NVDL: Pain Still Awaits

seekingalpha05:13

Despite a poor initial call, I believe NVDL long positions face potential pain due to NVDA's slowing growth and high valuation.NVDL is suitable for short-term trading but underperforms NVDA long-term,...

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I believe we're at or very close to a top in NVDA. Which would garner losses for NVDL.   Jonathan Kitchen When I last covered the GraniteShares 2x Long NVDA Daily ETF (NASDAQ:NVDL) for Seeking Alpha in early September, I said that \"pain awaits\" leveraged long NVIDIA (NVDA) positions:   Seeking AlphaNarrator: the pain was his own. Fast forward two and a half months and you'd be hard-pressed to find a better bottom tick than the day my last NVDL piece was published. I'll wear it. It was a horrible call and my synthetic NVDA short through the Tradr 1.5X Short NVDA Daily ETF (NVDS) was beat up pretty good. Justifiably so. However, with the latest earnings release from AI-darling NVIDIA, I think the time is right to explore the possibility that NVDL gains may have been had for the time being. Yes, I'm doing this again. I suspect pain awaits NVDL long positions. Fund Recap To briefly recap the fund itself, NVDL is an actively managed leveraged long product that is designed to produce two times the daily return of NVDA stock. For this, investors pay a 1.06% annual expense ratio. However, as has been explained numerous times on Seeking Alpha from myself and from other contributors, leveraged funds that are rebalanced daily are not designed for long term holdings. They are for shorter term traders and/or tactical hedging during brief periods of time. Liquidity in the fund is strong. NVDL has over $6.6 billion in AUM. As far as fund performance goes, it has met management's objective quite well since my September 5 article: Data by YChartsSince 9/5/24, NVDA shares have a total return of 36.1% while NVDL shares have a total return of 73.4%. Thus, NVDL shares have accomplished the 2x NVDA return over the last two and half months. But I have to stress - and this was largely the point of my previous piece even though my timing was poor - over longer periods of time NVDL is going to lag its 2x return goal if NVDA's directional trend is less clear: Data by YChartsDuring a nearly straight line up for NVDA, NVDL will work wonderfully. But when there is chop in NVDA, NVDL will lag the 2x objective and potentially even lag NVDA. For instance, the chart above shows the total return of the two from June 20. That date is significant because it was the top of the previous NVDA all-time high run before the stock broke out in October after several months of chop. But the point is, between June 20 and November 20, anyone who held NVDL the entire time has only returned 1.7% while NVDA is up over 11%. A strong bullish trend in NVDA is great for NVDL shareholders. Chop is not good. The question then is, how much gas is left in the NVDA rally? NVDA Earnings & Valuation Again, I was wrong on my timing in September. I can wear it, and I was punished properly for it in the market. That said, many of the things I pointed out in that earlier note still apply today. In fact, we have yet another quarter of NVDA earnings performance that indicate the company's growth story is slowing down - at least for now.           $ in Billions Oct 2023 Jan 2024 Apr 2024 Jul 2024 Oct 2024   Revenues $18,120 $22,103 $26,044 $30,040 $35,082   YoY Rev Growth 321.78% 338.06% 339.03% 138.58% 95.19%   Cost of Revenue $4,720 $5,312 $5,638 $7,466 $8,926   Gross Margin 73.95% 75.97% 78.35% 75.15% 74.56%   Net Income $9,243 $12,285 $14,881 $16,599 $19,309   Click to enlarge Source: Seeking Alpha, NVDA quarterly revenue I'm not going to argue whether or not NVIDIA's revenue and net income growth have been strong; it's very obvious that this company's fundamental story has been phenomenal and growth is still clearly happening. But it is slowing down. YoY revenue growth and gross margin have both declined for two straight quarters. YoY net income growth has actually been in decline for four consecutive quarters. Powering this growth, of course, is the company's data center revenue segment:   Seeking AlphaData center revenue grew 112% year over year and 17% sequentially. In just one year, we've seen data center revenue go from 80% of the company's total revenue to just under 88% - this was closer to 60% two years ago. Again, this company is still reporting absolutely tremendous top and bottom-line growth. That is not the question. The question is, what should investors be willing to pay for that growth? Data by YChartsAt 37x trailing twelve-month sales, NVDA is incredibly expensive. At 28x forward sales, NVDA is the most expensive it has been in at least the last three years. Perhaps PS ratios aren't the best way to analyze NVDA because margins are so juicy. Fine. Data by YChartsNVDA is still trading at 50x forward earnings. Meaning at a $3.5 trillion market capitalization - the largest market cap of any company in the world, mind you - earnings would have to double again for the company to be trading inline with an info tech sector that is also arguably very overvalued. That could happen, but I have doubts. The company is guiding for continued margin compression over the next few quarters, and there is certainly no guarantee that broad capex spend on data centers will continue to the degree that it has in the years to come. There are still very legitimate questions about generative AI pertaining to things like application profitability and copyright infringement issues from monetizing data that has been scraped from publishers who haven't been compensated for providing the data used when building language models. Closing Thoughts  If the early session action from 11/21/24 is any indication, this is the second consecutive NVIDIA earnings report that the market is selling. I suspect pain still awaits. Though this time it isn't going to be from any synthetic NVDA short position that I've put on; I'm not playing that game again. But I am of the opinion that NVDA stock is running out of steam. NVIDIA could double earnings again with a flat stock and still theoretically be overvalued based on broader market valuation ratio medians. A more painful scenario would be that net income growth continues to slow and NVDA gets repriced downward. Neither scenario are good for NVDL shareholders, as the latter would likely result in significant losses. To be clear, NVDL is perfectly fine for trading and short term tactical strategies. But longer term, NVDL will underperform NVDA unless NVDA goes up every day forever. I don't think that's going to happen.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485491426"}