Company Background

Nvidia Corporation is an American multinational technology company incorporated in Delaware and based in Santa Clara, California. It designs graphics processing units (GPUs) for the gaming and professional markets, as well as system on a chip units (SoCs) for the mobile computing and automotive market. NVIDIA was the pioneer in the graphic processing space as it is the inventor of the graphic processing unit, or GPU. Its primary GPU product line, labeled “GeForce”, is in direct competition with Advanced Micro Devices’ (AMD) “Radeon” products. The company’s GPU platforms are playing a major role in developing multi-billion-dollar end-markets like robotics and self-driving vehicles.

Over the years, the company’s focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high performance computing (HPC), gaming and virtual reality (VR) platforms. Nvidia expanded its presence in the gaming industry with its handheld Shield Portable, Shield Tablet, and Shield Android TV and its cloud gaming service GeForce Now.

NVIDIA is a dominant name in the Data Center, professional visualization and gaming markets where Intel and Advanced Micro Devices are playing a catch-up role. The company’s partnership with almost all major cloud service providers (CSPs) and server vendors is a key catalyst.

In addition to GPU manufacturing, Nvidia provides parallel processing capabilities to researchers and scientists that allow them to efficiently run high-performance applications. They are deployed in supercomputing sites around the world. More recently, it has moved into the mobile computing market, where it produces Tegra mobile processors for smartphones and tablets as well as vehicle navigation and entertainment systems. In addition to AMD, its competitors include Intel and Qualcomm.

Current Position – Financial Performance & Future Growth Prospects

One of the new growth areas for NVIDIA has been gaming, as the company has continued to gain a decent market share among the gaming service providers. The strong product line-up of advanced graphics cards has made it a favorite graphics card provider among the PC makers. The strong YoY growth in PC gamers, esports players and higher spending on the gaming GPUs have also been among the key catalysts. Further, NVIDIA’s Turing GPU and its real-time ray tracing technology are witnessing a massive adoption.

As mentioned above, the company generates most of its revenue from gaming graphics processing units (GPUs), but the chipmaker also sells high-end GPUs to data centers, where they process AI and machine learning tasks alongside central processing units (CPUs) and other chips. It also recently expanded that business by acquiring Mellanox, which provides networking equipment to data centers.

The stock has more than doubled year to date, despite the broad economic headwinds of the coronavirus pandemic.

However, if you’re thinking that NVIDIA’s stock is done moving higher for the moment, you may find yourself pleasantly surprised. The return of a well-known catalyst – cryptocurrency mining – could be giving them a nice lift at the moment. NVIDIA and its major competitor AMD benefited from the cryptocurrency mining craze in a big way in 2017 and 2018, selling nearly $800 million worth of graphics cards to miners, according to third-party reports. A chain reaction followed as the huge demand from cryptocurrency miners created a shortage of GPUs (graphics processing units), which in turn led to a sharp increase in their prices.

A similar trend seems to be playing out after the recent releases of AMD and NVIDIA’s latest-generation cards, which promise huge performance gains over their predecessors. The new GPUs are already hard to come by, and the shortages are anticipated to last well into 2021. Investors see the heavy GPU purchases by cryptocurrency miners as one of the reasons for this shortage. According to RBC Capital Markets, NVIDIA reportedly sold $175 million worth of its RTX 30 series graphics cards to miners in its fiscal third quarter, which ended on Oct. 25. That’s an impressive figure considering that it didn’t start to launch the new GPUs until the second half of September.

If that’s indeed the case, then it is not surprising to see why this is happening, as NVIDIA’s new-generation GPUs are reportedly much faster at mining.

The expansion of that business boosted NVIDIA’s data center revenue 167% year over year to a record high of $1.75 billion last quarter. That momentum should continue as the company rolls out its new Ampere GPUs for data centers, bundles in more of Mellanox’s products, and receives more orders from cloud, supercomputing, enterprise, telecom, and industrial edge customers.

