NVIDIA’s Rally Picks Up Pace Into Year End

Key Points

• Shares are in the middle of a red-hot recovery rally.
• It looks like the worst-case scenario has not come to pass. 
• Cooling inflation readings support further moves higher.

It’s always darkest before the dawn, and so it might well have been for shareholders of NVIDIA (NASDAQ: NVDA) in the middle of last month. They had had to watch the stock drop all year, almost 70%, from the all-time high they tagged this time last year. And crucially, shares were after dropping below the long-term support line around the $130 mark, which is where they found support multiple times in 2020 and 2021. But in the intervening four weeks, shares of the chipmaker have jumped more than 50% and this rally looks like it has a ton of room to go. 

A lot of that weakness seen in September and October could be blamed on the wider equity sell-off that sent the benchmark S&P 500 index down to its lowest levels in two years. Tech companies, and semiconductor stocks in particular for reasons we will see below, were among the hardest hit. But as equities in general have moved off those lows in recent weeks, so too have NVIDIA shares. In addition, investors were surely eyeing the company’s Q3 earnings, released last night, as an opportunity to get a fresh look under the hood. 

Strong Outlook

For the most part, it was a solid report, all things considered. Revenue was down 16.5% on the year but not as much as analysts had been expecting, while EPS was just short of the consensus. Management’s forward guidance was viewed favorably and essentially confirmed that the worst-case scenarios which bears were pricing in last month have not come to pass.

Jensen Huang, founder, and CEO of NVIDIA, summed up the situation well. He told investors that “we are quickly adapting to the macro environment, correcting inventory levels and paving the way for new products. The ramp of our new platforms is off to a great start and forms the foundation of our next growth phase. NVIDIA’s pioneering work in accelerated computing is more vital than ever. Limited by physics, general-purpose computing has slowed to a crawl, just as AI demands more computing. Accelerated computing lets companies achieve orders-of-magnitude increases in productivity while saving money and the environment,” he said.

Getting Involved

This is pretty cool stuff to hear as we head toward the end of the year, and with shares up in Thursday’s pre-market session it looks as if investors are more than happy to shrug off any of the not-so-good headline numbers from yesterday’s report. It also supports the narrative that NVIDIA shares overcorrected, a theme picked up on by the team over at Credit Suisse yesterday. 

Analyst Chris Caso and his team initiated NVIDIA coverage with an Outperform rating, writing in a note to clients that there has been "enough bad news". This was part of a broader bullish take on several semiconductor stocks, with Advanced Micro Dynamics (NASDAQ: AMD) also getting an Outperform rating. 

Caso went on to say that "we believe semiconductors are in a period of sustained long-term growth, with factors such as AI, cloud computing and automotive all driving growth that’s more diversified vs. the past. He added that while the sector is in an ongoing correction, the downside from here is limited, noting that multiples are close to "trough levels," even after the recent rally.

Looking at NVIDIA’s chart, it’s clear that shares have some way to go yet before they’re testing the first line of resistance around the $200 level, which makes a natural target. Even with the current rally, this points to additional upside of some 25% from where shares closed on Wednesday. The bull thesis, in the short term at least, is supported by fresh data this week which suggested inflation might be cooling. If this can be confirmed with some more CPI numbers, then it’s easy to see a new risk-on sentiment developer, with NVIDIA in that case standing to do as well as any other stock and better than most.