NVIDIA is currently only around 16 percent below its all-time high of $502.66, yet the correction appears to be far more brutal than what the numbers belie, especially when viewed against the bullish dynamics that prevailed during this August's languorous days, when hardly any trading session went by without the high-flying stock eking out a new all-time high, precipitated by the all-enveloping AI mania.
If one were inclined to take a cursory view, one would be hard-pressed to explain NVIDIA's ongoing weakness against its stellar fundamentals. After all, the GPU maker recently smashed all expectations to report $13.51 billion in revenue for its second quarter of fiscal year 2024. Moreover, NVIDIA remains on track to double its quarterly revenue in the ongoing fiscal Q3 2024 relative to the $8.3 billion that the company earned in its fiscal Q1 2022.
Plus, I spent 40 minutes going over my reasoning in this video interview.
Unlike the sell-side analysts schmoozing with management, I'm NOT PAID to do this. Something to ponder while reading their pathetic straw man rebuttals and snide comments.https://t.co/6Hxu5DUfNL
— Kashyap Sriram (@kashyap286) September 7, 2023
Yet, there is a need for a quantum of caution at least. As we explained in a previous post, NVIDIA recognizes its product sales upon shipment, but licensing and services revenues, including those derived from data center sales, are recognized when the associated costs are incurred. In the last quarter, almost all of the expectations-beating excess revenue that the company disclosed came from data center sales. Predictably, given the fact that most of the data center sales for the quarter had not materialized by the end of Q2, NVIDIA's accounts receivables increased by 73 percent on a sequential basis. The troubling aspect, as noted by Kashyap Sriram in his X thread above, is that NVIDIA's sales increased by 88 percent on a sequential basis and by 104 percent after accounting for a pre-payment. There is an alleged mismatch here, which might pave the way for a future impairment charge.
This brings us to the core of today's topic. Toward the end of August, we highlighted a critical resistance trendline (reproduced above) for NVIDIA shares. This resistance has come into play only two times previously, with the first interaction resulting in subsequent losses of around 57 percent while the second one spurring a much deeper loss of around 69 percent. Since NVIDIA's most recent entanglement with this "trendline from hell," the stock is down around 16 percent. If historical precedents hold true, NVIDIA shares might have a lot more to fall. Of course, given the prevailing robust AI tailwind, the correction this time around might not be so severe.
RIP Nvidia
"Nvidia is fine... do not take your money out of Nvidia"
- Jim Cramer Sep 21, 2023https://t.co/q6qVUWFxe6 https://t.co/3XjDvp7PRQ pic.twitter.com/z7tiTQ2HJr
— Financelot (@FinanceLancelot) September 22, 2023
Also, the Cramer curse is not exactly working in favor of NVIDIA bulls at the moment. With the CNBC host recently proclaiming that "NVIDIA is fine," the contrarian trade - which has been correct so far - would be to go bearish on the stock, at least for the time being.
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