Rising demand for high-end semiconductor chips used in artificial intelligence has caused Nvidia's revenue and profits to skyrocket, causing its stock price to soar by 190% in 2023.
The returns so far this year are impressive, but it has been difficult since the summer. Most of Nvidia's gains came in the first six months of the year, long before US restrictions on the sale of its ai chips to China took effect in October.
Nvidia's share price initially fell on concerns about a sharp drop in Chinese revenue. The stock has been trading higher recently along with a rally in the S&P 500, but there are still plenty of question marks that are likely making investors wonder if the stock is still a buy.
The stock's recent volatility has caught the attention of Real Money Pro analyst Bruce Kamich, one of the few analysts who correctly predicted in September that Nvidia's share price would fall to $400.
Kamich's latest analysis has led him to set a surprising price target for Nvidia shares. However, his recommendation may disappoint some investors.
Nvidia's growing demand for ai
The successful launch of ChatGPT last December generated significant corporate and government interest in training and operating artificial intelligence solutions.
ChatGPT, a generative ai application, allows users to search, analyze, and create content in more dynamic ways than traditional search engines. Companies are already using large language models like ChatGPT to improve customer service, but the benefits of ai will likely be much broader and will affect the number of companies doing business.
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For example, JP Morgan is using ai to hedge financial risks. Manufacturers are evaluating the potential of ai to improve quality and supply chains. Drug developers are experimenting with its ability to improve how new drugs are developed, and retailers like Walmart are using ai to reduce theft.
The potential of ai is vast, so large sums of money are being diverted towards ai initiatives, putting pressure on existing technology infrastructure that is not well equipped to cope with the heavy demands of IT workflows. ai.
As a result, enterprises and cloud networking companies like Amazon's AWS are immersed in upgrading networking equipment that can be used to train and run ai applications quickly and cheaply.
Because Nvidia's graphics processing chips, such as the A100 and H200, are better suited to ai than traditional CPUs, its sales and profits have skyrocketed.
In the third quarter, Nvidia's revenue was $18.1 billion, up from $13.5 billion in the second quarter and $5.9 billion in the third quarter of 2022.
Importantly, because these chips are sold at a much higher price than it costs to make them, third-quarter earnings soared 593% year over year to $4.02 per share.
Nvidia faces a big challenge in the ai market
Nvidia's high-end chips are sold around the world, and because much of the world's technology is made in China, sales there account for more than 20% of Nvidia's data center revenue.
While that's good for the company, the US government isn't very interested in the possibility of China using these advanced chips in artificial intelligence projects that could possibly threaten national security. As a result, the Commerce Department announced this fall that it will immediately restrict sales of high-end ai chips to China.
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Previously, CEO Jensen Huang designed scaled-down versions of its chips to stay within performance thresholds set by the Commerce Department. However, those chips are no longer eligible for sale in China under new government guidelines, and finding another solution may not be so easy.
In a filing with the SEC on October 18, Nvidia said:
“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). Any system incorporating one or more of the covered integrated circuits ( 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, that achieve certain total processing performance and /or performance density”.
In November, reports emerged that Nvidia was having trouble integrating newly designed chips that met restrictions into server platforms. As a result, the availability of those ai chips for the Chinese market was delayed until the first quarter of 2024.
Nvidia Price Charts Result in New Target
In August, Nvidia's stock price was above $500. However, concerns about China and a weak stock market contributed to its shares sinking to about $400 in October, close to the target Kamich set in September.
Since then, Nvidia stock has rebounded and is once again flirting with August highs. The promotion led Kamich to review your analysisresulting in new price targets.
Kamich, a technical analyst, has been studying price and volume for clues about aggregate investor sentiment, including big capital with access to resources that everyday investors can't imagine.
His updated analysis paints a mixed picture for the stock, raising nervous questions about risk-reward.
“NVDA is trading above the ascending line of the 50-day moving average and the ascending line of the 200-day moving average,” Kamich writes. “The On-Balance-Volume (OBV) line shows a slight increase in recent months even though trading volume has been neutral. The Moving Average Convergence and Divergence (MACD) oscillator has moved sideways around the zero line in recent months”.
Balanced volume (OBV) is essentially daily up-minus-down volume, while the Moving Average Convergence Divergence Oscillator (MACD) is a momentum indicator.
Ideally, greater volume on bullish than bear days and positive momentum would add conviction that the path of least resistance for Nvidia stock is higher. Unfortunately, that is not yet the case.
This is disappointing because its latest daily and weekly price targets suggest significant upside potential. The daily P&F chart suggests an increase to $591, while the weekly chart calculates a target of $726, more than 50% higher than the December 20 close.
Those goals are amazing. However, one disadvantage of point-and-figure charts is that they do not predict when a stock will reach a specific price target.
Given that P&F targets are not guaranteed and Nvidia's price and volume trends are not flatly bullish, Kamich's view on the risk-reward associated with the stock is bearish despite the attractive price targets.
“Can NVDA break above $500? Maybe, but it has stalled there several times. With extended averages on the upside, the risk, in my opinion, is to the downside,” Kamich concludes.
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