Why Nvidia's stock is at risk now: Morning Brief

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The weight of high expectations often becomes a heavy burden.

In life, if you're the top performer at work, it's expected that you act like your top performer every day. Are you having a bad day? That's not allowed, so shove that crap somewhere else.

Sure, some college professor who gave an inspiring leadership speech at a TED Talk 10 years ago and is now appearing in a one-minute clip on your Instagram feed might suggest that it's OK to have bad days at work, even if you're a winner.

Trust me, it’s not – and don’t let that social clip make you think otherwise.

The same philosophy can be applied to one of the most important stocks on the stock market: Nvidia (NVDA).

I know you loved this change, Morning Brief readers! Hear me talk about this top performer in the market.

Last week we were reminded just how high expectations are for Nvidia and how the stock has reached dangerous levels that many traders who got in late to Nvidia's game had never encountered before.

On June 18, Nvidia's market cap reached $3.34 trillion, making it the world's most valuable company, surpassing Microsoft (MSFT). Over the next three trading days, without any fundamental news, the company lost $430 billion in market cap.

For perspective, Coca-Cola (KO) has a market capitalization of $275 billion.

Some of the people I talked to told me that people were making profits on Nvidia as early as the second half of the year. Some of the people I talked to for my “Opening Bid” podcast told me that there is some talk about new competitors entering Nvidia's space, and that the company may not be as ridiculously dominant in the next five years as many people are expecting.

This is all fair, but it does reinforce the notion that the stock is susceptible to a sudden downside move, considering it is up over 3,000% in five years.

But if you dig deeper, you'll see just how intense expectations have become for Nvidia.

  • According to research by Charlie Bilello, chief market strategist at Creative Planning, Nvidia's stock is now trading at about 21x (super steep) forward sales, up from 12x (very steep) two months ago. That's a considerable premium compared to Microsoft (12x) and Apple (AAPL) (8x), both of which are tech giants that are performing very well fundamentally and are likely to continue performing well in the years ahead.

  • Jonathan Krinsky, chief market technician at BTIG, pointed out that Nvidia's stock was recently trading nearly 100% above its 200-day moving average. Since 1990, the largest spread by any U.S. company trading above its 200-day moving average was 80% by Cisco (CSCO) in March 2000, which was its all-time high. “In other words, Nvidia is in a different league of its own,” Krinsky said.

It certainly feels that way.

Chipmaker Micron (MU) had similar expectations heading into earnings this week. The stock took a beating thanks to “in-line” guidance that didn’t meet crazy expectations for anything related to AI demand.

And I emphasize insanity: On Monday, several sell-side analysts raised their estimates and price targets on Micron ahead of the report. As someone who used to manage a team of stock researchers, I can tell you this action before an earnings report is not normal.

Nvidia Corporation President and CEO Jensen Huang delivers a speech during the Computex 2024 exhibition in Taipei, Taiwan, Sunday, June 2, 2024. (AP Photo/Chiang Ying-ying)Nvidia Corporation President and CEO Jensen Huang delivers a speech during the Computex 2024 exhibition in Taipei, Taiwan, Sunday, June 2, 2024. (AP Photo/Chiang Ying-ying)

Nvidia CEO Jensen Huang delivers a speech during the Computex 2024 exhibition in Taipei, Taiwan, June 2, 2024. (AP Photo/Chiang Ying-ying) (associated Press)

This suggests that analysts have bought into the hype and are expecting the stock to move big one day.

“When you get a reaction like Micron, where the numbers should have been enough to avoid a sell-off, let alone fuel a rally, that’s a bad sign — it suggests expectations are so high they can’t be exceeded,” Steve Sosnick, chief strategist at Interactive Brokers, told me.

Others may disagree with my assessment that Nvidia is priced for perfection, and that's absolutely fine. I don't have a monopoly on good ideas!

“But for medium to long-term investors, the story is still the same when we look at how much capacity is booked and how stable pricing is,” said Chris Verses, co-founder and chief investment officer of Tematica Research.

One thing we can all agree on: Nvidia is the top-performing employee on the market, and if it catches a cold it won't even try to take a day off.

Speaking of expensive tech stocks, Amazon (AMZN) shares are up 55% in the past year. However, questions about its culture remain. WSJ reporter Dana Mattioli talked about her new book “The Everything War: Amazon's Ruthless Quest to Own the World and Remake Corporate Power” in an episode of the “Opening Bid” podcast. Listen below.

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