NVIDIA Could Test January Low

NVIDIA Inc. (NVDA) is trading lower by more than 2% in Thursday’s pre-market, despite beating Q4 2021 estimates and raising Q1 2022 revenue guidance. The chipmaker posted a profit of $1.32 per-share, $0.10 better than expectations, while revenue rose 52.8% year-over-year to $7.64 billion, about $200 million higher than consensus. The Q1 increase was substantial, raising estimates from $7.28 billion to the $8.00 billion range. The company fired on all cylinders in Q4, reporting strong growth in gaming, pro visualization, automotive, and data center divisions.

Worries About Valuation and Growth

Even so, the sell-the-news reaction wasn’t a surprise because chip stocks have traded poorly in 2022, dumping the PHLX Semiconductor Index (SOX) more than 10% since Dec. 31st. Chronic supply constraints have impacted the group’s performance while over-valuation has emerged as a potent headwind, with the SOX’s 41% return in 2021 lifting many components to unsustainable levels, especially with rising inflation putting a damper on growth.

Analysts were obsessed with the abandoned deal to acquire Arm Holdings, looking to the acquisition to justify NVIDIA’s astonishing 81.75 price-to-earnings-ratio (P/E). Business is nearly as good as it gets after two years of taking market share from Intel Corp. (INTC) but the stock is already priced for perfection, discouraging sidelined investors from opening new positions. All in all, it’s a perfect formula for a major correction and weak annual performance.

Wall Street and Technical Outlook

Wall Street consensus has eased from extreme bullishness, with an ‘Overweight’ rating based upon 28 ‘Buy’, 6 ‘Overweight’, 7 ‘Hold’, 1 ‘Underweight’, and 1 ‘Sell’ recommendation. Price targets currently range from a low of $200 to a Street-high $400 while the stock is set to open Thursday’s session more than $90 below the median $350 target. Analysts has been quiet since last night’s report, with a single downgrade by a boutique firm, but another round of bullish table pounding may not convince many investors to pull the trigger.

NVIDIA rallied above 2018 resistance at 73 in May 2020, entering a powerful uptrend that stalled below 150 in September. The stock cleared that barrier in June 2021, more than doubling in price into November’s all-time high at 346.47. The subsequent decline stretched to 40% in January while February’s bounce to 50-day moving average resistance failed to yield a breakout, ahead of this morning’s selloff. A long-term sell cycle is expanding at the same time, raising odds for another round of testing at 200-day moving average support near 200.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.