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Why Nvidia Corporation (NVDA) Stock Needs to Take a Chill Pill

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No matter how you look at it, Nvidia Corporation (NASDAQ: NVDA ) is simply a stunning investment. After a choppy start to the year, NVDA stock reasserted itself in the middle of the spring season. Once facing the prospect of double-digit losses for 2017, Nvidia shares are now on approach to 54% gains. But how long can this momentum last?

The Race is On: Nvidia Corporation Stock Will Hit $350 Before AMD Hits $25

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Such an inquiry is hardly unreasonable. For starters, every publicly traded asset requires a healthy consolidation to keep forward progress - that's just market reality.

More specifically for NVDA stock, we're talking about a company that returned over 230% for shareholders in 2016. To follow that up with another whopping year of profitability seems too good to be true.

The semiconductor sector has been hot, but much of that thermal energy is cooling off. Rival Advanced Micro Devices, Inc . (NASDAQ: AMD ) is up just under 15%, essentially keeping pace with the benchmark SPDR S&P 500 ETF Trust (NYSEARCA: SPY ). Industry leader Intel Corporation (NASDAQ: INTC ) experienced recent choppiness, bringing its year-to-date haul to a loss of 2.8%.

Up to this point, Nvidia stock avoided the turbulent air impacting its competitors. But very few companies are bigger than its industry, and typically, such dominance rarely lasts. Based on its current market performance, NVDA may be a little stretched.

The most conspicuous evidence for the company's drawn-out bullishness is its recent second-quarter earnings beat . Nvidia produced an earnings surprise of nearly 32%, and rang up $2.23 billion in sales against a $1.95 billion forecast. Yet shares slipped on the news, and NVDA stock hasn't fully recovered. From the Q2 earnings report until now, Nvidia is down nearly 5%. In addition, shares haven't moved much since the close of July 12.

How Long Can NVDA Stock Fly?

I want to state for the record that I've been bullish overall on Nvidia stock. I like the fact that the company substantially outperformed its semiconductor peers. More importantly, NVDA isn't relying solely on any one particular market. This is one of the more multi-faceted opportunities available, which is in part why valuations are pricey against earnings.

Still, as I mentioned at the top, consolidations (and "reasonable" corrections) are an integral component of the investing game. NVDA stock largely avoided meaningful slowdowns since its meteoric rise, and I think that could be a nearer-term problem. At this juncture, I'd avoid going too hot with the stock, as a better price tag likely awaits.

Looking back over the last four years, short interest for Nvidia stock is at a record low. At the most recent count of Aug. 15, short interest fell to 3.2%. Even more remarkably, at the beginning of this year, the metric stood at a lofty 8.5%. Undoubtedly, more investors are convinced that NVDA is going higher. Under the contrarian theory, this is exactly the time that shares will fall.

Click to Enlarge The mathematical evidence warns us not to overlook this data. Over the trailing four years, the NVDA stock price and its short interest allocation shared a -44% correlation. In the trailing one-year period, the correlation "dropped" to -76%.

What this data suggests is that as Nvidia stock rises, its short interest falls - no surprises there. But the magnitude of this inverse relationship dramatically increased in scope in the trailing year. Given that so few are doubting NVDA, this might be a time to do exactly that.

Role Reversal Suggests Buying Opportunity for Nvidia

The trading setup we currently have parallels the semiconductor rally of the prior year. Back then, few people believed in the sector, especially after pronounced routs like the one Micron Technology, Inc . (NASDAQ: MU ) experienced in 2015. Those speculators that did believe saw tremendous profitability.

In this particular case, the roles are reversed. Now, too many believers exist in the space. When the first wave of volatility hits, the weak hands will panic out. They got in at a high price on NVDA stock, so they have every incentive to panic.

Again, please note that I'm only mentioning this dynamic as a nearer-term concern. In the long run, I firmly believe that any corrections are buying opportunities. Nvidia smartly latched on to several growth markets aside from its GPU business (which performs superbly). Such business diversity will pay big dividends.

But we all know that in the markets, nothing moves in a straightforward, linear fashion. Hiccups always occur. Understanding this situation, I think it's wise to prepare for some choppiness in NVDA stock.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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The post Why Nvidia Corporation (NVDA) Stock Needs to Take a Chill Pill appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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