Nvidia’s Overbought Shares Seen Falling 9% Short Term

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Nvidia Corp.'s (NVDA) shares have soared this year rising by about 44%. But the stock has dropped by over 4% from its recent highs. The unwelcome news is that the stock may have further to fall over the short term by as much as 9% based on technical analysis

The longer-term outlook for the stock remains strong both based on the fundamentals and the technicals. Analysts estimate earnings growth will be healthy for the upcoming quarter and the balance of the year. (For more, see also: Nvidia's Stock May Drop 8% Over The Short-Term.)

NVDA Chart

NVDA data by YCharts

Trading Range

The technical chart shows the stock trending higher in a long-term trading channel. The stock rocketed higher to the upper side of that channel on October 2 around a price of $293. Now the stock is likely to drift back to the lower side of that channel around $255 about 9% lower than the current stock price of around $279.25. But as long as that channel remains intact, it suggests the stock can continue to rise over the long term. (For more, see also: Nvidia's Stock May Rise By 9% Short-Term.)

Another bearish sign is that the relative strength index (RSI) for the stock stopped rising around 70 in the middle of May despite the stock continuing to increase. Each time the RSI has peaked, it has not gone above that level of 70. That would suggest a bearish divergence is forming, and that momentum is leaving the stock. 

Strong Growth Forecasts

But do not confuse the recent trading activity in the stock with expectations for strong quarterly results when the company reports in early November. Analysts estimates are calling for earnings to climb by over 45% on revenue growth of over 23%. 

Upping Estimates

Since the middle of September, analysts have been raising their future growth outlook for the company. For example, analysts now see revenue growth in 2021 at almost 21% up from 19.6% in the middle of August. Analysts estimate earnings to grow faster too at over 20% versus a prior forecast for about 17%.

NVDA Annual EPS Estimates Chart

NVDA Annual EPS Estimates data by YCharts

With future earnings and revenue growth expected to be strong, it likely means any pullback may only be short term. But with the speed and pace of today’s markets and trading, it does not mean that things can’t get much worse before they get better again. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.

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