By Jacob Sonenshine
Nvidia, we have a problem.
It's difficult to say that about a stock that has been so successful. Shares of Nvidia have risen almost 14-fold since their split-adjusted low of just over $11 in late 2022 to a record intraday high of nearly $153 in November, dwarfing the S&P 500 index's 66% gain and just about everything else over that time frame. And every bit of those gains was deserved as demand for Nvidia's chips, which have the power and speed to handle the data needed for artificial intelligence, shot through the roof.
Now the rally in Nvidia's stock has ground to a halt. Initially, that didn't look like it would be that much of a problem. Taking time to digest gains, especially those as large as Nvidia's, can take time. The stock has dropped about 15% from its intraday record high to $130 on Tuesday, while the S&P 500 has gained almost 2% in that span. The stock was up 3% at $134.24 in early trading Wednesday.
Key technical levels are starting to break. Shares had support -- a level where buyers tend to cluster -- near $135, but that level has broken, with the stock closing at $130.39 on Tuesday. The stock has also dropped below short-term moving averages, including the 20-day, a sign that gravity is starting to kick in. "That 20-day moving average is pointing lower," says Fairlead Strategies' Katie Stockton. "[Nvidia] has downside momentum."
Nvidia's loss has meant gains for other chip makers. While Nvidia's stock has fallen 8% over the past month, the iShares Semiconductor exchange-traded fund (ticker: SOXX) has risen 5.7%, led by gains from Broadcom, which has jumped 47%, and Marvell Technology, which has climbed 29%. That's a sign that investors have found other chip stocks to buy.
And for good reason. Broadcom, for instance, reported $12.2 billion of total AI sales for all of this year, more than triple the revenue from the same period last year. The company says part of the growth was driven by its customers' uptake of its XPU chip, which allows customers to compute data efficiently to support their AI capabilities. The recent surge in Broadcom "is probably coming at a small cost to [Nvidia]," says Dan O'Regan, a trading analyst at Mizuho.
Nvidia, however, isn't down for the count just yet. It's expected to generate about $107.7 billion in data-center sales this year, most of it from AI chips. Total spending on these chips will keep growing. Advanced Micro Devices said on its latest earnings call that the total spent on AI chips could hit $500 billion in a few years, which means even if the likes of Broadcom and AMD grow their AI businesses aggressively, they'll steal only a few billion dollars of share away from Nvidia, which has continued to beat expectations for its overall growth.
So how low can Nvidia go? The stock's 200-day moving average sits near $115, and the stock has remained above that average since breaking through it to the upside in January 2023. If the drop picks up speed, it could slice through it and head for the low $90s.
We think $115 holds. Not only is that level its 200-day moving average, but it also represents 27 times 12-month forward earnings, near the low end of its range since it began its torrid run. It also wouldn't be all that much more expensive than the S&P 500's 22.5 times, despite growing sales and revenue at a far faster pace.
"I would be a lot more excited to add to Nvidia at those levels," says Joe Tigay, chief trading officer at Equity Armor Investments, referring to $115.
Nvidia CEO Jensen Huang has a chance to arrest the decline on Jan. 6, when he provides an update on the business at the CES conference in Las Vegas. And in the meantime, investors should watch the 20-day moving average for signs of strength, Stockton says. "You want to make sure that momentum is alleviating," she says. "Once you start to see that 20-day turn up, that tends to be a better time to buy."
So wait for Nvidia. Just not too long.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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(END) Dow Jones Newswires
December 20, 2024 21:30 ET (02:30 GMT)
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