taper. Besides, the Fed suggested that they are still our friend. If the markets get in trouble, they will step back into it.
Valuation is not a concern even though NVDA stock is not cheap. It doesn’t need to be for as long as management is delivering rapid growth. Even then, profitability is also improving. Critics should not fault it for carrying a premium versus its competitors. If the stock markets are higher in the future, this one is also winning.
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.
