Date: 08/21/2023
Author: Mr. X
We’ve all had our fun but it is time to secure the bag. Nvidia (NVDA) is up more than 200% YTD and up more than 154% over the past calendar year. The stock is one of the biggest beneficiaries of the AI boom that is in large part responsible for prolonging the stock market rally.
However, there are some signs that this boom may be over. Bing hasn’t had a significant impact on Google’s market share, even though it is powered by ChatGPT. Traffic to ChatGPT declined in June for the first time, and that is likely to continue. Reports that ChatGPT is actually becoming less effective are unlikely to help. According to a recently released paper from researchers at Stanford and UC Berkeley, ChatGPT 3.5 and 4 actually declined in their performance on certain mathematical performance by June of this year compared to March.
Nvidia’s earnings will be reported on Wednesday. Its current valuation is in large part because of the huge amount of revenue it forecast. However, this is already priced into the stock – there is the potential for a major disappointment if revenue doesn’t surpass expectations. Remember – underpromise and overperform. Remember also to buy the rumor and sell the news. If the news is sky-high revenue for this year, that is essentially already priced in.
Should a long-term buyer sell Nvidia? No. It remains the best stock for the AI boom and the change in technology is real. Yet this is not something that is going to totally transform the market in the next year. It is going to hit over the next decade, and there will be plenty of interruptions and problems along the way. Nvidia is also the only company that is capable of meeting the surging demand for data centers that are looking to integrate generative AI into their operations.
Wedbush analyst Matt Bryson is presenting the most optimistic case for earnings, essentially by saying that the earnings themselves won’t even matter. “With demand for AI training having lifted substantially in the past quarter and with no other silicon supplier now capable of providing part volumes within an order of magnitude of Nvidia’s output,” he said, “we believe any unfilled demand will just be pushed into forward quarters fueling future sales and EPS.” Numerous companies have set targets around $500.
The current stock price is just over $430. Look to ensure gains by setting a floor for $400. That’s enough room to ensure a solid profit if there is a drop before or after earnings. However, the fact remains that the stock is currently overvalued – traders are looking to the future, not the present. Nvidia is a great stock to own for the long-haul, but the next few months are likely be difficult. It could be caught in a general downturn as the expectations for AI lessen.
Eventually, AI will be a reality and it will change every aspect of business. However, that transformation still has a long way to go. The current stock price doesn’t justify such optimism. Consider setting a floor for $400 and a sales target for $500 for NVDA in the short term.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing
