NVDA underperforms the market again on Wednesday

  • Nvidia stock has been falling since August 4.
  • Things got worse when he downgraded third-quarter earnings on Aug. 24.
  • New US government sanctions will hurt NVDA’s sales in China.

UPDATE: A day after the inflation-induced mayhem of September 13, Nvidia once again proves that it is weaker relative to the market. NVDA shares are down 0.5% half an hour into trading, while the Nasdaq Composite is actually up the same amount. Despite the market-wide rally (all three major indexes are ahead by less than a percentage point), Nvidia stock still looks weak. Generally, higher beta stocks will outperform indices on green days, but Nvidia trades as if the market is repricing. The future of much higher interest rate increases over the next three to four months due to persistent inflation has the usual suspects deciding not to buy this drop. Put contracts expiring Sept. 23 for the strike price of $132 rose more than 8% on Wednesday to a price per share of $6.18. 332 contracts have been negotiated during this strike so far in the session.

Nvidia (NVDA) stock charts indicate further weakness ahead. After losing 9.5% on Tuesday, much worse than the Nasdaq’s terrible 5.5%, fans seem increasingly skeptical of the leader among American semiconductor designers. The cause of Tuesday’s capitulation was the worse-than-expected inflation reading that came out before the market opened. Although the overall figure was not terrible, core inflation (excluding energy and food) rose by 0.6% month on month. This showed that inflation would likely be much harder to control and force the Fed to raise interest rates higher than expected.

NVDA stock is trading down 1.2% at $132.82 in pre-market Wednesday.

Nvidia Stocks News

This is basically an interest rate story. When interest rates rise, treasury bills and risk-free bonds have a better risk-return profile than stocks. This means that institutional investors are likely to reduce some of their equity holdings to buy Treasuries and weather the storm. Additionally, higher Treasury yields mean that future earnings are discounted at a higher rate (see Discounted Cash Flow Model), which makes stocks like Nvidia that depend on much higher future earnings less attractive. Nvidia is currently trading at a P/E of 30 and a forward P/E of around 38 while its sector is trading at a forward multiple closer to 17. This means there is plenty of room for a multiple compression.

Nvidia is still suffering the fallout from its significantly reduced Q3 revenue forecast. $5.9 billion due to the continued deceleration of the gaming segment. Wall Street was expecting $6.9 billion when Nvidia released the trimmed outlook on its second-quarter earnings call on Aug. 24. Once Ethereum becomes non-mineable, expected in mid-September, Nvidia is likely to lose a large segment of demand for its GPUs.

A positive sign is that Nvidia is working with its main foundry, Taiwan Semiconductor (TSMC), to build new arrays that combine multiple GPUs that will perform better for AI processing. The big setback is that the US government is blocking Nvidia from shipping its newest chips to China in an effort to slow down China’s technological progress. Government agencies believe this will limit China’s ability to invade Taiwan. In a filing filed in late August after the earnings, Nvidia said the penalties could cut revenue by up to $400 million.

Read also: Nvidia Stock Deep Dive Analysis: NVDA Price Target at $205 with Strong Revenue Growth

Nvida Stock Prediction

As you can see below, NVDA stock price is heading towards a demand zone between $116 and $127. The region is large, but it held up quite well during the period of September 2020 to March 2021. This period saw NVDA stocks start to create traction and rise above this area, but several sessions helped Nvdia to regain its place in this region. With the stubborn nature of underlying inflation right now, expect the Fed to keep its foot on the pedal. Rates will likely be raised more aggressively and the likelihood of overshoot is high.

Fans are probably already excited to grab NVDA around $131, but a much better bet is the low end of the $116 zone. The Relative Strength Index (RSI) is close to oversold but not there yet.

NVDA Daily Chart

As can be seen from the weekly chart below, the demand zone between $116 and $127 has a lot of volume. If a breakout of $116 occurs, expect Nvidia to trade down to the lower trendline near $95. I doubt we are so lucky!

NVDA Weekly Chart

Karen J. Nelson