Why Nvidia’s rise may signal a change in this tense market
Markets / May 26, 2022 / DRPhillF / 0
With Nvidia (NVDA), the split between short-sighted traders and discerning investors – like club members – continues. As much as Wall Street’s positive reaction to Broadcom’s (AVGO) purchase of VMware (VMW) and stellar earnings from the Dollar Tree (DLTR) says market sentiment, a Lazarus-like move for Nvidia’s (NVDA) stock could lead to an important shift in judgments Snap vs overall equities. Well, there’s probably more irony to selling SNAP than we thought. First, let’s check the setup. Like we told club members, Nvidia’s big drop predicted everything that could go wrong and then sometimes. That’s why we were shocked to see people really dazed by the increase in the stock price, especially the unwise people who sold the stock down $15 after the report. I want to delve into that 15th moment because it has a lot to do with current psychology, which may be about to happen after this week, when those who shot themselves were shot. Nvidia’s stock has become a house from hell ever since it traded at $750 billion, an excess amount that will likely haunt the stock for some time. It could take a long time, if that happens, to return to 60 times earnings next year versus 29 times earnings that traded this quarter. And remember: That was with stocks up 8 points from the day before. What made sellers sell? This is critical. They looked at the directive cut, not the earnings, and considered it disastrous. I don’t want to drift too far here. But remember, sellers made similar judgments when it came to Dick’s Sporting Goods (DKS), Best Buy (BBY) and Williams-Sonoma (WSM), all of which were giving cautious estimates that seemed reasonable but were by no means a judgment from the current business. Unfortunately, these companies, like Nvidia, beat out profits. Sellers, who still only reacted to cuts to steering — fearful of a Cisco-like backlash, and disappointment that it beat profits and then cut steering and saw its stock collapse — wanted to get the jump. They wanted to avoid the familiar drop from $52 to $42 by selling Nvidia 8 pips less than it had before yesterday’s expiration. This is no different from running a Cisco aborted to shutdown. This time, though, there is no profit protection, and a retest of the low $155 price seems to be a foregone conclusion. So, this is the mindset of the trader. Merchants also never listen to calls. Traders often interact with so-called complex programs that show how low a company’s stock will be sold offering discounts in guidance. Now, let’s move on to the investment issue that got us buying after some good sales that were pretty expensive. You could say something like this when you beat yourself up daily on Paypal (PYPL), Wynn and a couple of other problematic stocks. This was before our November pivot for companies that make things and do things to make a profit and return some of that profit to shareholders either in the form of buybacks or dividends and selling at a reasonable price relative to their growth rate. The Nvidia call was like no other. It begins with a summary of the quarter and forecasts by illustrious CFO Colette Chris, then moves to a thoughtful Q&A as some of the answers emerge from Jensen Huang, founder and CEO of this amazing GUI-interface company, not a semiconductor company subject to old Moore’s Law. Oh wow!! Last night’s call was the most interactive Jensen has heard since the Ethereum disaster that offered a welcome entry several years ago. Club members from my former pocket will remember how we did our best to avoid this deterioration as we did this. Jensen weaves through a path of incredible sprawl as he answers the question. If I can sum up, I’m pretty sure that the directive cut stems from Russia and the complete shutdown is in China. Given the huge proportion of GPUs and gamers in China, the expected downgrade seemed negligible and far less significant than the upcoming giant product cycle and the update Jense and Collette explained. Then they discussed 80% growth in data center orders — something that, by the way, has been talked about as steady by the bears. Big difference between fixed and 80%. The size of this market bodes well for the share price of Advanced Micro Devices (AMD), which is in league with Nvidia, but not with Intel (INTC), which is also running as the Gulf only grows. Is Intel a value trap? Certainly at the moment. Then Jensen dropped the next leg of this amazing company: billion-dollar auto growth, perhaps as much as $10 billion, on a short horizon, which is certainly shorter than any analyst expected. Not in numbers, so to speak. I’m certainly happy that Jensen clarified this forecast because there has been a decline in orders year after year. He dismissed the significance of this decline. To most CEOs, this was called ‘bulging’, but not by Jensen. The broader nature of the next generation of GPUs is amazing. The AI-omniverse-inspired digital twin will provide recommendations for children’s toys and will jump from Amazon (AMZN) to banks, retailers and call centers. It would be the first actual