SMH, SOXX, NVDX, and XLK ETFs brace for a key event on Aug 28

The VanEck Semiconductor ETF (SMH), iShares Semiconductor (SOXX), T-Rex 2x Long NVIDIA Daily Target (NVDX), and the Technology Select Sector Fund (XLK) ETFs will be in the spotlight in the next few days. 

The four funds have done well this year, with the XLK rising by over 16.5% this year and the SMH and SOXX by 41% and 20%, respectively. The NVDX fund has jumped by over 395%, making it one of the best-performing funds this year. 

Nvidia is a big constituent

These ETFs have one thing in common: Nvidia is their biggest constituent. Nvidia is one of the biggest constituents of the XLK ETF, with a 21% stake. The other big names of this $70 billion fund are Microsoft, Apple, Broadcom, and Salesforce. Nvidia accounts for 21.7% of the $23 billion SMH fund and 10% of the $15 billion SOXX fund. 

The T-Rex 2x Long NVIDIA Daily Target is a unique fund because it is a single stock that uses leverage to track the Nvidia stock. It aims to generate 200% the daily return of Nvidia’s performance. For example, on Tuesday, Nvidia’s stock dropped by over 2.12% while the NVDX fund fell by over 4%. 

Therefore, the NVDX index does well when Nvidia shares are doing well. For example, Nvidia’s shares have risen by 170% in the last 12 months while the NVDX fund has risen by over 557%.

The T-REX 2X Inverse NVIDIA Daily Target ETF (NVDQ) fund is the opposite of the NVDX, which explains why it has fallen in the past few months. NVDQ has fallen by almost 95% in the last 12 months.

Nvidia earnings ahead

These stocks have been in the spotlight in the past few months as it has gotten highly volatile. On August 8, the stock tumbled to $90, down by over 35% from its highest point this year. It has now bounced back by almost 40% and is nearing its highest point this year. 

The next important catalyst for these ETFs will happen on August 28th when Nvidia will publish its quarterly earnings. 

These will be the most important earnings in the US because of Nvidia’s role in the economy and the technology sector. Its chips have become the most popular in the artificial intelligence industry.

Therefore, a sign that the company is slowing will have a big impact on these ETFs and the broader market in general. 

The most recent results showed that Nvidia’s revenues jumped by 262% in Q1 to $269 billion. Most of this revenue – about $22.6 billion – came from the data center segment. Companies like Microsoft and Amazon that run large data centers are buying its chips in large quantities to accommodate their AI needs. 

NVIDIA’S gross margin rose to 78.4% while its net income soared to $14.8 billion in the first quarter. 

Analysts expect that Nvidia’s revenue growth continued in the second quarter, albeit at a slower pace. According to Yahoo Finance, the average estimate is that its revenue came in at $28.6 billion in Q2, higher than the $24 billion it made in Q1 and the $13 billion it made in the same quarter in 2023.

I believe that Nvidia’s earnings will beat the consensus view easily in these results. Besides, the company has a long record of beating the analysts’ view. It has done that in the past four consecutive quarters.

For the year, Nvidia’s revenues are expected to come in at $121.13 billion this year followed by $168 billion in 2025. 

Valuation concerns remain

The main risk for the XLK, SOXX, SMH, and NVDX ETFs is that Nvidia seems like it is a highly overvalued company. It has a market cap of over $3.1 trillion, giving it a forward P/E ratio of 50.3. Its forward EV to EBITDA P/E multiple is 39.6, higher than the sector median of 20 while its forward sales multiple of 50 is higher than the industry’s average of 22.

Nvidia has always been a highly overvalued company. And in most cases, data shows that investing in overvalued companies produces better results than buying laggards. Just ask investors who buy perenially undervalued REITs.

The risk for Nvidia is that its growth will ultimately slow as we have seen in other industries. A good example of this is in the electric vehicle industry, where Tesla became the first company to hit $1 trillion in valuation. 

Today, Tesla’s valuation has dropped to $705 billion and is facing substantial competition pressures. In Nvidia’s case, there are chances that AMD will take its GPU market share in the coming weeks.

The other good example is Lululemon, which has dominated the athleisure industry. Today, more companies like Nike, On Holding, and Gap have come in, hurting its growth and its stock, which has dropped by almost 50% from the highest point this year.

Therefore, my view is that the Nvidia stock has more upside for now but could suffer a big reversal if growth starts slowing.