NVIDIA Is Bottoming But Don’t Buy It Just Yet

Key Points

• NVIDIA stock may be at a bottom but there is a risk for investors. 
• The sentiment is still bullish, but price targets are falling and weighing on the action.
• If Q4 results and outlook are not good enough this stock could set a new low. 

NVIDIA Corporation NASDAQ: NVDA  is bottoming, but investors are cautioned not to get too bullish too quickly. While the fundamental set-up is consistent with a potential bottom and the technical set-up shows a potential Head & Shoulder Reversal this pattern is far from confirmed. The risk for investors today is that this pattern will turn into a full-blown double bottom and offer a better price before it starts moving higher. 

As it is, the company’s revenue and earnings are in a deep contraction versus last year, weighing on the near-term outlook. If the Q4 results and outlook for F23 are consistent with the market’s outlook that business will improve as we move into the latter portions of F2023, this bottom may hold and even turn into a reversal. If not, NVIDIA will most likely see much lower prices. 

NVIDIA Corporation Expected To See Double-Digit Declines 

Marketbeat.com’s analyst tracking tools show the targets for NVIDIA revenue and earnings are not only expected to decline by high-double-digit figures, but the consensus estimates are trending lower as well. The targets for Q4 have revenue and earnings up sequentially but down 21% and 58% on a YOY basis.

This is largely due to a contraction in the gaming industry as well as macro-headwinds and slowdowns in other key areas, including cloud and cryptocurrency. The good news is the consensus estimates for F2023 are expecting a significant rebound in both figures the question is when will the rebound start and how big will it be? 

Bank of America analysis recently released a report after meeting with company executives. The takeaway is that near-term headwinds persist, but demand for next-generation technology remains high and has the company in a good position for when the economic rebound begins.

As for when that should start, in the case of NVIDIA, Bank of America is expecting that to happen sometime after the fiscal 1st quarter of the year which has not begun yet. What this means for investors is that the upcoming Q4 release on February 22nd and the one after could be disappointing. There is certainly a chance for the outlook to dim or for the rebound to be “kicked down the road” with each report. 

Bank of America reiterated its Buy rating and $215 price target with the report. The rating and the price target are slightly above the consensus ratings of Moderate Buy and $206, which implies about a 45% of upside for the stock. The only bad news is the price target is trending lower, so there is no bottom in sight in that regard. Assuming this trend continues over the next 5 weeks, NVIDIA stock could easily move lower before it forms a firm bottom. 

The Technical Outlook: NVIDIA Is Close To Bottoming But Not Quite There Yet

NVIDIA price action may be at the bottom now, but we would need to see a strong bounce from at or near the current levels to call it a Head & Shoulders Pattern. The technical risks are that weekly and daily price actions, along with the indicators, are consistent with a downtrend that could take the stock back to the recent lows near $125.

In this scenario, the market might form a Double-Bottom, but only if the news is consistent with a brightening outlook. If not, NIVIDIA could fall to a lower low and shave a few more handles off its high 43X price multiple.