Living Up to Expectations NVIDIA
Welcome to my other blog today we discussed about”The Burden of High Expectations” Carrying the weight of high expectations can be a daunting task. If you’re a top performer at work you’re expected to excel every single day. Having a bad day? That’s simply not acceptable you’re expected to push through and deliver excellence regardless. While an inspiring leadership speech from a college professor might suggest it’s okay to have off days, especially if you’re a winner, reality often tells a different story.
The Stock Market’s Top Performer: Nvidia
This same philosophy can be applied to one of the stock market’s standout performers Nvidia (NVDA). Over the past week, we’ve seen just how inflated expectations are for Nvidia and how the stock has ventured into risky territory that many traders, new to the Nvidia game, have never navigated before.
A Market Giant’s Roller Coaster: Nvidia
On June 18, Nvidia’s market cap soared to an astounding $3.34 trillion, surpassing Microsoft (MSFT) to become the world’s most valuable company. However, in the next three trading days, without any fundamental news, Nvidia’s market cap plummeted by $430 billion. For perspective, Coca-Cola’s (KO) market cap stands at $275 billion.
Some analysts suggested that investors were taking profits as the second half of the year approached. Others mentioned the emergence of new competitors in Nvidia’s domain, hinting that the company might not maintain its dominant position over the next five years as many had anticipated. This view underscores the idea that Nvidia’s stock is susceptible to sudden, sharp declines in sentiment, especially given its 3,000% rise over the past five years.
Valuation Concerns
Nvidia’s stock now trades at around 21 times forward sales, a steep increase from 12 times just two months ago, according to Creative Planning chief market strategist Charlie Bilello. This valuation is significantly higher than Microsoft’s 12 times and Apple’s (AAPL) 8 times, both of which are fundamentally strong and expected to perform well in the coming years.
BTIG chief market technician Jonathan Krinsky noted that Nvidia’s stock recently traded about 100% above its 200-day moving average. Historically, the widest spread any U.S. company has ever traded above its 200-day moving average while being the largest company in the world was 80%, achieved by Cisco (CSCO) in March 2000, marking its all-time high. “In other words, Nvidia is in a league of its own,” Krinsky said. And it certainly seems that way.
Similar Expectations for Micron
Similar high expectations were placed on chipmaker Micron (MU) leading up to its earnings report this week. The stock took a hit due to “in-line” guidance that failed to meet the lofty expectations tied to AI demand. On Monday, several sell-side analysts raised their estimates and price targets for Micron ahead of the report, which is not typical behavior before an earnings release. This action suggested analysts were buying into the hype too much, hoping for a big one-day stock surge.
The Reality of High Expectations
“When you get a reaction like Micron’s, where the numbers should be good enough to avoid a sell-off. Let alone spur a rally that’s a bad sign — a tell that expectations are so high that they can’t be exceeded.” Interactive Brokers chief strategist Steve Sosnick explained. While some may disagree with the notion that Nvidia is priced for perfection. It’s important to acknowledge differing perspectives.
The Long-Term View
Tematica Research co-founder and chief investment officer Chris Versace noted that for medium- to long-term investors, Nvidia’s story remains strong, with its capacity booked far in advance and pricing firming up. However, one thing is clear Nvidia. As a top-performing entity in the market, will not be excused for a bad day.
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