Nvidia's Rally Cools Amid Correction

The company’s shares have rallied quite rapidly, almost 200%, in the past year, peaking at $140, before investors decided it was time for some profit-taking.

The stock was down 12.9% in the last 3 days, losing more than $400 billion in value during that period.

Source: TradingView

Shares have entered correction territory, typically defined as a selloff of 10% or more from a recent end-of-day peak.

The end of the breathtaking rally with a sharp sell-off indicates that the move is getting tired — the idea that all parabolic moves get exhausted and reverse.

Last week, Nvidia briefly became the world’s most valuable firm after it surpassed not only Apple and Microsoft for the number 1 spot. It also became larger than the respective stock markets of France and the U.K.

The AI Chip maker was also the top holding in the world’s largest ETF, SPY, before losing its spot to Microsoft.

Is Nvidia overvalued?

Investors constantly search for companies that combine promising growth potential with appealing valuations.

A common tool for finding these opportunities is the PEG ratio, which is the Price-Earnings (PE) ratio divided by the earnings per share (EPS) growth rate.

This calculation utilizes the anticipated growth rate and earnings over the next 12 months, as agreed upon by a consensus of professional analysts.

Source: Koyfin

A lower PEG ratio is more favorable because it suggests you are getting more value for future earnings growth.

Nvidia’s PEG ratio stands at 1.4, which is among the lowest in the group often referred to as the magnificent 7, and it also boasts the highest expected EPS growth rate at 32%.

These figures might lead one to view Nvidia’s stock as potentially undervalued.

However, despite having the highest P/E ratio in the S&P 500, Nvidia’s revenue growth is projected to decelerate in the upcoming quarters.

The company’s market valuation hinges on its anticipated rapid earnings growth, especially in the AI sector—a prediction aligned with most analysts‘ expectations, yet it still demands a degree of investor optimism.

Macro Data & The Fed

As the peak of earnings season approaches in a few weeks, key data releases will be crucial for the data-driven US Central Bank.

The markets anticipate a 64% likelihood of a rate cut in September, followed by another in December.

However, this week’s numerous reports could influence those probabilities. The most significant of these reports is Friday’s Personal Consumption Expenditures (PCE) report, which is projected to reveal a slight 0.1% month-over-month increase in prices.

Investors can long Nvidia using our 2x NVIDIA, 3x NVIDIA.

Alternatively, trades can short Nvidia using our -1x NVIDIA, -3x NVIDIA.

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