Nvidia soared 40% year-to-date. Is it time to divest before earnings?
Nvidia( $NVIDIA Corp(NVDA)$ ) fell 4.35% overnight to USD694.52.
Nvidia is the last of the Magnificent Seven stocks to report latest quarterly earnings.
Nvidia serves as a proxy for AI demand; if earnings miss street expectations, other AI-related stocks may encounter some price corrections.
UBS reports that the lead time for Nvidia's H100 GPU for AI applications has shortened significantly, from 8-11 months to just 3-4 months. This suggests that Nvidia may either expand its future production capacity or face lower demand going forward. The drop in share price yesterday indicates that investors may agree with the latter scenario, suggesting that Nvidia may have reached its growth peak with the H100.
Investors may have priced Nvidia to perfection. Thus, any earnings miss will likely result in a significant dip in share price.
An earnings beat alone may not be sufficient to sustain its premium valuation; investors expect to see strong earnings forecasts.
However, Nvidia appears reasonably priced to me, with its forward PE at 33x seeming fairly valued as AI demand is expected to boost its EPS growth. After all, the AI revolution is still in its early stages.
Nvidia's earnings implied move is 8.6% (from 4Q2018 to 4Q2023). In other words, Nvidia's stock may move up or down by 8.6% after the earnings announcement, which is after the market closes tonight.
Nvidia was trading as high as USD828 before splitting its shares in 2021. If history serves as a guide, there may be increasing speculation about share splits once the share price surpasses the USD800 mark.
Bloomberg consensus shows a 12-month target price of USD734.48, representing a modest upside potential of only 5.8% relative to yesterday's closing price.
Nvidia stock remains one of the best options to gain exposure to the AI revolution. While a correction appears to be underway, our preferred investment strategy is to gradually accumulate at support levels such as USD645, USD595, USD 534, and USD491.
Buying deep in-the-money Nvidia Leap calls could be another preferred investment strategy.
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