Why It’s Not Time To Sell Nvidia (NVDA) Just Yet
Peter Sayles |
Nvidia (NVDA) dropped a huge bombshell to investors around the world.
It slashed its revenue forecast for this upcoming quarter by $500 million – a massive adjustment. Most of its revenue generators just didn’t do as well in Q4 as they would’ve liked.
It also blamed macroeconomic factors (aka China) as a cause for weakness in demand.
Investors were not expecting this whatsoever.
Shares dropped as much as 17%. But closed down 14% on the day.
Analysts slashed their price targets left and right.
Raymond James cut its price target from $250 to $165. Susquehanna dropped its price target from $210 to $170. Cowen cut their price target from $265 to $215.
The bears on NVDA are out in full force.
But we’re not closing out our position just yet. We’re going to stick with our original stop loss at $127.
Grant and I (Peter) differ on closing the position. But I think the risk/reward on NVDA is still compelling.
You see, NVDA hit a low of $127 in December… before this horrible guidance was announced. It was down 55% from its peak.
Yet it still trades 8% above its December low amidst the worst announcement NVDA has ever made.
Second, NVDA historically has a volatility quotient of 33% – meaning a 33% up or down is normal. And anything in between is just “noise.”
Third, I think NVDA is pulling the Netflix card – but reverse.
Netflix (NFLX) announced on January 15 it was raising subscription prices on all its subscribers. Increasing prices means more cash flow to fund its $8+ billion annual expenditures on original content.
Investors cheered pushing NFLX up 6.5% on the day.
But the question is why didn’t NFLX save the news for its earnings call two days later?
We think it’s because NFLX’s earnings call was worse than expected. And it wanted to get the good news out in the open first. And take the hit on the earnings call after… netting each other out.
Let me explain.
Netflix traded at $333 on January 14th. It told investors it was raising prices January 15. Investors pushed the stock up to $355. Then it reported earnings that disappointed investors who pushed the stock down 4% to $339.
We think Nvidia is doing the same thing but the opposite. It released the worst possible news early and got crushed for it – down 14%.
Analysts have now adjusted all their models and price targets. And it can allow NVDA to operate without the cloud of lofty expectations.
Of course, we could be wrong. NVDA could forecast even lower on its earnings call in early February.
In that case, our downside still remains at $127 – about 8% lower. We’ll exit our position if it closes below that. And will lock in a loss of 15%.
Risking 15% to potentially make 100% gains is a risk we’re willing to take.
Hold your position in NVDA.