Don’t Buy Nvidia Until the Downtrend Turns

  • On Monday, Nvidia (NVDA) fell to a new low for 2022 as panic seized the stock market.
  • Despite a secular growth story, semiconductors remain out of favor as bears roam the land.
  • Recession fears are overshadowing the solid fundamentals of NVDA stock. Don’t buy it until the trend changes.
Nvidia (NVDA) logo and sign on headquarters. Blurred foreground with green trees

Source: Michael Vi / Shutterstock.com

We’re in a baby-and-bathwater market, where seemingly good companies with solid growth numbers are seeing their share prices swoon. Nvidia (NASDAQ:NVDA) is a prime example of this. With Monday’s market massacre, NVDA stock is officially 50% off its 52-week high.

The halving hasn’t come as a result of poor management or a mass deterioration in the company’s fundamentals. On the contrary, its February earnings report revealed a 53% revenue increase year-over-year (YOY), among other rosy metrics and upbeat forward guidance. Instead, Nvidia’s woes are born from a broader shift in investor sentiment as high inflation and soaring interest rates have investors re-thinking stock market valuations.

In short, investors have looked into the not too distant future and seen a hawkish Fed solving inflation by pushing the economy into a recession. Were that to happen, Nvidia’s growth path would slow and demand a lower share price. Of course, as equities are wont to do, they aren’t waiting around for the earnings decline to arrive before reacting. True to their discounting and forward-looking nature, stocks are sliding now.

NVDA Nvidia $1775.99

Is Nvidia Stock Now Cheap?

Nvidia (NVDA) P/E Ratio

Source: yCharts.com

The halving in NVDA stock has transpired while its earnings per share have continued marching higher. As a result, the price-to-earnings ratio (P/E) has shrunk considerably.

At its richest point, Nvidia’s P/E ratio topped 100. Now, it’s in the mid-40s. Fans will point to the steep discount as a reason to gobble up shares now while the flames of the fire sale are burning bright.

On the one hand, they may be right. As economist Paul Samuelson joked, the stock market has predicted nine of the past five recessions. Sometimes stocks see a bogeyman that simply isn’t there. Perhaps the pendulum of pessimism has swung too far. There’s a chance the Federal Reserve won’t over-tighten, will successfully get inflation under control, and will deliver the much-desired but all-too-rare soft landing.

In that case, Nvidia is indeed a rousing buy here — as are most stocks, for that matter. Only time will tell. As for pinning your hopes on Nvidia’s seemingly cheap valuation, remember it can get far cheaper before all is said and done.

That illustrates one of the critical problems with using a valuation metric to time your purchases. It’s unwieldy and lacks precision. No doubt some investors scooped up NVDA stock when the P/E ratio sank from 100 to 70 or 60, reasoning it was “cheap enough.” If you are interested in bottom fishing here, then let technical analysis be your guide. In the case of Nvidia, it simplifies the story considerably.

Let the NVDA Stock Chart Be Your Guide

Nvidia (NVDA) stock chart with downtrend.

Source: The thinkorswim® platform from TD Ameritrade

If you want to buy shares with greater conviction, wait for evidence that the downtrend is turning. The weekly trend is below the 20-week and 50-week moving averages. The daily is following suit with prices below the 20-day, 50-day, and 200-day moving averages.

Given the multitude of broken support zones overhead, ample resistance threatens to halt future rallies. Breaking one of them will at least signal a short-term change in character. For now, I have my eye on $204.

The old pivot high needs to be breached before the daily trend turns higher. Beyond that, a push above the 50-day moving average would signal a more significant reversal is in place. Until then, patience is warranted. And if you must acquire Nvidia, do yourself a favor and at least buy partial shares so you can add more at lower prices in the likely event the downtrend persists.

On the date of publication, Tyler Craig 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.

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