To The Moon

Nvidia’s Q2 earnings report might not have delivered the exact blowout expectations some investors had hoped for, but there's still a strong case for bullishness. Nvidia beat second-quarter revenue and EPS estimates, yet its stock slid 7% following a Q3 revenue guidance that was lower than the most optimistic forecasts. So, should investors consider buying Nvidia at $110, or is there a possibility of a further dip?

Why Did Nvidia's Stock Decline?

The primary reason for the decline in Nvidia's stock is the tempered third-quarter revenue guidance. Nvidia forecasted Q3 revenues of $32.5 billion, plus or minus 2%. While this figure is impressive, it didn't meet the sky-high expectations that the market had priced in, as evidenced by the stock's reaction. The options market was primed for a 10% move in either direction, indicating that investors were bracing for, and possibly betting on a more substantial surprise.

However, this pullback should be viewed in the context of Nvidia's staggering performance over the past year. Nvidia’s earnings and sales have more than doubled, a feat that is not sustainable indefinitely. The moderation in growth projections could very well be a sign of responsible management, aligning expectations with achievable results rather than overpromising.

Bullish Outlook for Nvidia

Despite the recent dip, there are several reasons to maintain a bullish outlook on Nvidia:

1. AI Momentum is Still Strong: Nvidia remains a dominant player in the AI and semiconductor space. The company's GPUs are critical for AI workloads, and the demand for these technologies is only expected to grow. Nvidia’s second-quarter earnings beat forecasts, with sales topping $30 billion, underscoring the company’s strong market position.

2. Broader Market Dynamics: The broader market might not need Nvidia's outperformance to maintain its momentum. The S&P 500's correlation with Nvidia has weakened, indicating that other sectors are picking up the slack. This diversification can be healthy for the market and doesn’t necessarily mean Nvidia’s value proposition is diminishing.

3. Potential Fed Easing: As noted by strategist Jim Paulsen, the Federal Reserve appears poised to start cutting interest rates. This could usher in a new investment environment, favouring equities. Nvidia, being a tech giant, stands to benefit significantly from a lower interest rate environment, as tech stocks generally do well when borrowing costs are low.

4. Fundamentals Remain Strong: Nvidia's fundamentals are robust. With a revenue forecast still significantly up year-over-year, the company’s core business remains healthy. It’s important to remember that a slight miss on overly bullish guidance doesn’t negate the fact that Nvidia is still growing at an exceptional rate.

My Trading Actions

Reflecting on these dynamics, I took a proactive approach by selling half of my Nvidia position at $128.79 during Wednesday’s pre-market session. I then covered my position at $116.45 during the night session. These actions were based on a short-term reaction to earnings but are by no means an indication of a lack of confidence in Nvidia's long-term prospects.

While it’s tempting to focus on the short-term disappointment from Nvidia’s guidance, the bigger picture still favours a bullish stance. The company's leadership in AI, a stabilizing broader market, and potential monetary easing by the Fed all point to Nvidia being a solid investment for the future. At $110, Nvidia could offer a compelling entry point for investors looking to capitalize on the next leg up in this tech titan's journey.

@TigerWire