What a day for one of the world’s biggest companies…
Chipmaker Nvidia (NVDA) reported its first-quarter numbers after the market closed last Wednesday. Its earnings handily beat Wall Street’s consensus estimates.
And the stock surged 24% the next day.
Now, a 24% gain in a single day is incredible for any company. But it’s even more impressive when you consider Nvidia’s massive size…
You see, Nvidia was already among the top 10 largest companies in the world. Then, its market cap jumped $184 billion in one day.
In other words… Nvidia gained the equivalent of 18 stocks on the edge of large-cap status.
It’s now approaching a $1 trillion market cap. The only other companies to hit that level are Apple (AAPL), Microsoft (MSFT), Saudi Aramco, Alphabet (GOOGL), and Amazon (AMZN).
Nvidia is on an incredible run higher. And that leaves us with a simple question…
How do you engage with this type of stock?
We’ll turn to the Power Gauge to help us figure out the answer…
Regular readers know the Power Gauge is our system for finding the best opportunities in the market. It’s built on Chaikin Analytics founder Marc Chaikin’s five-plus decades of experience.
The Power Gauge looks at 20 different factors in four categories – Financials, Earnings, Technicals, and Experts. And using all that data, it produces an overall rating for more than 5,000 stocks.
Our system turned “bullish” on Nvidia in late February. And it still holds that ranking today.
Better still, the Power Gauge boasts “very bullish” grades for the stock’s relative strength and our Chaikin Money Flow indicator. We put a lot of weight into those two factors…
If a stock is outperforming the market (relative strength), there’s a good chance the momentum will continue. And the Chaikin Money Flow indicator gives us a glimpse into what the “smart money” is doing. It’s a great sign when these powerful investors are buying.
Over the years, Nvidia became known for its terrific graphics cards. And it’s getting a bit of a resurgence with so much hype about and focus on artificial intelligence (“AI”) these days.
For AI to achieve its full potential, we’ll need newer, more powerful chips. That’s what Nvidia hopes to deliver.
And unlike many growth-minded companies riding disruptive trends, Nvidia is solidly profitable. The Power Gauge is “very bullish” on its return on equity.
But it’s not all sunshine and butterflies…
The Power Gauge also includes four valuation-related factors (price to book value, price to sales, free cash flow, and projected price to earnings). And today, the system ranks Nvidia as “very bearish” in all four factors.
Put simply, Nvidia’s stock is far too expensive right now. Its price-to-earnings ratio is roughly 49 (based on next year’s estimated results). And its price-to-sales ratio is about 36.
For perspective, the chipmaking industry’s median price-to-earnings ratio is 16.5. And the industry’s median price-to-sales ratio is 4.2.
In the end, the takeaway is clear…
Nvidia is flying magnificently right now. It’s up roughly 240% since last October.
And with the AI hype in full force, we can’t deny the stock’s current momentum.
But some of our cockpit gauges are already flashing red. The valuation-related factors are all “very bearish” right now.
Thankfully, the Power Gauge gives us the nuance we need.
Good investing,
Marc Gerstein
