Nvidia is down 20% in a month!! Why?

Stock Movement:-

Nvidia, which has been Wall Street’s favourite since the launch of ChatGPT, has been struggling for 2 months. However, the stock has seen an unprecedented weakness for the past three weeks, losing a record 20.5%!

April 2023 saw Nvidia consolidate around $250. The US markets had received their second rate hike in less than a year as poor market sentiment kept the markets rangebound. Low wage growth, higher-than-expected inflation, cracks in the labour market, poor earnings results, and low consumer spending kept markets rangebound and Nvidia was stuck between $260 and $280 throughout April.

May brought about a positive move in the stock as the company announced the launch of its new RTX 4060 Ti GPU investors cheered the move, sending the stock up 4% in a single day! While another rate hike resulted in some correction, the announcement of the launch date of its latest GPU helped the company reclaim the $300 mark while helping it breach its immediate resistance at $306.53.

The level proved too much as the stock corrected and eventually fell below the level. However, Nvidia beat all estimates when it released its first-quarter results and forecasts for the second quarter. The forecast was 50% higher than what analysts estimated as the company announced that it was boosting supply to meet high demand. As a result, Nvidia gained over 24% in a single day and gained over $200 billion in market cap in a single day!

May 2023 saw Nvidia’s stock register a gain of 36.3% as the company’s impressive growth and even greater potential sent the stock up to $400, helping it reach a market cap of $1 trillion. The level of $400 proved to be too much for the stock to sustain as Bears took the stock down once again. The stock fell almost 10% in a week as it turned ex-dividend, but Bulls were not done with it.

Buying resumed in the stock as it broke through its immediate resistance at $404.27 and began climbing. Bulls helped it surge as the stock gained over 5% in a day! But market sentiments soured in mid-June when two Fed officials took a hawkish stance. This spiked fears that the Fed was planning another rate hike as a Bearish trend was observed in the market, taking Nvidia down to its (now) support at $404.27.

The level proved to be a strong level for the stock as it rebounded from such level. With the growing craze for AI, Nvidia was a direct beneficiary, giving investors the stimulus they needed to keep buying it. Nvidia surged to $480 per level when Bulls ran out of steam. Adverse economic data and stubborn inflation sparked fears of another rate hike as Nvidia and the US market saw a downturn.

As analysts had expected, the US Fed announced another 25 bps rate hike on 26th July 2023 sending Nvidia back down to its support at $404.27, declining almost 20% in 2 weeks! But the level proved to be a strong support for the stock as it rebounded from such level.

While the markets were sluggish throughout August, Nividia climbed higher and reached a fresh high of $502.66 due to its second-quarter results surpassing Wall Street’s expectations. The level proved to be too high for the stock, sending it back to $470 before challenging the level once again in September.

Bulls were trying hard to push the stock above the immediate resistance at $497.76, but Bears were stronger above such level and it couldn’t sustainably breach it. This marked the beginning of a 4-month-long range-bound battle between Bulls and Bears. Bulls wanted to drive the stock back up to $500 and higher while Bears wanted to take the stock back down to $400.

Bulls were assisted by the dividend announcements and excellent earnings results by Nvidia while Bears were driven by adverse economic data and the market volatility due to the beginning of the Israel-Hamas war. The Bull-Bear stalemate lasted throughout the remainder of 2023 as Nvidia ended 2023 by unsuccessfully challenging its resistance at $497.76.

2024 started off poorly with tech stock tumbling for the first few sessions, but a week into 2024, Nvidia began soaring, sometimes outpacing the broader market itself. On 8th January, Nvidia broke through its resistance at $497.76 sustainably when the company announced the launch of its new GeForce RTX 40 SUPER series of graphics cards.

The launch was seen as a massive success and investors cheered the launch with Bulls taking the stock up to $520 per share, up over 6% in a day! Since then, Nvidia’s stock began making new lifetime highs and reached $600 per share, gaining over 20% in a month!

Buying continued throughout the first half of February as Nvidia reached $740 per share and gained another 12% in two weeks. However, the momentum slowed around its resistance at $745.72 as investors awaited the company’s earnings results to justify its high valuations.

Nvidia dazzled Wall Street once again as its quarterly revenues grew threefold! Demand for the company’s chips was higher than analysts expected as future forecasts painted an even brighter picture, inciting another Bull run in the stock! The stock jumped over 15% in a day and kept registering sharp gains, supported by Dell’s optimistic demand forecast for AI-optimised servers, until early March when it reached $970 per share.

However, market sentiments took an adverse turn here as Nvidia declined and formed another key level at $905.77. US inflation data was hotter than analysts expected as markets lost hope for a March 2024 rate cut with a June 2024 cut seemingly out of reach. Investors tried to take the stock up once again as it reached $960 per share, but volatile geopolitical conditions sent the stock back down.

On 1st April, Israel launched an assault on the Iranian embassy in Syria which was followed by an Iranian assault on Israel in mid-April. Friday saw the stock lose a staggering 10% because Super Micro Computer failed to publish a preliminary earnings report, spiking fears of a slowdown in the industry!

Analysis:-

Technically, the company is trading below its 5, 20, and 50-day averages but well above its 100 and 200-day averages. The sharp declines registered by the stock has taken its RSI down to 34.02, a level fairly close to its oversold zone at 30.

The chart above compares Nvidia with its competitors. As seen above, heavyweights like Broadcom, Qualcomm, Intel, and AMD are no match for Nvidia’s stock which has yielded a return of 560+% in less than 18 months! While Nvidia’s growth is impressive, Nvidia's gains were dwarfed by SuperMicro, one of the largest manufacturers of high-performance and high-efficiency servers as the stock has grown almost 1000% in the same period!!

Fundamentally, the company has been consistently beating all estimates. In Q4FY24, Nvidia reported a 265% YoY growth in revenues with quarterly revenues reaching a record high of $22.1 billion! The company’s gross margin improved 200 bps to 76% while Net Income came in at $12.3 billion, up 769% in a year!

What’s the future outlook??

Nvidia is a market leader in GPUs with a market share of a staggering 80% in the global GPU semiconductor chip market! Moreover, Nvidia is not just a chip maker. It has its own AI-friendly hardware and software, indicating that Nvidia has end-to-end AI offerings. It recently partnered with heavyweights like Amazon, Singtel, Recursion, and Amgen for AI offerings, and its GPUs are demanded by many EV manufacturers like Li Auto, ZEEKR, GWM, and Xiaomi EV.

Furthermore, the company’s fundamentals are excellent. Revenues have been registering blockbuster growth as operational metrics are improving every quarter with forecasts suggesting greater growth in coming quarters! With AI expected to reach a market size of $2.6 trillion by 2032, Nvidia would stand to be one the biggest beneficiaries of the growing industry.

However, the share could face near-term weakness. The ongoing Israel-Iran conflict has spooked investors, leading to steep declines throughout the globe. The stock of Nvidia had fallen after hitting a lifetime high of $974. Although Bulls were returning the stock to such a level, adverse geopolitical conditions weakened investor sentiments, and Nvidia, alongside global markets, crashed. The stock fell through 2 support levels and closed on Friday above its immediate support at $745.72. As such, the stock is expected to register marginal gains, no major movement (in either direction) is expected until its quarterly earnings are published in May 2024.

Thus, although the company's long-term prospects are positive, the company could face near-term weakness due to poor market sentiments.