Update - August 30, 2024
A Beaten-Down Stock Is Primed for 80% Gains
The dust has settled…
After the recent sell-off that saw the S&P 500 lose as much as 9.7% from the July 16 high to the August 5 low, markets have rallied. We’re once again on the verge of breaking out to new highs.
We know what caused the recent sell-off (I explained it here). It’s behind us.
Today’s personal consumer expenditure (PCE) numbers were in line with expectations… and that’s a good thing.
Even second quarter results from Nvidia (NVDA) – which caused the AI-related bellwether to lose more than 6% in yesterday’s session – didn’t drag the market down. That suggests we’re seeing more buying outside of the mega-cap tech stocks that have recently been the main driver of the market.
In fact, over the last five days, the Invesco S&P 500 Equal Weight ETF (RSP) has gained 0.5% while the S&P 500 (with its weighting heavily skewed to the Magnificent Seven tech stocks) is down -0.11%. That confirms we’re seeing breadth expanding beyond mega-cap tech.
Will that breadth expansion continue?
It’s too soon to tell… but this week’s action is encouraging!
Beyond that, we know the Fed is going to start cutting rates in September. The only questions now are how much the September rate cut will be, and how long will the Fed continue cutting rates.
That’s also a positive!
Trigger Happy
As for Nvidia’s sell-off… it was merely a case of trigger-happy traders looking for any reason to capture profits. Wednesday’s results, which by all accounts were stellar, weren’t quite stellar enough.
For the quarter, the company reported revenue of $30.04 billion. That was above estimates of $28.7 billion and up 122% year over year.
Revenue in Nvidia’s data center business, which includes its AI processors, climbed 154% from a year earlier to $26.3 billion. That figure accounts for a whopping 88% of total sales.
On the bottom line, net income came in at $16.6 billion, which was up 168.6% year-over-year.
Any way you look at it, those are great numbers.
The key metric that drove shares lower was slowing revenue growth.
This quarter’s 122% revenue growth is down from more than 200% in Q1 and 300% in Q4 ‘23.
Sure, that growth is slowing… but gimme a break! Triple-digit revenue growth is fantastic.
In yesterday’s call, CEO Jen-Hsun Huang shared that the next generation of Nvidia’s Blackwell GPUs aims to transform $1 trillion worth of data centers, shifting them from general-purpose computing to accelerated computing.
Will Nvidia capture all $1 trillion in data center revenue?
Probably not, but Nvidia’s AI accelerators dominate the market, holding between 70% and 95% of the share for AI chips. At the lower end, that could mean around $700 billion in revenue.
As long as Nvidia maintains its technological edge, it’s likely to secure the majority of data center orders. That means Nvidia will continue minting money!
Sticking with AI, and the processing power needed to drive the technology… I have a bonus recommendation for you today.
Down but Not Out
Two weeks ago, on the Stuart Verney show, I told Stuart and his audience that Intel (INTC) was the only semiconductor stock on sale right now.
After a series of sell-offs related to bad earnings and negative news stories, Intel closed yesterday’s session at levels not seen since 2012.
I’m convinced the bad news is already priced in… and the company has much more upside than downside.
Intel only needs a few positive news stories to attract investors back to the stock – the first of which happened today.
News broke this morning that the company is considering splitting off its foundry business and potentially scrapping new foundry projects.
Morgan Stanley and Goldman Sachs are advising in evaluating these options, which might also involve mergers and acquisitions.
A divestiture or separation of Intel’s chip foundry division would represent a significant shift for CEO Pat Gelsinger, who had initially believed this division would enhance the company’s position in the semiconductor industry. However, insiders think that Intel may first pursue a less drastic measure, such as delaying some of its expansion plans.
Markets like the idea. Shares are up nearly 9% in early Friday trading.
That’s a good start for a rebound.
Do I think Intel is going to fully turn the ship around, and get their financials back in order?
Yes, but it’s not going to happen overnight. It will likely take time, but with every positive news story, investors are going to start scooping up shares of the only semiconductor stock on sale right now.
I could see the stock at $30 with the next 12 months… and $40 over the next 24 months. If I’m right and Intel is trading at $40 in 24 months… that would represent an 81% gain for where the stock is currently trading.
I like our chances here.
Action to Take: Buy a half position in Intel (NYSE: INTC) at market. We’ll hold shares in the Rocket Rider portion of the Modern Asset Portfolio. Plan to add the second half of your position at $20, which is just below yesterday’s close.
