Last week I wrote about how the meteoric rise of Nvidia, and other AI-driven stocks was likely reflecting bubble-like conditions. Since that article, the stock has sold off quite hard, losing over $500MM of market capitalization. Seeking Alpha has a great note from a BTIG analyst on Nvidia, comparing its meteoric rise to Cisco’s in 2000, which I wanted to share with you. The point is not that Nvidia’s stock is up or down in the short-term. The key is you don’t have to swing at every pitch, as the great Ted Williams proclaimed in the Science of Hitting. By staying within the zones where you have a competitive advantage, you dramatically increase your odds of success. Is Nvidia a buy now after this recent pullback? Not on my valuation metrics, because I can’t accurately predict how their revenue and earnings trajectory will go over the next 3-5 years, as the margins and growth seem unsustainable, but that doesn’t mean that it can’t be done either. Apple for instance, has been an outlier in that it has retained incredibly high margins on consumer technology goods, where previous competitors such as Dell, HP, Compaq, Sony, etc., failed. Maybe Nvidia will do the same or better, but it’s not a bet that I’d recommend making with your or my retirement funds. There are easier fish to fry, with much better odds of success, and dramatically less risk in our estimation. Here is the note below:
“BTIG Chief Market Technician Jonathan Krinsky on Monday highlighted Nvidia’s (NASDAQ:NVDA) entrance into “unchartered territory” in becoming one of the largest U.S. companies. While Nvidia (NVDA) stock on Monday notched its third straight loss, its YTD gain remains mighty.
Nvidia (NVDA) shares lost 6.7% on Monday. The market capitalization has been cut by +$500B, pulling the company just below the $3T market cap level held by only Microsoft (MSFT) and Apple (AAPL). But the stock is still up +138% YTD, among the top S&P 500 (SP500)(SPY)(VOO) performers.
Nvidia this month briefly overtook MSFT and AAPL as the most valuable company. The AI chipmaker (NVDA) recently traded ~100% above its 200-day moving average. Krinsky said since 1990, the widest spread any U.S. company has traded above its 200-DMA while it was the largest company was 80%. Cisco (CSCO) held that distinction in March 2000, and on March 24, 2000, the networking equipment maker marked its all-time high along with the Nasdaq-100 (NDX).
“In other words, NVDA is in a league of its own,” Krinsky said. He highlighted other market data points:
- While fundamentals are much different, in the last five years, (NVDA) is up ~4,280% compared with (CSCO)’s gain of ~4,460% gain in the five years leading up to its peak.
- Over the last 18 months, (NVDA) is up 827%, double that of (CSCO)’s 18-month gain into 2000.
- More broadly, large-cap tech/growth funds including (VUG), (XLK), (SMH) and (MGK) last week had some of the biggest inflows on record. “That feels like a sign of froth after the run we have had,” Krinsky said.
- The Nasdaq-100 (NDX) has had 379 trading days without a 2.5% down day, the longest streak in history, going back to 1985.
“We remain concerned about a near-term unwind of many YTD leaders,” the strategist said. However, even within the so-called Magnificent 7 group of stocks, he said he’s seeing dispersion and charts like Amazon (AMZN) and Alphabet (GOOG)(GOOGL) are “still constructive and not overly stretched.”
The market next week will enter July trade. July is a well-known bullish month, with the Invesco QQQ Trust ETF (QQQ) not logging a losing July since 2007.
“If we don’t get a meaningful pullback this week, then we would be hard-pressed to look for further strength in July as it would appear that some of it was pulled forward,” Krinsky said.”
As we reiterate over and over because of its importance, investing is the process of upon thorough fundamental analysis, one has the expectation of profits. This is a very different endeavor than speculating or gambling. If you’ve spent any real time in a casino, you know how the process works. The lights, the sounds, the cheers, can downright intoxicating. A hot table looks like the epitome of fun. A gambler gets hot and keeps increasing his/her bets. But in the end……the casino wins. Most investors in Nvidia or any hot stock you want to name, aren’t the people that owned it when it was in the 2000% percent ago, or usually even 100% ago. Most people chase things after they have already gotten hot. That works until it doesn’t and then the decisions get much worse. The stock is down 20%, 40%, do we buy more or buy less? When we understand the fundamental value, which is vital to how we make our investments, that decision-making is easy, as we generally would buy more unless the fundamentals have changed materially. If it is a speculative gamble, the stock being down 20%, doesn’t prohibit it from going down by 80% and staying there as Cisco and other speculative bubble stocks have done in the past.