Can NVIDIA stock continue its remarkable run or will there be a correction?
- Nvidia stock has gained around 30% in the last ten days.
- RSI indicates that the stock is overbought.
- Will there be a correction?
NVIDIA (NASDAQ:NVDA) stock is on a roll. The shares of the Santa Clara, California-based graphics card maker are up more than 250% for the year. Nvidia stock gained more than 7% in yesterday's trade, that too on a strong volume (almost double the average volume), indicating that the stock still has strong momentum. Yesterday marked the tenth consecutive day of gains, with the stock gaining around 30% in this period. On the other hand, the recent rally has also sent the RSI into the overbought zone, with RSI coming in at 84.4. So should you wait for a correction? Or get into the NVDA stock before it climbs further?
Traders Eye Strong Year End Close
Traders have been playing along with NVIDIA stock. After all, "the trend is your friend". In the past couple of weeks, call buying has outpaced put buying. A Schaeffer's research analysis of options activity of Nvidia indicates that many traders believe the stock will close 2016 on a strong note.
...Call volume is so far outpacing put volume, and running at two times the expected intraday pace. The most popular option is the weekly 12/30 115-strike call, and all signs point to buy-to-open activity. Since these options expire at the end of the week, traders are betting on NVDA ending the year on a strong note.
Fundamentals Remain Strong And Analysts Are Bullish
Nvidia is firing on all cylinders. Whether it is datacenter or automotive, the company has shown strong growth. In Q3, Nvidia reported a huge beat on both earnings and revenues. The revenue came in at $2 billion, a 54% YoY growth. And the company still has strong growth drivers, from AI to VR to gaming. AI market for HPC vendors is likely to grow from $300 million to $16 billion in 2025. Even if Nvidia manages to capture a small share, it will have a huge impact on its revenue. Another growth driver is the autonomous car market. Nvidia is partnering with more than 20 automakers and has entered into an agreement with Tesla. The Model S, the Model X and upcoming Model 3, will feature a new AutoPilot system powered by the NVIDIA DRIVE PX 2 platform. The company expects driver-less car market to be a $6-$12 billion opportunity. (Also Read: The Next Billion Dollar Opportunity For NVIDIA Corporation)
The strong fundamentals and bullish outlook have resulted in multiple upgrades for Nvidia stock. The company has recently earned price target upgrades from CITI, Jefferies, Evercore ISI and Loop Capital. The latest to join the bandwagon was Goldman Sachs which raised the price target from $92 to $129, implying more than 10% upside even after yesterday's rally, and added the stock to its "conviction buy" list. According to Goldman Sachs, because of trends in gaming, VR, machine learning, and automotive, electronicsthe company remains a "unique growth story in semis". Goldman increased NVIDIA's 2018 and 2019 EPS targets by 18% and 33%. To quote Goldman analyst Toshiya Hari:
"We continue to view NVDA as a unique growth story in semis, levered to positive secular trends in gaming, VR (virtual reality), AI (artificial intelligence)/ML (machine learning) and automotive. Note our revised FY18/19 EPS estimates are 26%/57% above the Street, respectively, and we expect estimate revisions to serve as a positive catalyst for the stock in the coming quarters,"
The 250% run in the stock price has stretched Nvidia's valuation. Nvidia currently trades at a PE (ttm) of 77 and PS (ttm) of 10.33. The company's EV/EBITDA ratio is 33.93. These valuations are way above the valuations of other semiconductor companies such as AMD and Intel. Of course, we can not look at valuation in isolation, we need to take growth into consideration. In the current year, the revenue is expected to grow by 36% and earnings by 120%. But this kind of growth is not sustainable. Analysts expect revenues to grow by 15% next year, while the earnings is expected to grow by 12%. Nvidia's forward PE is currently at 43.5 which is not cheap, even for Nvidia's kind of growth. (Also read: Don't Sell NVDA Stock Before Reading This)
The Shorts Are Piling On
The shorts are increasingly betting against NVDA stock. Nvidia remains one of the most shorted stocks on the Nasdaq. The short interest has increased by 4% in last two reporting cycles, with short interest coming in at 14% of the float. The total shorted shares rose from 70.7 million to 71.4 million. But with days to cover at 5 days, a strong run-up in the price could send the shorts to take cover, resulting in a short squeeze. It is possible that shorts taking cover could have played a part in yesterday's pop.
2016 has turned out to be an "annus mirabilis" for Nvidia investors. The stock has gained more than 250% this year. Goldman's price target of $130 indicates that NVDA stock still has upside left. Many traders are betting the price to move even higher. Around 3,000 contracts were added during the past 10 days for March 130 call. But the rally has also stretched Nvidia's valuations, with the stock currently trading at a forward PE of 43.5. RSI indicates that the stock is overbought and is headed for a correction. Also, the short interest has increased in the last two reporting cycles. You can expect a correction. However, the company's long-term fundamentals remain strong. The company has been recently added as one of the top picks for 2017 by RBC capital. But despite having strong growth catalysts, it is unlikely that Nvidia will generate this kind of returns anytime soon. Don't expect another 2016 kind of return from NVDA stock in 2017.
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