savings in labor that might increase the gross margins of all those firms. I wouldn’t rule out a fast food partnership on the driveways, either. The next generation will only cement Nvdia’s sacred relationship with Disney (DIS) animation. Having seen the GPUs programmed in action, I can tell you that you might be able to get rid of the reps entirely – speaking of savings – since I couldn’t distinguish between an “I” as created by me and Jensen as created by a mother and father. You can see stars that are not on the horizon. Now there’s some gross margins for you, though I don’t know who would apply to replace Scarlett Johannsen with the GPU version. Perhaps the most exciting use of next-generation processors comes from a close partnership with Facebook’s Metaverse. You know I’ve continued to believe that Zuckerberg’s Metaverse – as opposed to Jensen’s overall world – can be one and himself. My belief in Zuckerberg, stemming from Reels’ challenge to TikTok and its meta platform, including buying shares the other day we would have sold at a much higher price. Nvidia’s Collette bombed the table on a $15 billion buyback as something that showed the board’s dissatisfaction with the stock price. I find buybacks like this convenient because they make Nvidia part of the hub even knowing it can be considered a drop in the bucket by the bears. Now zoom in (no pun intended) to buy Broadcom for VMware and you can assume not only that Nvidia is cheap but the kit is getting very cheap compared to the market. This is good news for Microsoft (MSFT) and Salesforce (CRM). Not much for Apple (AAPL), unless you can handle the Chinese shutdown at $8 billion, which now, formerly on Alibaba (BABA), looks very low. So the question becomes: If Apple previously announced, say, a new number, would it really go down? What if I did Qualcomm (QCOM)? Will they be Cisco after a quarter of a year or Nvidia after a quarter? Machines/dealers will tell you they’re going to struggle, but the action in Broadcom and Nvidia stocks might say otherwise. Which brings me to the strange reaction to the Snap app that was also launched. As someone who knows the ROI of Instgram/Reels and Google (GOOGL) well, it’s hard to believe anyone would advertise with Snap, other than those looking for a demo that doesn’t have any money at all. And the spoils belong to the hardworking and thoughtful Victor, not Snap either. Twitter (TWTR) is in the same group until it is cleaned up and said column is effectively eliminated to speed up advertising. Going forward, we don’t know if this rally, which occurred on Friday, is a counter-trend and a seasonal trend or real. It’s hard to lose a behemoth like Target (TGT) / Walmart (WMT), though these are trying a meager return versus well-prepared Macy’s (M) and big-box hardware stores that have had blessed weather in much of the gardening country. I would be careful about the rally because it depends on sentiment – the proportion of bears showing the fewest bulls in memory – and the belief that many stocks reflect a downward spiral, rather than a short, sharp period. I’d feel better if the energy went down, but our sheer stature for extra pounds and our desire to add on by buying more Pioneering Naturals (PXD) and looking forward to Sempra Energy (SRE), will tell you otherwise. Then again they are the best at companies that make things and do things and return money to shareholders with huge dividends and buybacks, while also selling at an incredibly reasonable price. If I’m right about Nvidia, I’m more likely to be right about Salesforce and Microsoft, neither of which are related to China and both sell well below previous levels. The former appears to be questioned by many because co-CEO Brett Taylor must have been preoccupied with his unfortunate role as head of Twitter, and the omnipresent Marc Benioff seems to be teaching the gospel of many things. But the most important thing is that AMD, Nvidia, Marvell Technology (MRVL), and Qualcomm may be more valuable than we think. Marvell is an enterprise (awesome), 5G is a (perceiving killer), and Qualcomm is a bad Uber. But what if they made that clear in their routing cuts and they were reacting like Nvidia, not Cisco? The bet here is exactly what’s going on. And if they don’t? we buy. (See here for a full list of stocks in Jim Cramer’s Charitable Trust.) As a CNBC Investing Club subscriber with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable fund portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. The above investment club information is subject to our Terms and Conditions and Privacy Policy, along with our disclaimer. No fiduciary obligation or duties will be created, or created, by virtue of your receipt of any information provided in connection with the Investment Club. There are no definite results or guaranteed profit.
A sign is placed in front of Nvidia’s headquarters on May 10, 2018 in Santa Clara, California.
Justin Sullivan | Getty Images
With Nvidia (NVDA), the split between short-sighted traders and discerning investors – like club members – continues.
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