Datacenter presents a solid growth opportunity for the company. As more and more businesses are shifting towards the cloud in the current environment, the demand for datacenters is expected to continue to rise in the months and years to come. To cater to this huge demand, datacenter operators like Amazon, Microsoft and Alphabet are expanding their operations across the world, which is driving demand for the GPUs. This bodes well for NVIDIA’s uptrend as well.

In September, Nvidia announced a $40 billion deal to acquire chip designer Arm from Softbank. The company stated that it will take 18 months to complete the acquisition. However, the deal has to win regulatory approvals in several jurisdictions around the world.

The deal, if approved, is expected to strengthen Nvidia’s data center business. ARM develops technology that is widely used in low-power chips for smartphones, wearables and tablets, and supplies its technology to most of Nvidia’s competitors.

The company also focuses on selling its Arm-based Tegra CPUs for connected and driverless cars. Those high-end chips power infotainment and navigation systems and help driverless systems process what they’re “seeing” on the road. NVIDIA’s automotive revenue plunged 47% year-over-year to $111 million last quarter as the pandemic disrupted auto plants worldwide, but that business could recover quickly after the crisis ends. As we all know, Artificial Intelligence, Autonomous Driving, Internet of Things, Machine Learning etc. are all trends that will define the way the world will look in the coming decades. Thus, NVIDIA is currently in a unique position for benefiting from all of these high-growth trends in the future, as it is currently a leader in all of them.

Wall Street expects NVIDIA’s year-over-year revenue and earnings to rise 45% and 57%, respectively, this year, as the growth of its gaming and data center segments offset the slower growth of its other businesses. The stock still looks reasonably valued at less than 50 times forward earnings, and it remains a solid long-term play on the AI and driverless vehicle markets.

NVIDIA is a high-growth stock with an extremely stable financial position and a remarkable balance sheet. As of Jul 26, 2020, the company had cash and cash equivalents of nearly $10.98 billion, which is significantly higher than its total debt of $6.96 billion. Since it has net cash available on its balance sheet, the existing cash can be used for pursuing strategic acquisitions, investment in growth initiatives and distribution to shareholders.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 6 months taking the price from the March 19th lows of around $180 to the highs at $590, thus representing a 228% increase in 5 months. The all-time highs were reached in the beginning of September and ever since then, we have seen a volatile roller-coaster price action for the stock and the SPY ETF altogether. An initial correction took the price down with over 21% in less than 2 weeks throughout the first half of September. Then, we saw another sharp rally as the price made an attempt to re-test the all-time highs and the psychological resistance lying there. However, the stock failed to break the $580 resistance in the first half of October, which was then followed by a sharp drop of the price in the lead up to the US Presidential Elections. With the elections behind us the stock made another (3rd) attempt to continue its outstanding bull rally, and break the $590 all time highs. However, the bullish momentum was relatively weaker than the one we saw in early September as the RSI was trading significantly lower. This in turn was a signal that one of the best performing stocks so far this year and a company that we firmly believe in for the long term, might be due for a pullback from the current all time high levels. The actual rejection at $590 for a third time in the last 2 months formed a Triple Top reversal pattern on the daily chart. Does, this remind you of something? Well, that is exactly what we got from the SPY, PYPL and AMD daily charts – a relatively weaker attempt for a push above the ATH, with two prior strong rejections at the current levels.

The stock is currently sitting at the $532 mark after rebounding from the strong diagonal, horizontal and dynamic trendline support around $500. The initial downward correction was anticipated as a result of profit taking interest as well as the general uncertainty in the market. When there are high levels of uncertainty in the market, then even the best stocks out there could become vulnerable. Additionally, lets not forget that NVIDIA’s stock has already appreciated with the staggering 228% from its March lows, thus these current corrective movements, could very well be considered healthy and necessary for the continuation of the uptrend. However, it is of essential importance to note that the Triple Top figure is still not officially activated as that would happen only when the stock breaks the key support level (neckline) of the figure at around $515. The neckline of this figure would be around the $515 mark and a potential break there could open up the doors for a much larger decline towards the $420 level.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, presidential elections, the economic recovery etc. – and that we could be in for a sideways and choppy price action in the coming months, we see the winners continuing to win. We remain cautiously bullish on NVDA’s stock and believe that any profit-taking corrections and potential larger price declines would give us a great opportunity to buy the stock at a good discount and hold it for the long term. This, in turn would give us a chance to maximize our profits to the upside, once the stock resumes its strong uptrend. Furthermore, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing that the price might not have enough steam to break the current diagonal trendline, horizontal and psychological resistances that it faces. The exhaustion of the recent up move could be signaling that a potential short-term decline could be just around the corner. Thus, we are not advising our followers to go ahead and start buying the stock right now at its current highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

