What Nvidia’s graphics breakthrough means for the company’s stock

U.S. chip company Nvidia is making a bold claim that it has accomplished the greatest leap since the invention of the CUDA GPU more than a decade ago.

There is positive sentiment developing around Nvidia’s NVDA, +1.59% stock. After all, Nvidia claims to be combining artificial intelligence, real-time ray tracing, simulation and rasterization. To top it off, there is a catchy name: Nvidia Turing GPU architecture.

Will the technological leap from Nvidia make the stock leap? Let’s explore with a chart.

Please click here for the annotated chart of Nvidia. Please note the following from the chart:

• The chart shows that Nvidia stock has been rising, supported by a trend line.

• The chart shows the resistance from which the price will have to decisively break for the stock to leap.

• If the stock breaks the trend line shown on the chart, there is significant downside.

• The chart shows that lately the volume is low. This indicates that investors are waiting for the next trigger to drive the stock either higher or lower.

• The relative strength index (RSI) shows negative divergence. In plain English, this means that even though the stock price has risen, the momentum has waned. In traditional technical analysis, this is considered negative. However, in my decades of experience, this is not necessarily a negative in top-performing stocks.

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Nvidia bulls are getting excited about the introduction of ray tracing. However, they may want to temper their enthusiasm because the new GPUs will not be available before the fourth quarter and may not materially impact earnings for a while.

Nvidia is an expensive stock, along with AMD’s AMD, +1.62% stock. Nvidia trades at a trailing price-to-earnings (P/E) ratio of 42 and a forward P/E of 32. If growth slows, what will happen to those lofty numbers? We just have to look at Intel’s INTC, +0.13% stock. Intel trades at trailing P/E of 17 and a forward P/E of 11.

In explaining that Nvidia is an expensive stock, bears sometimes point to Micron Technology MU, -1.56% Micron trades at a trailing P/E of 5 and a forward P/E of under 5. But that’s not a valid comparison because Micron’s products are more of a commodity compared with Nvidia’s proprietary, advanced content. Nonetheless, Nvidia is one of the most expensive stocks in the semiconductor ETF SMH, +0.26%

An analysis of recent earnings reports shows that growth is slowing, but the market has ignored it. Slowing growth is dangerous for a high-priced stock like Nvidia’s. For this reason, the upcoming earnings are critical.

Stocks move based on the difference between actual earnings and projections compared with the whisper numbers. Whisper numbers are different from the widely published consensus numbers. Whisper numbers for Nvidia stock are higher than the consensus numbers.

According to the ZYX Trading Method, the stock has a 25% probability of a move to $300, a 35% probability of a move to $220, and a 40% probability of being range-bound. There is a small, but real, risk of the stock falling below $200 if growth dramatically slows.

Keep in mind Arora’s Second Law of Investing: “No one knows with certainty what will happen next.” The only rational thing we can do is make decisions based on probabilities. Aggressive investors can make decisions based on the probabilities given above.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at [email protected]

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