- Nvidia (NVDA) is a great semiconductor company.
- However, steep pricing and a shaky price chart warn against NVDA stock.
- A collar strategy is a terrific compromise to timing a trade in Nvidia.
Economic relief from the housing market and a couple weeks of stiff selling pressure were replaced by some broad-based bargain-hunting on Tuesday. And with large-cap tech stocks leading the way higher, Nvidia (NASDAQ:NVDA) stock also rose to the occasion. Well, kinda sorta.
It wasn’t entirely festive on Wall Street. But beggars can’t be choosers, right? And that’s the predicament equity investors found themselves in Tuesday with inflation through the roof, consumer spending worries and no end in sight for Covid-19, the conflict in Ukraine and their negative impact on economies at large.
By the closing bell, the Nasdaq added a “we’ll take what we can get” 2.15% gain after two weeks of slippery de-risking of nearly 10%.
With more significant damage to rate-sensitive growth stocks and NVDA stock taking it on the chin by 28% over the same period, you might think the reigning champ of the semiconductor market stood even taller. You’d be wrong too.
Today, let’s see what else is behind NVDA stock’s seemingly odd and more cautious gain of just 1.90% and what, if any, course of action investors might consider going forward.
NVDA Stock Is Largely to Blame
In the realm of massive, large-cap tech stocks led in valuation by Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT), NVDA shares have a larger problem. Its own hefty $620 billion girth is aggravated by a lofty forward price-to-earnings ratio of 38x, price/earnings-to-growth (PEG) ratio of 2.8x and whopping price tag of 20-fold over sales.
The latter three out of the four metrics may not be a problem in smaller caps. But when it comes to a large-cap name like NVDA stock, it’s clearly playing with fire. And the risk is potentially greater than those factors suggest.
Highlighting those concerns, Ukraine’s vast neon gas supply is at risk and critical for semiconductor production.
Also, Ethereum’s (ETH-USD) nearby transition to a less complex mining process could spell a significant reduction in demand for graphic processing units (GPUs) — something that has been a significant catalyst for NVDA stock.
To be fair, getting past these possible crises, with Nvidia’s tendrils in everything from data centers to AI and machine learning, genomics, autonomous driving, gaming and more, NVDA will continue to be an important company. But owning NVDA today is another story entirely.
Nvidia Is At Risk Elsewhere Too
Source: Charts by TradingView
It happens to the best of them and Nvidia is not an exception. Today’s weekly price chart agrees with our concerned assessment that NVDA stock is at risk of a larger correction.
The observation and worry in Nvidia shares is tied to the stock’s relative weakness this month. The price action puts shares in a testing position of NVDA’s three-pronged bear market low taking place from January into March. The fourth challenge is unlikely to prove the charm.
Given the relationship of the three-month pattern to Fibonacci, Bollinger and Covid-19 uptrend support, as well as a bearish stochastics, a failure could easily trigger a selloff toward $160 and NVDA stock’s 62% retracement level.
To walk the aisle as a bull, Nvidia has already put together a rather large correction of around 40% for a large-cap of its stature.
Also, support — until busted — allows for a lower risk technical entry in NVDA stock. I’m just unsure what the upside is given that Nvidia’s growth story has likely seen its best days and its shares remain well out of reach of value investors.
NVDA Stock Takeaway
Ultimately, I’d be wary of buying NVDA stock. For investors that think they’re being offered a bargain or a new-to-unfold momentum story, both are challenged ideas at best.
That said, I’m not anti-Nvidia or a bear. But today, if you’re going to be a buyer of NVDA stock despite my fair warning, I’d advise any purchase decisions be accompanied with a collar hedge.
When actively managed, the collar strategy’s limited-risk, bullish profile can minimize downside exposure and even turn a profit while others are deep underwater.
It’s true, investors using this approach will never reap the same rewards on the upside during a raging bull market. But given everything that has been said, riding a bullish trend if it does unfold, and making profitable adjustments along the way, is still an appealing strategy for Nvidia shares.
On the date of publication, Chris Tyler 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.