Dow Theory 2.0 – Correlation Confirmation

Dow Experts’ approach has always been based on identifying the next great movement in the market by analyzing both the fundamentals, the technicals and all-important factors that have an impact on the price. Furthermore, our cross-correlation analysis allows us to act in the market only if the movement on the chart is confirmed by the other key ETFs and indices that we use in our investing philosophy.

As you know, the Dow Theory 2.0 includes more than 30 correlations between different ETFs and stock market indices, which give us a chance to confirm whether a certain movement in the market is worth taking action for.

Therefore, in order to determine whether NVDA is a good stock to buy with respect to the current levels of the price we have decided to analyze the performance of both the SPY (Select Sector SPDR S&P 500 ETF Trust) and the XLK (Technology Select Sector SPDR Fund). The two ETFs share a very strong and positive 90% 10-year correlation, which would allow us to confirm some of the signals that we are getting with a great deal of certainty. The SPY is the largest, most liquid and most commonly traded ETF out there that invests in the 500 most well-capitalized companies in the US, and by doing so it mimics the performance of the S&P 500 benchmark index. NVIDIA is the 13th largest holding of SPY with its current 1.05% weight within the ETF, which is understandable as the stock has already more than doubled throughout 2020 and it has far outpaced some of the other SPY holdings. However, this should definitely not be taken as a negative for the stock, but rather as a positive, as the company is considered to be one of the most popular stocks among traders and investors and as a result of that its valuation metrics are not always the driving force behind the price movements on the stock. The stock is also the 4th largest holding of the XLK ETF with its 3.82% weight.

By looking at the daily chart, one could see a very similar movement on the SPY, compared to both the chart of NVIDIA and XLK. Due to the coronavirus outbreak earlier in the year, the SPY made a 35% correction, dropping from its highs at $339 towards the key support at $221 where it found lots of buying interest, which ultimately led to one of the strongest rebounds in the history of the stock market as the SPY has appreciated with 62% in just 5 months. There has been a lot of speculation and discussion recently on how come the US stock market continues to rally when the US economy is barely trying to survive in the current COVID-19 environment. However, as we know the technical charts reflect the overall fundamental picture and the investors’ sentiment in the market. At the moment, the remarkable and relentless fiscal and monetary support provided by the government and the Fed is acting as a safe net for this highly overbought and overvalued market. The support will continue, but how much longer could the market continue to grow in this environment.

Similarly to NVIDIA and XLK, the SPY experienced a volatile correction in the first 2 weeks of September that took the price down with around 5-6%. However, the uptrend resumed shortly thereafter. The ETF is currently sitting at the $367 mark after rebounding from the strong dynamic 20 DMA support at $363, which also overlaps with another strong horizontal support positioned at $362. The initial correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it was more than normal to see a downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the effect of the outcome of the presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. The strong rebound that we saw in the first part of October kept us bullish on the SPY ETF at the time but we also believed that any profit-taking corrections should be treated as great opportunities to buy one of the most well diversified ETFs and some of the stocks in it at a good discount. Furthermore, this would in turn give us a chance to maximize our profits to the upside and finish this year in a strong and profitable manner. The month of November was the best month for the US Equity markets since 1987 – the S&P 500 rose 10.75%, the 30-stock Dow Jones Industrial Average gained 11.84% and the Nasdaq Composite rose 11.8% in November. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing early signs of exhaustion of the recent upward movement and are signaling that the uptrend might be at risk if some of the key support levels on the chart are broken. Thus, we are not advising our followers to go ahead and start buying the stock orthe ETF right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 6 months taking the price from the March 17th lows of around $68 to the $127 all-time highs in the beginning of September. Since then, we have seen a 15.6% correction for the XLK in the first part of September, which was quickly recovered in the second part of the month, as the price headed back up strongly. Throughout the month of October, the XLK ETF experienced quite the roller coaster as after a nice bullish run from $110 to $123, the ETF saw its price declining in the 2nd part of the month all the way down to $110, thus establishing a nice trading rage. The month of November on the other hand was the best month for the US Equity markets since 1987 – the S&P 500 rose 10.75%, the 30-stock Dow Jones Industrial Average gained 11.84% and the Nasdaq Composite rose 11.8%.

