Fueled by the pandemic gaming boom, NVIDIA's (NASDAQ:NVDA) sales surged 53% and 61% in its 2021 and 2022 fiscal years, respectively. Net income in fiscal 2022, which ended on January 31, came close to $10 billion. As it often does, the market rushed to extrapolate the recent rosy past into the distant future. The stock skyrocketed to nearly $350 a share in November, 2021.
That $10B profit still amounted to just $3.85 in earnings per share, though. In other words, investors were paying 90 times peak earnings for NVIDIA. Unfortunately for them, even the best company is a bad investment when you pay too high a price for the stock. Less than a year later now, NVDA fell to $126 last week, down by $220 a share or 64% in just ten months.
So, it is fair to say that the bulls desperately need some relief from their pain. The problem is that even after the recent crash, NVIDIA still trades at a P/E ratio near 40. Just because it used to be even more overvalued, it doesn’t mean the stock is cheap now. Quite the contrary. According to the Elliott Wave chart below, however, a recovery might be around the corner anyway.
NVIDIA ‘s 4h chart reveals that the decline from $346 to $126 has taken the shape of a five-wave impulse. The pattern, labeled (1)-through-(5), is interesting in numerous ways: The five sub-waves of wave (1) are visible. Waves 1 and 5 of (1) are both expanding diagonals. Wave (2) ended just ahead of the 61.8% Fibonacci level. Wave (4) is a textbook A-B-C running flat correction, whose waves A and B are simple a-b-c zigzags, while wave C is an impulse.
Some Good and Some Bad News for NVIDIA Investors
Impulses point in the direction of the bigger pattern. It is likely that the bigger pattern is going to be a zigzag correction, labeled Ⓐ-Ⓑ-Ⓒ. It follows we’re currently in wave (5) of Ⓐ. Once it is over, we can expect a bullish reversal for the start of wave Ⓑ, since every impulse is followed by a correction. Of course, the (a)-(b)-(c) recovery shown above is an oversimplified approximation.
Still, wave Ⓑ should be able to reach the resistance area between $200 and $220 a share. From the current level of $132, that would be a recovery of 52% to 67%. The bulls’ relief is likely going to be only temporary, though. Once wave Ⓑ is over, the 5-3 wave cycle would be complete. Wave Ⓒ should then drag NVIDIA to new lows. Given the stock’s still-stretched valuation, we wouldn’t be surprised to see the price eventually drop below the $100 mark. It is for the same reason that we’re not tempted to participate in the upcoming wave Ⓑ rally.