To The Moon

Initially simply called "NV" for "Next Version" and then becoming a homophone for "envy" in Latin, NVIDIA Corporation is one of the world's leading microprocessor companies. The company is also responsible for popularizing the phrase "Graphical Processing Unit" (GPU) in the course of describing some its leading products, which has gone on to elevate and enhance the experiences of many a gamer in the world.

The company's stock ($NVIDIA Corp(NVDA)$) is currently one of the most watched in the world right now since it lies squarely in the middle of the "tech" zeitgeist of high-conviction names for many investors. This conviction isn't exactly unearned.

Fiscal Trends

A quick rundown of the past two years' Full Year results versus the the first quarter of this year - as per the company's calendar - shows at least partially why the stock is so highly prized:

Steady Line Item Discipline Indicates a Steady Hand at the Wheel

In past fiscals years, the trends indicate an all-round positive growth in excess of cost increases coupled with an almost-doubling of earnings per share attributable to common shareholders. In the current quarter, there is a slight indication that while costs and current liabilities are roughly proportional to one-fourth of the previous year's figures, the revenue is a little less than a fourth. Diluted earnings per share, after accounting for a four-for-one stock split executed on July 19, 2021, also trails relative to the corresponding quarter in the previous year.

This isn't necessarily a major concern this early in the fiscal year. However, like every other stock - particularly "tech" names - in the year so far, the stock price has seen a precipitous fall. The reasons for this is more reflective on the stock's valuation as opposed to the company's.

Ratio and Volume Analysis

From March of last year through this week, an analysis of the 3 ratios as carried in past articles, reveal a few interesting facets:

A Steady Trail Increasingly Farther Away for 2021 Highs

While the stock's Price to Sales (PS) and Price to Book Value ratios indicate a fair bit of relative stability, the Price to Earnings (PE) ratio - by far the most popular metric for stability evaluation - shows a precipitous decline of nearly 37% in the current week.

While high ratios are typically seen in companies with significant invested capital or in those with high growth outlook, lower ratios signify weakening growth outlook or a recognition of the company attaining some semblance of a "steady state" in terms of market share.

BlackRock Investment Institute's Weekly Commentary dated June 13 attributed BlackRock's decision to not "buy the dip" in the near term to three reasons:

1. The energy crunch will hit growth and higher labour costs in the face of inflationary pressures will eat into companies' profits;
2. Stock valuations don't show improvement after accounting for lower earnings outlook and faster expected pace of rate rises;
3. There's a growing risk that the Federal Reserve will tighten too much, making equities less attractive.

Leaving aside the third point, there's an interplay between the first two points: if inflation weighs heavy on the earnings of individuals and corporations alike, what are the likelihoods of an upgrade in "rig"? Corporations could push back upgrades to improve their earnings while individuals would rather focus on essentials over spending on new tech.

There is also a very different argument as to whether the PE Ratios for long-standing companies should be in the 50s to 70s while simultaneously considering them to be stable in the first place. A dramatic growth outlook forever simply doesn't happen.

Given that "tech" stocks have been a hot choice for investors for quite some years now, this leads to a consideration of traded volumes. Over the year till date (YTD), monthly average traded volumes have generally been trending down after the customary "January bump". However, when comparing trading volumes in the stock versus the "tech-heavy" Nasdaq-100 (here represented by the ETF QQQ), this overall market trend isn't very smooth.

Correlations and More Correlations

Overall, there is a very high degree of correlation between rallies in the broader ETF and the stock. One possible attribution for the strong tendency to attempt a bullish rally on tech stocks (that nearly always come a cropper shortly thereafter) could be "tech" overall historical sky-high valuations. If so, reality has been biting market participants hard; there appear to be simply no takers for rosy Total Addressable Market estimates, operational efficiency estimates, et al in the face of increasing external pressure on earnings.

In Conclusion

Companies like NVIDIA are top-tier companies in that they're well-led, have deep expertise in their area and a commanding market share in a field of limited competitors. Thus, as a company, it is indeed a valuable and interesting company. Overvaluation, however, divorces the company from the stock and leaves the stock to the mercy of overall macroeconomic scenario.

For investors interested in holding over the long-term, the key takeaway should that expecting the status quo from 2020 or even 2021 lies at odds with base reality for at least in the present year: in the present day, overvaluation comes with volatility on a downward-trending basis. In the months or quarters going forward, a series of price discovery actions around certain levels could be expected.

This gives an interesting advantage to the tactical investor in Asia who has access to Daily Leveraged Certificates (DLCs) and Exchange-Traded Products (ETPs) with daily-rebalanced inverse and leverage factors embedded. For instance, as shown in an earlier article wherein Tesla's downward trajectory was monetized, a similar approach with different rules can be considered with $LS 3X NVIDIA(3NVD.UK)$ or $LS -1X NVIDIA(NVDS.UK)$ to capitalize on the upside and the downside respectively to either prop up investment value or straight-up make some short-term profits.