The ETF is currently sitting at the $126 mark testing the strong psychological and all-time high resistance at $127. The correction back in September was anticipated by us as nothing can go up or down in a straight line forever and after the strong bullish rally in the past 5 months it was more than normal to see a downward corrective movement. While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the effect of the result of the presidential elections, the economic recovery etc. and that we could be in for a sideways and choppy price action in the coming months, which in turn could affect a lot of the stocks negatively, we see that the winners would most likely continue to win. We remain cautiously bullish on the XLK ETF and believe that all these profit-taking corrections are giving us great opportunities to buy the best performing ETF and some of the stocks in it at a good discount, which would in turn give us a chance to maximize our profits to the upside. However, some of the technical indicators that we are monitoring closely on a daily basis (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the recent upward movement and are signaling that the uptrend might face some headwinds very soon. However, it is important to note the fact that the XLK and the Technology sector as a whole would continue attract a lot of the investors’ attention moving forward, as Technology is everything nowadays and the companies in this space are the ones shaping up our future. This makes us rather cautiously optimistic for the performance of the ETF as even if there is a short-term price decline coming soon, we believe that this ETF will be able to hold its ground better than some of the other ETFs out there.

The daily chart shows that the price is currently testing the key resistance line at $127, which actually matches with the all-time highs for the stock. Considering the fact that the price is currently sitting at this high level and there is plenty of uncertainty in the market at the moment, we are expecting to see a short-term correction taking place in the coming days and weeks. As mentioned above, the technical indicators that we are monitoring closely are also signaling that certain exhaustion currently exists in the market. The fact that all three charts that we’ve analyzed are showing the same exhaustion patterns means that there is a roughly 90% chance for the XLK to move slightly lower in the coming weeks, before it resumes its strong long-term uptrend. If we see the price breaking down below the initial strong support levels at $123 and $119, then we could expect a steeper decline towards the next major horizontal support lines at $110 and $103 where lots of buying pressure is expected to occur, thus sending the price back to the all-time highs . Thus, we are not advising our followers to go ahead and start buying the stock right now at its all-time highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

Conclusion

In conclusion, after analyzing NVIDIA’s fundamentals, new products and features, recent financial performance, as well as the technical picture with the recent correction and the potential profit taking interest building up ahead we wanted to get a further confirmation as to whether NVIDIA qualifies as a qualitative stock purchase according to the DowExperts. Following the recent strong appreciation for the stock, we looked at 2 ETFs that have a strong positive 10 year correlation in order to put the recent sell off in NVIDIA’s stock into context. By doing so, we could further test our short-term cautiously bullish and long-term bullish stance for the stock in the right way. Both SPY and XLK confirmed our expectations for an initial short-term weakness before the resumption of the long-term bullish trend for NVIDIA’s stock. Thus, we will take advantage of the great long-term bullish potential, by opening 1/2 of our overall positioning at the current levels, and will be looking to add more to our NVIDIA exposure on any additional declines both caused by either intrinsic company weakness or by a broader market sell off.

Our short-term correction targets to the downside are going to be placed at $473 and $428, where we will be looking to further add to our NVIDIA long position, thus improving our average cost basis on the trade.

As the price starts to reverse back to the upside, we will be interested in collecting our first profits at the $600 mark. Our next profit-taking area is positioned at $675 and $710 respectively, where we will be collecting the majority of our profits.

Sincerely,



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