Question du Jour – “What’s Wrong with NVDA?”

As you might expect, a key element of my job involves discussing markets with members of the media.  Don’t get me wrong – it’s a highly enjoyable privilege.  But there are days (generally volatile ones) where I’m more popular than others.  And almost every discussion involved some version of “why did Nvidia (NVDA) get hit so hard?”  Funny, when the stock rallied about 30% in two weeks last month, adding a cool $1 trillion to its market capitalization, no one asked me why.   And bear in mind that we haven’t been at these low levels since… checks notes… less than a month ago.

NVDA remains by far the most active stock on our platform, with buying activity far outpacing selling.  Many investors have understandably become true believers.  Frankly speaking, a lot of people have made A LOT of money in a fairly short period of time, so it makes sense.  And the belief is based upon results.  I can’t recall a company so consistently beating on the top and bottom lines, raising guidance, then doing it all again the next quarter.  The growth has been stupendous, justifying a big rally, and thrilling many investors.

The current NVDA sell-off is a gut check for sanguine investors.  But first, bear in mind that we haven’t been at these low levels since… checks notes… less than a month ago.  It’s easy to forget that the stock rallied from under $100 to over $130 from August 7^th -21^st.  I heard no complaints when the stock was shooting higher because we’ve come to expect that the stock will go up rapidly.  It’s become a very volatile stock, so investors who believe in the company had better get used to the swings.  Investors love volatility on the way up (aka “socially acceptable volatility”) but hate it on the way down.  Unfortunately, one usually brings the other.

NVDA 6-Months, Daily Candles

Source: Interactive Brokers

Past performance is not indicative of future results

(Note that the peak occurred shortly after the 10:1 split went into effect.  Buy the rumor, sell the news…)

However, I think we’re at a point where individual investor enthusiasm remains sky high (it never occurred to me to attend an earnings watch party) at a time when institutional investors seem to be taking a more sober view.  And, because traders react while investors consider, it is understandable why institutional investors might have waited until yesterday to make a move.  Many portfolio managers take vacations and send their kids off to college in late August, rather than focus on their work.   Some might attribute this to seasonality, which we noted yesterday, but there are less emotional, more sober reasons why investors may choose to protect their well-earned profits.

Last week’s earnings report reminded us that we have become quite spoiled by NVDA’s consistent ability to beat revenue and earnings estimates, raise guidance, then do it again next quarter.  But the magnitude of the beats has been shrinking.  As we pointed out last week, NVDA’s EPS beat consensus by 31.07% last August.  The level of “beat” has declined since then to 19.64%, 11.69% and 8.51% ahead of last week’s 5.43%.  NVDA’s EPS beats have gone from enormous to pedestrian.  A stock with a 50 P/E needs to be more than pedestrian.  At that valuation it needs to be excellent.

It’s clear that investors have not given up their well-deserved faith in NVDA yet.  Only the most robust stocks could be essentially unchanged after receiving a subpoena from the Department of Justice.  But the stock’s smooth upward trajectory has become quite a bit bumpier in recent weeks.  Turbulence is often unsettling.