This is the most important takeaway from today’s morning letter, which you can read to register to receive in your inbox every morning, along with:
The weight of high expectations is often a heavy burden to bear.
In life, if you are a top performer at work, you are expected to be a top performer every day. Have a bad day? You can’t, so go and throw that shit somewhere else.
Sure, a college professor who gave an inspiring leadership speech during a TED Talk a decade ago and now appears in one-minute snippets on your Instagram feed might suggest that it’s okay to have bad days at work, even if you’re a winner.
Trust me, it isn’t. And don’t let that social clip change your mind.
This same philosophy could be applied to the most important stock on the market: Nvidia (NVDA).
I know you’re excited about this transition, Morning Brief readers! Hear me out about this top performer in the market.
This past week, we’ve been reminded of just how high expectations are for Nvidia, and how the stock is in dangerous waters that many traders who got into the Nvidia market late have never navigated before.
On June 18, Nvidia’s market cap reached a staggering $3.34 trillion, surpassing Microsoft (MSFT) to become the world’s most valuable company. Over the next three trading days, without any fundamental news, the company lost $430 billion in market capitalization.
By comparison, Coca-Cola’s (KO) market cap is $275 billion.
Some people I talked to told me that people were taking profits on Nvidia at the start of the second half of the year. Others I spoke to for my “Opening Bid” podcast told me that there is some talk about new competitors entering Nvidia’s territory, and perhaps the company won’t be as absurdly dominant in the next five years as many expect.
That’s all right, but it does reinforce the view that the stock is sensitive to sudden, negative sentiment swings, because the price has risen by 3,000% in five years.
But if you zoom in further, you can see how intense expectations about Nvidia have become.
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Nvidia’s stock now trades at about 21x (super steep) forward sales, up from 12x (also steep) two months ago, according to research from Creative Planning chief market strategist Charlie Bilello. This is a significant premium over Microsoft at 12x and Apple (AAPL) at 8x, two tech giants that are fundamentally performing very well and will likely continue to rock for years to come.
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Nvidia’s shares recently traded about 100% above their 200-day moving average, noted Jonathan Krinsky, chief market technician at BTIG. Since 1990, the largest spread a U.S. company has ever traded above its 200-day moving average while being the largest company in the world was 80% in March 2000 by Cisco (CSCO), which was an all-time high. “In other words, Nvidia is in a class of its own,” Krinsky said.
It seems so.
Similar expectations were applied to chipmaker Micron (MU) in this week’s earnings report. The stock took a hit due to “in-line” guidance that fell short of crazy expectations for anything related to AI demand.
And I emphasize the crazy: On Monday, several sell-side analysts raised their estimates and price targets for Micron ahead of the report. As someone who led a team of stock researchers, I can tell you that this action leading to an earnings report is not the norm.
It reeked of analysts who bought too much into the hype and hoped for a huge one-day price increase.
“When you get a reaction like Micron, where the numbers should be good enough to prevent a sell-off, let alone fuel a rally, that’s a bad sign — a sign that expectations are so high that they can’t be exceeded,” Steve Sosnick, chief strategist at Interactive Brokers, told me.
Others disagree with my assessment that Nvidia has a price for perfection, and that’s totally fine. I don’t have a monopoly on good ideas!
“But for medium to long-term investors, it’s still the same story as we look at how much their capacity is already booked and prices are rising,” said Chris Versace, co-founder and chief investment officer of Tematica Research.
We can all agree on one thing: Nvidia is one of the best employee performers on the market and the company will have no excuse to take a day off when it catches a cold.
Speaking of expensive tech stocks, shares of Amazon (AMZN) are up 55% in the past year. But questions remain about its culture. WSJ reporter Dana Mattioli discussed her explosive new book, “The Everything War: Amazon’s Ruthless Quest to Own the World and Remake Corporate Power,” on an episode of the “Opening Bid” podcast. Listen in below.
Starting bid Episode list
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