Nvidia stock hits key support, forms bullish pattern as key valuation metric dips

Nvidia stock remains under pressure this week as the recent sell-off continues. It dropped to $189, down by 18% from its highest point this year, with its valuation falling by nearly $1 trillion.

Still, the stock has formed a highly bullish pattern and has landed at a core support, suggesting a rebound is possible.

Nvidia stock finds support at the 200-day EMA

Technicals suggest that the NVDA stock price may bounce back in the near future. For one, it has landed at the 200-day Exponential Moving Average (EMA), which has provided it with substantial support over time. It has barely remained solidly below this MA in years.

At the same time, the stock has slowly formed a falling wedge pattern, which is made up of two descending and converging trendlines. These two lines are now nearing their confluence, which may lead to a bullish reversal.

Technically, a key risk is that the Relative Strength Index (RSI) is falling and is yet to hit the oversold level. As such, the stock may continue to drift lower for a while before it eventually bounces back.

NVDA stock chart | Source: TradingView

Nvidia has become a bargain

Nvidia is being valued like a value stock despite being one of the fastest-growing companies in the United States. Its latest earnings showed that first-quarter revenue surged to $81.6 billion, representing an 85% year-over-year increase.

Most notably, analysts believe that the growth path remains intact. Its second-quarter revenue is expected to be $91.7 billion, up by 96% YoY. This growth is being driven by soaring data center spending, with the top hyperscalers planning to spend over $700 billion in capital expenditure this year. 

Yahoo Finance data shows that its annual revenue is expected to grow by 81% to $392 billion. Unless things change, Nvidia has a long history of beating analyst estimates, meaning that its revenue may hit $400 billion for the first time ever. It is then expected to hit $554 billion next year.

Despite these developments, the company’s valuation has plunged. SeekingAlpha data shows that the company has a forward price-to-earnings ratio of 20, much lower than the five-year average of 53. It has dropped to the lowest level in years.

This valuation multiple makes it cheaper than other slow-growing and lower-margin companies. For example, Walmart has a forward PE ratio of 38, while Tesla’s multiple is 189. 

Other valuation multiples suggest that the company is a bargain, considering that its growth is accelerating. For example, the company has a rule of 40 metric of 132%, based on its forward revenue growth of 70% and a profit margin of 62%.

Nvidia has some notable catalysts that may help to supercharge its growth.

The US has approved H200 chip sales to selected Chinese companies, although shipments remain subject to regulatory approvals and have yet to begin.

It also launched a new line of CPUs recently.

The undervaluation is likely because investors are concerned about the AI industry and whether companies will continue spending. Also, there are concerns about competition, with its biggest customers like Microsoft, OpenAI, Amazon, and Google launching their own custom GPUs.

More competition is coming from smaller companies like Cerebras and SambaNova.

Analysts remain upbeat about Nvidia, with the consensus target being $309, representing a 60% gain from the current level.