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Nvidia Mania: Is the AI Bump Over, or Is the Best Yet to Come?

Editor’s Note: Any and all references to time frames longer than one trading day are for purposes of market context only, and not recommendations of a specific holding period. Daily rebalancing ETFs are not intended to hold over lengthy timeframes and those positions should be monitored daily. Inverse and leverage ETFs are not appropriate for investors that do not have adequate capital or the time to actively monitor positions.

Investing in the funds involves a high degree of risk. Unlike traditional ETFs, or even other leveraged and/or inverse ETFs, these leveraged and/or inverse single-stock ETFs track the price of a single stock rather than an index, eliminating the benefits of diversification. Leveraged and inverse ETFs pursue daily leveraged investment objectives, which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying stock’s performance over periods longer than one day. They are not suitable for all investors and should be utilized only by investors who understand leverage risk and who actively manage their investments. The Funds will lose money if the underlying stock’s performance is flat, and it is possible that the Bull Fund will lose money even if the underlying stock’s performance increases, and the Bear Fund will lose money even if the underlying stock’s performance decreases, over a period longer than a single day. An investor could lose the full principal value of his or her investment in a single day. Investing in the Funds is not equivalent to investing directly in NVDA.

Analysts talk about the “Magnificent 7” tech stocks, but that group has a leader—and its name is chipmaker Nvidia Corporation (NYSE: NVDA). The stock is up an astounding 238% so far in 2023 as of August 31, leaving the broader NASDAQ Composite Index* (up 34% over the same period) in the proverbial dust. The dramatic surge in NVDA, of course, is down to two letters that have captured the attention of investors: AI. Artificial intelligence is powered in no small part by NVDA’s chips and the relentless demand has fattened the company’s profits and more than tripled the stock year to date.

But what does the future hold for NVDA? Are we at the peak of a mania? Or is this a secular boom with real long-term staying power?

Source: StockCharts.com, August 30, 2023.

Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open. The performance data quoted represents past performance. Past performance does not guarantee future results.

You Might Be an NVDA Bull If….

  • You Believe AI High Will be Higher in the Short Run—and NVDA Will Lead the Way: Maybe you believe generative AI (think ChatGPT) is in its infancy and Nvidia won’t be giving up its dominant spot as the maker of AI memory chips anytime soon. The world is expanding the number of potential applications for generative AI, so demand for Nvidia’s chips may be well supported in the months and years to come because they are powerful enough to train AI models. In late August, Nvidia said its quarterly revenue doubled** from the same quarter last year. “The thing that we understood is that this is a reinvention of how computing is done,” Nvidia CEO Jensen Huang told The New York Times (8/21/23) “And we built everything from the ground up, from the processor all the way up to the end.”
  • You Like the Price Action: On a shorter-term horizon, the performance of the stock may keep many bulls and momentum traders interested. As of August 31, NVDA traded above both its 20-day and 50-day moving averages*. If the name can hold these key levels, the mania could continue. Shallow corrections tend to be a sign that many investors have missed out and want to get in when they see anything resembling a for-sale sign. 

You Might Be an NVDA Bear If….

  • You Think the Valuation is Absurd: The company reported revenue of $13.5 billion for its fiscal second quarter that ended in July. At an annualized rate of $54 billion, that means that stock was trading for around 22.5 times sales in late August. To say this is richly valued is an understatement. And the problem with such a lofty valuation is that NVDA will have to grow like a weed to justify it. If virtually anything goes wrong (the AI boom fizzles, more competitors emerge, etc.), NVDA could be ripe for a setback.
  • You Worry About Production Capacity: You can’t sell chips you can’t make. That’s something worth thinking about in the case of NVDA, because there have been lingering questions about whether the company has the production capacity to meet burgeoning demand for its powerful chips. The fact that Taiwan Semiconductor is a key supplier makes this issue even more pressing given the simmering tensions between Taiwan and China. 
  • You Think the Boat is Lopsided: There are no longer any brokerage analysts with sell ratings on NVDA. In fact, they seem to be one-upping each other by raising targets on the stock in the wake of the latest quarterly earnings report. For the contrarians out there, this sort of behavior may be a sign that a turn—and a nasty one—could be close. 

