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Don’t Buy NVIDIA Corporation (NVDA) Stock Just Yet

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NVIDIA Corporation (NASDAQ:NVDA) stock may fall further before rising again, providing an entry point for long term investors.

Shares of NVIDIA Corporation (NASDAQ:NVDA) registered an uptick yesterday after a week of correction, driven by all the excitement and anticipation around CES 2017. While there’s no disputing the fact that Nvidia looks poised for a good run in the long term, a couple of headwinds that investors seem to be ignoring, could potentially stall the stock’s stellar rally in the near term. And that’s not including some of the concerns raised in Citron Research’s bearish call last week.

If you look closely at all of the news that’s come out over the course of December 2016, and analyze the triggers that have driven NVDA stock higher, you’d probably come away with the impression that a further correction could be in store. So, even if the announcements from CES drive the stock higher over the next couple of days, investors who plan to buy into the stock might want to watch the stock closely and wait for a correction to enter the stock.

spacedrone808/Shutterstock.com

spacedrone808/Shutterstock.com

What’s Been Driving NVDA Stock Lately?

Nvidia shares had a massive run in 2016, rising by over 224% for the year, and nearly 264% at the peak of the rally, before Citron’s bearish commentary put a temporary stop to the euphoria. In spite of Nvidia’s great run in the early part of the year, the stock continued to pile on handsome gains of ~75% over the last three months of the year. Interestingly, gains of nearly 37% came in December alone, backed largely by bullish commentary from analysts, rather than fresh news. What triggered these gains?

Also Read: Citron Says Nvidia Stock Belongs At $90, Does It Really?

Most of NVIDIA Corporation (NASDAQ:NVDA)’s strengths aren’t new to investors. Be it the company’s presence in on-the-horizon sectors like Artificial Intelligence (AI), Virtual Reality (VR) and self-driving cars, or it’s growing presence in the data center space, these are catalysts that observers have been aware of. Most of the renewed optimism in the last month or so came largely on the back of upgrades and price target hikes by popular analysts, based on existing facts, which served as reinforcements to the bullish sentiment that had been around for most part of the year. At large, the stock was driven by sentiment alone towards the end of 2016. Apart from lifting the stock to newer highs with each passing day, these louder by the day bullish calls also seemingly drowned out every word of caution.

What Could Go Wrong For Nvidia Now?

On 12th December, a report by Barron’s saw Pacific Crest’s Michael McConnell warn investors about “dark clouds forming for Nvidia”. In that report McConnell raised concerns about the piling up inventory of graphic cards and the potential impact the trend could have on Nvidia. Quoting McConnell from the report:

Our specific findings were as follows: High-end NVIDIA GeForce GTX 1080 and 1070 card inventory levels have risen to 2 to 2.5 months in the channel versus targeted levels of 1 to 1.5 months due to weaker-than-expected sell-through in late October and November. Two weeks ago, desktop graphics card manufacturers began to experience order pushouts and cancellations of GTX 1080 and 1070 cards from channel customers ahead of the holiday season. Given the excess supply situation, GeForce GTX 1080 pricing has dropped ~10% in the channel

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