Impressive But Expensive

 October 11th, 2023, written by Crazy Miser

Key points:

Analysis

The impressive success of Nvidia during the second quarter of 2024 confirmed the excitement of many investors over its profitability prospects for AI. The company's revenue increased by an astounding 101% year over year, reaching a whopping $13.5 billion. The data center sector of the company had a stunning 171% increase, which was mostly due to the increased demand for AI processors. Most significantly, operating income increased by an astounding 1,000% during this quarter, totaling close to $7 billion. The current quarter stands out as one of Nvidia's best ever and offers encouraging signs for the potential course of the AI sector. However, past performance doesn't indicate future results, and the current valuation is relatively expensive compared to other investment opportunities which may be a sign to watch for future earnings reports.

Valuation

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Nvidia is significantly overvalued compared to their historic trading valuations. However, if future growth can keep up then the current valuation may be justified. We estimate Nvidia to trade at a valuation of 20x P/S which would give it a price of $260-325.

Technical Analysis

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Although it cannot ensure success, technical analysis can help us predict the direction the stock will take over the next few weeks or months. We believe the stock is currently over-extended and could sell off very soon. The current chart shows a head and shoulders pattern could be forming. The stock may sell off to close the gap between ~ $310-370 which could give an opportunity for new investors. However, the stock may have slightly more room run but, be on the lookout for a break in the neckline at ~ $410 which could indicate a sell-off.