How To Handle Red-Hot Nvidia Stock Ahead Of Earnings?

Key Points

• Nvidia boasts a year-to-date return of more than 88%, making it the S&P 500's second-biggest gainer in 2023.
• Nvidia's commitment to AI applications is driving investor and analyst enthusiasm about the company's future prospects.
• At the end of fiscal year 2023, Nvidia had $7.23 billion remaining under its share repurchase authorization through December of this year.
• Nvidia is up nearly 53% from a January breakout at $188.
• Do sideways trade and lower trading volume signal that it's time to take profits?

What’s the best way to handle a stock that’s posted gains in five of the past seven months, boasts a year-to-date return of more than 88%, is the S&P 500’s second-biggest gainer so far in 2023, and that Wall Street expects to grow earnings by 47% next year?

The stock meeting all those criteria is chipmaker Nvidia Corp. NASDAQ: NVDA, the mega-cap chipmaker that’s been on a tear since rallying from a mid-October low.

Nvidia stock is benefiting from enthusiasm about the company’s commitment to AI applications. 

Nvidia pioneered accelerated computing, with an early focus on PC graphics. That’s expanded to include the gaming market, where the company carved out a sizeable niche. Other business segments now include scientific computing, artificial intelligence, data science, autonomous vehicles, robotics, metaverse, and 3D Internet applications.

AI In A Multitude Of Industries

In its annual report, published in February, Nvidia said, “We are engaged with thousands of organizations working on AI in a multitude of industries, from automating tasks such as consumer product and service recommendations, to chatbots for the automation of or assistance with live customer interactions, to enabling fraud detection in financial services, to optimizing oil exploration and drilling”

Nvidia went on to say that its customers include the world’s leading consumer Internet and cloud services providers, as well as other large enterprise and start-up businesses “seeking to implement AI in transformative ways across multiple industries.” 

The chipmaker also has partnerships in transportation, retail, healthcare, and manufacturing, among industries looking to accelerate the adoption of AI.

Nvidia analyst ratings show a consensus view of “moderate buy” with a price target of $268.79, a downside of 6.11%from where the stock is currently trading. 

What Goes Up Must Come Down

There’s the rub. Every investor and trader knows: What goes up must come down. While it’s fun to track a stock like Nvidia while it just keeps going up, up, up, the reality is downside risk is how investors are rewarded. 

Risk and return are related. All stocks have risk, and Nvidia has a beta of 2.08. That means Nvidia stock is roughly two times more volatile than the overall market.

Year-to-date, Nvidia has not only outperformed the S&P 500, but also the tech sector, both by wide margins.

So far, so good. Frequently, after a breakout, watch for the stock to rise about 25% before pocketing some profits with at least a partial sale. At this juncture, as you can see on the Nvidia chart, the stock is up nearly 53% from a January breakout at $188. 

For many investors, that’s clearly been a case of “let your winners run.” In fact, Nvidia raced 22% higher in the first three weeks after its breakout. In those situations, it’s often a good idea to hold onto the stock for another eight weeks, as it has momentum on its side.   

Is Momentum Fading?

But even momentum fades at some point, and there are some signs of that happening with Nvidia.

As Nvidia earnings data show, revenue growth is slowing, but the company has signaled that, and analysts have taken that into account in their forecasts. With the expectation of an earnings increase next year, many investors may opt to hold.

But an indication of a potential slowdown in price momentum is right there on the chart: Trading volume has decreased in the past six weeks, as Nvidia stock traded in a sideways pattern, trending along its 50-day average ahead of earnings on May 24.

Lighter trading volume is typical as a large-cap treads water. It means big investors are holding their shares, and essentially biding their time while awaiting any surprises, good or bad, in the next report. 

So back to the original question: How to handle Nvidia? A pullback is absolutely inevitable, at some point, as you’d expect after an increase of 88%. For investors or swing traders who don’t like the opportunity cost of a stock that’s declining, taking profits is not a bad move at all.

Sell Or Wait It Out?

On the other hand, investors with long-term conviction, who are content to wait out a pullback or even a correction, often choose to hold stocks. The Nvidia dividend yield of 0.06% isn’t much to shout about, and the company is more focused on growth than shareholder payouts. Nonetheless, during fiscal 2023, Nvidia returned $10.44 billion to shareholders in the form of share repurchases and cash dividends. 

At the end of fiscal year 2023, it had $7.23 billion remaining under its share repurchase authorization through December of this year. 

All that is to say: Whether to buy, sell or hold Nvidia shares represents what’s called “a good problem to have.” The company has outstanding growth prospects in all its industry segments. Being this close to earnings, investors should use caution in case the report is a catalyst for a pullback, but those with a longer time horizon might consider either holding or taking partial profits.