Given Nvidia’s recent rally after it’s Q4FY23 results, we’d thought it be helpful to provide a fundamental and technical view, as well as a brief follow up on the other two stocks we have discussed within this service – AMD, NFLX. Both of which are positioned to capture market share from their competitors. We wrote about it here, here, here and here.
As long-term investors, we firmly believe holding quality companies for at least 3 years is crucial. However, as you will see, there are times to buy, and times to take some gains. Last week we discussed why we are cautious right now based on our overall technical and macro view of the markets.
In summary, my current market outlook for 2023 has devolved since the start of the year. I have grown more bearish as time has progressed and remain rather cautious. Prompted by technical indicators that point to lower market index levels as the Fed’s fight against “supercore inflation” has proved to be difficult. Previously, I wrote about my concerns over the US consumer here.
I think that the market will provide me an opportunity to buy Nvidia, AMD and NFLX at lower levels.
First let’s take a look back at Nvidia. Below is a chart showing the buys and sells I’ve communicated to readers on a real time basis, which are moves we made in real-time. This is an example of how we actively manage a high quality position to help mitigate risk and boost returns. For reference, the percentage buys/sells are in reference to our portfolio value.
Fundamentally, we have written about the potential of AI in the past and potential beneficiaries of this secular trend. We identified Nvidia as a winner given its product offering and market position. The announcement of its H100 GPU in March 2022 to be available in 2h22 was a gamechanger. We wrote about that here.
However, in 2022 its cyclical gaming business was a significant earnings headwind. Nvidia Q3FY23 missed expectations mainly due to China related inventory write-downs, higher compensation expenses and excess inventory in the gaming channels. However, Nvidia’s gross margin guidance for Q4 suggested that the first two were isolated to Q3 and stated that gaming related inventory would be worked down in Q4. Importantly, H100 was gaining acceptance faster than expected. We wrote about it here. We bought shares the first trading day after the earnings release.
As we entered 2023, we assessed Big Tech’s capex plans and all pointed to the prioritization of AI related capex. This gave us further confidence that Nvidia was well positioned, regardless of the macro headwinds.
Nvidia recently announced Q4FY23 and full year earnings. Gross margins improved sequentially, earnings beat expectations and the Q1FY24 revenue guidance was better than consensus. Gaming showed sequential growth and the inventory situation was no longer an issue. Clear signs that earnings had bottomed in Q3. Critically, management guided to sequential growth in all 4 of its businesses and talked about the benefits of AI related demand on the company. Pointing to their March GTC conference as a key event where they will update investors.
Fundamentally, we continue to like Nvidia. Technically, after its recent rally we would wait and look for better entry points.
Regarding the technicals, we are seeing a 3 wave uptrend, which is a warning. It’s pushing higher on weakening momentum (divergence). So, big warning. I do believe that we could see one more, push we believe the time to buy is not now. Our buy zone is in green, and we must hold $138 on any drawdown, or the odds start shifting towards us seeing a fresh low.
Taking a look at AMD and NFLX.
AMD (hold)
We are seeing the same symmetrical 3 wave pattern off the October low. I can see AMD making one more run higher, but it should not be bought. I believe AMD will retest the lows in the coming months, which will set up a great buying opportunity. (hold/trim)
NFLX (hold)
Like NVDA, I believe THE low is in. However, like most stocks, the time to buy is not at these levels, unless one plans to be nimble. I do believe NFLX could set up for one more push to new highs, but after that it is due for a large retrace. We expect lower prices as we move into 2023, which will set up a great buying opportunity.
Conclusion
Given the macro backdrop, Winners and Losers will emerge within the technology sector. From a fundamental stock perspective, the team has been focusing on companies exposed to secular rather than cyclical growth with strong competitive moats.
Recent commentary from Big Tech indicates a prioritization of AI related infrastructure capex through 2023 and beyond. We continue to look for companies benefiting from AI or other themes that can withstand these macro headwinds. I believe Nvidia will emerge as a winner.
Meanwhile, AMD and NFLX are well positioned to capture market share from their competitors.
I believe that the market will provide us with better entry points in all three.