Part 4

Nike Inc. (NKE)

Company Background

Founded back in 1967 in the US, Nike is the global leader in the business of designing, developing and marketing of athletic footwear, apparel, equipment and accessories, as well as other services for men, women and children worldwide. Thanks to its strong brand portfolio, including Nike Pro, Nike Gold, Nike+, as well as Air Jordan the company offers well-designed and high-quality premium products, in line with the latest trends. Shares of NIKE have outpaced the industry year to date owing to momentum in its digital business that gained prominence amid the coronavirus crisis. While store closures across North America, EMEA and APLA impacted results in fourth-quarter fiscal 2020, the company benefited from robust double-digit digital sales across all regions. Even as stores reopen, the company continues to witness strong digital trends, which demonstrates the strength of its brands and investments to improve digital consumer experiences. Moreover, the company benefited from Greater China returning to currency-neutral growth in the fiscal fourth quarter as stores in the region resumed operations.

Nike plays a major role in the overall performance of the XLY with its 5.83% weight within the ETF. In fact, the company is among the top holdings of the XLY and we have always been very interested in analyzing Nike’s financial as well as stock market performance in order to identify great investment opportunities and be able to maximize our followers’ profitability.

Current Position – Financial Performance and Future Growth Prospects

Nike posted better-than-expected second-quarter fiscal 2021 results, beating both top and bottom lines with a substantial improvement year over year. As mentioned above, some of the companies in the Consumer Discretionary space have managed to navigate this volatile and rapidly changing economic landscape and the footwear and athletic gear giant Nike is definitely one of them. The company’s financial results gained from robust growth in the digital business despite soft retail traffic and wholesale revenues. The company also noted that its holiday season went well with record online sales during the Black Friday week. Furthermore, it is important to note that the company is also well-positioned to grow from consumers’ increasing preference for digital, athletic wear, and health and wellness. Despite the uncertainty regarding the impacts of the coronavirus outbreak, the company updated its guidance for fiscal 2021 based on the impressive second-quarter results. NIKE is likely to witness growth on a sequential basis with gross margin remaining flat during the fiscal third quarter.

In the last reported quarter, the company’s earnings per share of 78 cents rose 11% from 70 cents reported the year-ago quarter, which surpassed the street’s expectations of around $0.62. Revenues grew 9% to $11.24 billion, thus again surpassing the consensus estimate of around $10.50 billion.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 9 months taking the price from the March 17th lows of around $63 to the $147 all-time highs in the beginning of January. This represents a phenomenal 133% appreciation for the stock since last March. In the last couple weeks, we have seen a small correction, which technically started on January 12th after the price was rejected by the strong psychological and round number at $150 per share. However, considering the fact that the correction so far has been less than 5% (4.1%) and that the uptrend is still intact, with the 50 DMA and the 100 DMA being steadily grinding higher, we believe that the stock is poised to continue its remarkable bull-run in the coming weeks as well. The stock is currently sitting at the $140, right above the 50 DMA at $137. This will most likely end up bringing more buying interest, which will then push the price again higher. In case the 50 DMA gives away then we have the 100 DMA waiting to provide the support that bulls need around the $130 mark. This type of corrections are necessary and healthy for every long-term uptrend as they are needed in order to help investors reposition themselves.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks surrounding COVID-19, the transition of power in the White House, 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 expect that the winners will continue to win. With that being said, we are issuing a cautiously bullish view on Nike’s stock as we believe that it has all of the necessary drivers to continue to win in the current environment. However, being only 4% below the stock’s all-time highs every investor should exercise caution when positioning his capital, as there is a certain over-extension of the uptrend. Additionally, the recent price action of the stock doesn’t reflect the short-term bearish setups that we are seeing on XLY, which also points to the fact that there might be some short-term price declines before the stock moves any higher than the current levels. We remain bullish on the NKE stock in the long-term and believe that all these profit-taking corrections are giving us great opportunities to buy the stock at a good discount, which would in turn give us a chance to maximize our profits to the upside. Moreover, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing exhaustion of the most recent upward push and are signaling that the uptrend might be experiencing a short-term pause with a downward bias.

The daily chart shows that the price is currently testing the diagonal trendline support at $140 on a lower volume with all the RSI, Stochastics and MACD pushing lower from overbought levels, which is another worrying signal for the bulls in the short-term. We believe that there is a short-term correction coming up for the stock, after which the uptrend movement will be resumed. The correction that we are seeing for the stock, should take the price down towards the $125-130 region, as there are few strong supports lying around these levels. However, if the prices manages to hold the current support levels in play, then it would resume its upward trend, thus heading into uncharted territory and will continue to set up new all-time highs. Potential target levels to the upside could be $158 and $165. However, the higher the stock goes without any meaningful pullback the more risky it would be for you as an investor to hold on to your long exposure.


Chart: Nike Inc.

We will start buying Nike at $140, just above the major support at $139 where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $125. Our first take profit target is at $158, followed by the next target at $165 where we will be fully closing our positions and collecting the profits.

NVIDIA Corporation

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 XLK 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 at the time

Ever since the stock got rejected at the Triple Top resistance line, we have seen the stock moving mostly sideways with a slight downward bias as a major sector rotational process has been in play. Investors have been mostly booking profits in some of these high-growth Technology stocks and reinvesting their capital into more of the value stocks out there. The main reason for that is associated with the general belief that the economy is already in the process of recovering form the huge 2020 COVID-19 shock and that some of the heavily beaten stocks out there are offering better potential returns for investors. However, here at DowExperts we have learnt to always take the critical approach when evaluation any market thesis as usually things are not always as straightforward. Our analysis shows that the continuous rise in the number of new COVID-19 infections, the unclear long-term effects of the vaccines, the social unrest in the US surrounding the administration change etc. will continue to suppress the recovery process. We don’t see the global economy returning to pre-COVID-19 levels before Q3 of this year. This means that all of the stocks that were dominating the playing field last year will most likely continue to outperform the market in the coming months, and NVIDIA is one of them. However, the current sector rotational and rebalancing process hasn’t finished yet and NVIDIA might have some more price declines to experience before it resumes its strong long-term trend.

The stock is currently sitting at the $514 mark after being rejected from the strong diagonal and horizontal trendline resistances around $550. The initial downward correction that started back in November was anticipated as a result of profit taking interest as well as the general uncertainty in the market at the time. 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 had 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 remind you 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.

We will start buying NVIDIA at $510, just above the major support at $505 where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be interested in adding more to our buy positions at the next strong support at $475. Our first take profit target is at $600, followed by the next target at $635 where we will be fully closing our positions and collecting the profits.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, change of administration in the US, 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.

Sincerely,

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