Nvidia has rode a wave of rising demand for its high-end semiconductor chips this year. The company’s revenue and earnings have soared, sending the stock soaring in 2023. However, it’s been a rocky ride for investors recently, however.
The company’s shares have retreated from their summer high on concerns about strict US restrictions on the sale of chips to China for artificial intelligence.
The drop took many investors by surprise, but Real money Analyst Bruce Kamich was not among them. Kamich was one of the few to predict Nvidia’s sell-off, warning investors in September that the stock could fall to $400.
The prediction seems prescient, given that Nvidia was trading almost exactly where Kamich said it would at the end of October. What could happen next for Nvidia stock? Kamich just updated his analysis and set a new price target for Nvidia stock.
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Nvidia ai demand is increasing
The successful launch of ChatGPT last December unleashed a torrent of interest from companies interested in training and launching artificial intelligence solutions.
Generative ai applications like ChatGPT primarily help users search, analyze, and create content. However, the benefits of ai could be much broader and reshape the way many industries do business.
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Investment banks are using ai to develop models that hedge their risks more efficiently. Manufacturers are considering how ai can help them reduce waste, improve quality and better anticipate demand. Drug manufacturers are evaluating its use to select drug targets and model clinical trial outcomes. Retailers are even investigating to see if ai can reduce theft.
The applications seem endless, which is why companies are investing large amounts of money in ai initiatives. In turn, that is increasing demand for networking equipment that can train and operate ai applications more quickly and cheaply, driving sales of Nvidia graphics processing chips that are better suited to ai than traditional CPUs. .
Specifically, sales of Nvidia’s H100 chipset, which can cost more than $30,000, have outstripped supply, causing revenue to skyrocket. Since these chips cost just $3,320 to make, according to Raymond James, the sales growth has been a boon to the company’s bottom line.
In the second quarter, Nvidia reported revenue of $13.5 billion, well above CEO Jensen Huang’s previous guidance of $11 billion. Earnings rose 429% year over year to $2.70 per share in the second quarter, handily beating Wall Street forecasts.
Nvidia management left the second quarter expecting the trend to continue. Its third-quarter sales guidance coming out of the second quarter was $16 billion, beating analysts’ estimates of $12.4 billion.
Nvidia’s ai opportunity hits a roadblock
Demand for Nvidia’s high-end chips is global, and with much of the technology coming from China, demand there has been strong, accounting for more than 20% of Nvidia’s data center sales.
The US government, however, is not very happy about that. Concerns that Chinese buyers could use Nvidia chips to outflank American interests have led the Commerce Department to restrict sales of cutting-edge technology them.
Initially, Huang’s team thought they could get around those restrictions by selling watered-down versions of their most powerful chips. As a result, they developed the A800 and H800 specifically for use in China.
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Unfortunately for them, the US government’s updated guidance includes those chips on its restricted list, effectively ending sales of its ai chips there effective immediately. Nvidia wrote in aSEC filing on October 18:
“The Interim Final Rule amends ECCN 3A090 and 4A090 and imposes additional licensing requirements for exports to China and country groups D1, D4 and D5 (including, but not limited to, Saudi Arabia, the United Arab Emirates and Vietnam, but excluding Israel) of the Company’s integrated circuits that exceed certain performance thresholds (including, but not limited to, A100, A800, H100, H800, L40, L40S and RTX 4090) (emphasis mine). Any system that incorporates one or more of covered ICs (including (but not limited to NVIDIA DGX and HGX systems) are also covered by the new licensing requirement. The licensing requirement includes future NVIDIA ICs, boards or systems classified with ECCN 3A090 or 4A090, which achieve a certain total processing performance and/or performance density.”
The broad restriction on current and future chips suggests that Nvidia could struggle to find a solution.
Nvidia price chart reveals new target
Unsurprisingly, the news affected Nvidia’s stock price. In August, its shares were trading above $500, but had sunk to about $400 by the last week of October.
The liquidation of its shares once again caught the attention of Kamich, who has been analyzing price charts for professional investors for more than 50 years. His bearish view of Nvidia in September was driven by his analysis of Nvidia’s price, volume, and momentum.
Kamich, on November 6,technology/nvidia-may-no-longer-be-a-leadership-stock-16137311″>reviewed Nvidia daily and weekly price chartfor updated information. He also calculated a new price target using a weekly point-and-figure chart.
Unfortunately, Kamich is pessimistic about what could be next for Nvidia’s share price.
“The daily chart shows a bearish trend with lower lows and higher highs, while trading volume is not increasing, which tells me that investor interest is decreasing,” Kamich wrote. “On the weekly candlestick chart of NVDA, below, I can see a large overhead pattern. The stock is above the ascending line of the 40-week moving average, but the weekly OBV line has moved down. The MACD oscillator remains in a corrective mode since early August.”
Balanced volume (OBV) is essentially daily up-minus-down volume, while the Moving Average Convergence Divergence Oscillator (MACD) is a momentum indicator.
Kamich would like to see more volume on up days than on down days and for momentum to be sustained before warning Nvidia shareholders that the coast is clear.
Its weekly price target of $333 is particularly concerning, given that its weekly P&F target in August was $397. Nvidia shares are trading above $450 after recovering in the first week of November.
Point-and-figure charts do not predict when a stock will reach a specific price target, but the possibility of further declines warrants caution.
This is especially true because Nvidia is scheduled to report third-quarter financial results on November 21. What Huang says during the company’s quarterly conference call about China restrictions could cause Nvidia stock to trade unpredictably.
“Nvidia has been a leading stock, but I think that’s a thing of the past. Markets are looking to the future,” Kamich concluded.
