Shares of Nvidia (NASDAQ:NVDA) have dropped below the $150 price level as crypto carnage and market malaise drive NVDA stock lower. Nvidia has been cut in half since making all-time highs above $330 last November. Just as the speculative fervor was too hot back in November, the pessimism is getting too pervasive now. Time to be a buyer of NVDA stock on any further weakness.
NVDA stock will likely never carry low valuation multiples, at least for the foreseeable future. But it’s important to always look at stocks like Nvidia from a comparative prism. The company has beat earnings in a big way over the past four quarters. Yet shares don’t seem to reflect that strength.
Valuation View on NVDA Stock
The combination of a stagnant stock price (P) and continued better earnings (E) makes for a much lower P/E ratio. Indeed, the current P/E ratio is now well under 40 and at the lowest levels since July 2019. Other traditional valuation metrics, such as price/sales and price/free cash flow, also look attractive here.
The stock analysts certainly like NVDA stock going forward. TipRanks shows that the 30 analysts covering Nvidia rate it as a strong buy on average. There are 26 buy ratings, four hold ratings, and no sell ratings. The average price target is $266, implying over 75% upside. The lowest price target is still at rather respectable $165.
Louis Navellier also likes NVDA stock at current prices. The latest research piece from Navellier and the InvestorPlace research staff just a few days ago highlights some of the many reasons to like Nvidia going forward. It says the share price was unduly punished, especially given that is continuing to grow, albeit at a slower, but still solid, pace.
Some multiple compression is certainly warranted given the recent rise in interest rates. The current move, however, is nearing an extreme. Time to look to be a buyer of NVDA stock on any further weakness.
Nvidia is getting oversold as it nears major long-term support at the $150 level. the 9-day RSI has pulled back sharply towards 30. MACD just turned negative. Bollinger Percent B is once gain nearing the zero line. Shares are trading at a steep discount to the 20-day moving average.
Previous times all these indicators aligned in a similar fashion signaled significant short-term lows in NVDA stock. Look for Nvidia to likely hold support and bounce once again.
How to Trade NVDA Stock Now
The latest drop in NVDA stock has caused the implied volatility (IV) to rise sharply in Nvidia options. This means option prices are comparatively more expensive, favoring selling strategies when constructing trades.
Selling out-of-the-money puts to position to get paid to be a buyer of NVDA stock at even lower prices makes sense here.
For example, the NVDA Aug $140 puts are currently priced around $8.50. Selling one of these puts would bring in $850 to your account. It would also obligate the seller to be a buyer of 100 shares of NVDA stock if it closed below $140 on August 19 option expiration.
The net cost of those shares would be $131.50 apiece ($140 strike price less $8.50 premium received). This equates to over a 12% discount to the current price of NVDA stock just above $150.
If Nvidia closes above $140 at expiration, you get to pocket the entire $850 for the 100-share contract. You can close out the short puts anytime prior to expiration. More risk-adverse traders may want to sell the Aug $140/$135 put spread for about $1.50 net credit to define the risk while reducing the potential dollar return.
Investors and traders who are looking to add NVDA stock to their portfolio may want to look at using puts in place of outright stock to take advantage of the rich option premium.
On the date of publication, Tim Biggam 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.