The tech industry is undergoing an upheaval in both hardware and software capabilities. We are in the dawn of the AI era, where chipmakers vie for dominion. As the newfound demand for processing power in the Artificial Intelligence space grows, so do the stakes for some of the biggest tech companies. Nvidia stands out as the current leader due to its business model and strategic positioning. How long can its reign last?
Chips on the Table
The phenomenon of Artificial Intelligence has been taking the stock market by storm. Tech companies across the board have been scrambling to either make or buy microchips that make AI possible.
The latter half of 2023 gave birth to some breakthroughs in software—and more concretely—in the training of Large Language Models. Those are the algorithms that comprise what we colloquially call AI.
These advances allowed what was once a pipe dream to finally start resembling something of a real possibility – an intelligent and truly useful machine. With that began a cascading effect of companies including AI functionality into their offerings.
Surprisingly, those enhancements proved profitable for businesses, which got the ball rolling from the demand side of the equation, leaving us where we are currently.
The High Roller
NVIDIA Voyager. Photo courtesy of Nvidia Corporation https://nvidianews.nvidia.com/multimedia/
There was one company that really stood out in the process and is currently riding the proverbial crest of the tech wave – Nvidia (NASDAQ:NVDA).
The company is regarded as the largest producer of Graphics Processing Units or GPUs in the world. Those are chips designed to allow a computer to process video content better – such as in games. That was—at least at the outset—the original purpose of that product.
And Nvidia's forte proved—coincidentally—to be extremely effective at training those same Large Language Models. This inevitably resulted in some Big Tech companies like Microsoft (NASDAQ:MSFT), Meta (NASDAQ:META), and Amazon (NASDAQ:AMZN) using them for their own AI projects.
With Nvidia being the incumbent leader in the GPU market, by extension they also became the de facto chipmaker for the entire tech sector.
Raising the Stakes
Being the best in a field requires dedication and strategy. Nvidia have proven to have both judging by their business model. Unlike other tech companies like Intel (NASDAQ:INTC) who design and then manufacture their own chips, Nvidia is exclusively a designer.
This means they outsource all of their production to third-party companies, such as TSMC (NYSE:TSM), who specialize in manufacturing only. As such, Nvidia have tremendous agility when it comes to changing market conditions.
Because their products are narrowly focused, the company has specialized in being extremely good in something that was up until recently rather niche. Nvidia has been fortunate that two of the largest movements in both technology and finance have made great use of their products. Namely mining cryptocurrencies and training AI.
Let's peer into some of their numbers to see how successful Nvidia really is. Long-standing tech giants are clamoring to get their hands on the chipmaker's products. Tesla (NASDAQ:TSLA), for one, is planning on deploying upwards of 80,000 of Nvidia's H100 chips in its own vehicles soon.
Meta is another big customer, planning to stockpile up to 600,000 of the same chip by the end of the year.
These and all the other orders from the past quarter tally up for a gross profit of $16.8 billion dollars. If that number is not indicative enough, the result is almost $13 billion larger than for the same quarter the year before.
Nvidia's net income is likewise up by $10.87 billion quarterly year-over-year. This all propelled the company's Earnings Per share to $4.93, up from $0.57 a year before.
The meteoric rise in revenues bolstered the company's share price, as investors fiercely bought the stock up.
Additionally, the company is rather flush with greenbacks, sitting on $25.98 billion in cash or cash equivalents, which are also up by 95% year-over-year. The tech sector is experiencing shifts as more and more tech companies are transitioning to having their own fabrication plants. This is a costly endeavor, so having that type of liquidity buffer is great should Nvidia decide to onshore its chip production too.
Technical analysis of Nvidiа
By employing some technical analysis methods to Nvidia's share price, we can try to determine how the stock can potentially develop in the upcoming weeks and months. Here is what we took note of.
- Support and resistance levels: We've identified three significant support levels at $380, $750, and $880. The $761 level, where Nvidia found support on April 19, is seen as a strong level. Resistance was noted at $880.
- Change of character: Between April 9 and April 19, there was a change of character in the charts, signalling a shift from a hyperbolic trend to a downtrend. The support at $761 indicated a healthy retracement.
- Break of structure: There was a break of structure at the $824 level, shortly followed by a push to the all-time high. Additionally, there was a significant pump on March 25, reaching close to the all-time high.
- Overbought levels: Nvidia was overbought at the $960 range, indicating a crucial level to watch.
- Fair value gaps: We've noted fair value gaps between $936-$930 and $833-$852. These levels have been tested multiple times recently.
- Healthy retracement: The recent drop of 20.88% within the last month is seen as a healthy retracement, considering the rapid upside movement.
- Relative Strength Index (RSI) divergence: Multiple bearish divergences have occurred since the beginning of the year, suggesting a potential bullish divergence in the near future, indicating a likelihood of the price moving towards the upside and nearing the previous all-time high.
- All-time high: The stock reached its all-time high on March 8, 2024, at $974, which remains a target for bullish traders.
In conclusion, our analysis suggests a complex but potentially favourable scenario for Nvidia, with indications of both bullish and bearish movements, along with key levels to watch for potential trend changes.