Nvidia's Stock May Drop 8% Over The Short-Term

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

Nvidia Corp.'s (NVDA)  shares have soared in 2018, rising by more than 41%, beating the S&P 500 rise of approximately 8%. But technical analysis suggests shares may fall by about 8% over the short-term from its current price around $274.

Any pullback in the stock is likely not to last. Analysts have been upping their estimates on the company since the start of the year. Shares may even be too cheap given the outlook for the balance of the year and the stock’s current valuation.

NVDA Chart

NVDA data by YCharts

Moving Lower

The chart shows that Nvidia has hit the upper bound of its trading range when the price hit approximately $285. Now the stock may be heading to the lower end of that trading range around $252, a drop of roughly 8% from the current stock price.

The relative strength index (RSI) is also flashing warning signs. The RSI has now hit overbought levels around 70 on three occasions since May. Additionally, the RSI has not increased, despite the stock price continuing to rise, a bearish divergence. It suggests that the bullish momentum is leaving the stock.

Upping Estimates

The good news is that the longer-term outlook for the company remains strong. With earnings forecast to climb by approximately 62% for fiscal 2019 to $7.97 per share, which is up from an estimate of $6.85 at the start of the year. Earnings for fiscal 2020 are forecast to grow by more than 10%, while fiscal 2021 is forecast to increase by 18%.

Revenue growth is also forecast to remain strong and forecast to grow by 34% in 2019 to $13.0 billion. Followed by a growth rate of 14% in 2020, and almost 21% in 2021.

NVDA EPS Estimates for Current Fiscal Year Chart

NVDA EPS Estimates for Current Fiscal Year data by YCharts

Valuation Compelling

Shares of the stock are currently trading at 34 times 2019 earnings, which seems highs. But when adjusting that earnings multiple for growth, the stock is trading at half its earnings growth rate, giving it a PEG ratio of 0.55. The one concern may lie in fiscal 2020 with earnings growth forecast to slow. But Nvidia has a strong history of delivering better than expected forward guidance. Should the company be able to grow faster than analysts’ expectations than estimates could climb higher over time. 

Nvidia has had a stellar run over the past few years, and 2018 has been no different this far. Should the stock pullback as the chart suggest, it may be a momentary pause for a stock that has a bright future.

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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