The company’s next earnings report is scheduled for November (earnings report dates may change without notice).

New! NVDA Single-Stock Leveraged ETFs

Direxion recently introduced two new single-stock ETFs to give the aggressive bulls and bears on NVDA a chance to make their desired bets. The Direxion Daily NVDA Bull 1.5X Shares (Ticker: NVDU) and Direxion Daily NVDA Bear 1X Shares (Ticker: NVDD) which seek daily investment results, before fees and expenses, of 150% and 100% of the inverse (or opposite), respectively, of the performance of the common shares of NVDA.

To view the fund’s full holdings, click here. Holdings are subject to risk and change.

We’ll see which side is right about the prospects for NVDA, in the short term. Whoever calls it right may come out ahead, no matter the direction.

*Definitions and Index Descriptions

**CNN Business

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

The Funds have derived all disclosures contained in this document regarding NVIDIA Corporation from publicly available documents. In connection with the offering of each Fund’s securities, neither the Funds, the Trust, nor the Adviser or any of its respective affiliates has participated in the preparation of such documents. Neither the Funds, the Trust nor the Adviser or any of its respective affiliates makes any representation that such publicly available documents or any other publicly available information regarding NVIDIA Corporation is accurate or complete. Furthermore, the Funds cannot give any assurance that all events occurring prior to the date hereof (including events that would affect the accuracy or completeness of the publicly available documents described above) that would affect the trading price of NVIDIA Corporation have been publicly disclosed. Subsequent disclosure of any such events or the disclosure of or failure to disclose material future events concerning NVIDIA Corporation could affect the value of a Fund’s investments with respect to NVIDIA Corporation and therefore the value of the Funds.

Semiconductor Industry Risk – Semiconductor companies may face intense competition, both domestically and internationally, and such competition may have an adverse effect on such companies’ profit margins.  Semiconductor companies may have limited product lines, markets, financial resources or personnel.  Companies in the semiconductor industry may have products that face obsolescence due to rapid technological developments and frequent new product introduction, unpredictable changes in growth rates and competition for qualified personnel.  

NVIDIA Corporation Investing Risk — NVIDIA Corporation faces risks associated with meeting the evolving needs of its large markets – gaming, data center, professional visualization and automotive – and identifying new products, services and technologies; competition in its current and target markets; changes in customer demand; supply chain issues; manufacturing delays; potential significant mismatches between supply and demand giving rise to product shortages or excessive inventory; the dependence on third-parties and their technology to manufacture, assemble, test, package or design its products which reduces control over product quantity and quality, manufacturing yields, development, enhancement and product delivery schedules; significant product defects; international operations, including adverse economic conditions; impacts from climate change, including water and energy availability; business investment and acquisitions; system security and data protection breaches, including cyberattacks; business disruptions; a limited number of customers; the ability to attract, retain and motivate executives and key employees; the proper function of its business processes and information systems; impacts from the COVID-19 pandemic; its intellectual property; and other regulatory, and legal issues.

Direxion Shares Risks – An investment in each Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with a Fund concentrating its investments in a particular security, industry, sector, or geographic region which can result in increased volatility. A Fund’s investments in derivatives such as futures contracts and swaps may pose risks in addition to, and greater than, those associated with directly investing in securities or other investments, including imperfect correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility and lack of availability. As a result, the value of an investment in a Fund may change quickly and without warning. Risks of the Funds include Effects of Compounding and Market Volatility Risk, Leverage Risk, Derivatives Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Correlation Risk, NVIDIA Corporation Investing Risk, Market Risk, Industry Concentration Risk, Cash Transaction Risk, Tax Risk, Indirect Investment Risk, Trading Halt Risk, and risks specific to the technology sector and semiconductor industry.  Additional risks include, for the Direxion Daily NVDA Bear 1X Shares, risks related to Shorting. Please see the summary and full prospectuses for a more complete description of these and other risks of the Funds.

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