After the epidemic, US retail investors prefer reverse and leveraged exchange traded funds (ETFs) because these products are convenient for investors to hold in the short term and can amplify returns in the context of long-term one-way stock price increases. Of course, these retail investors have also suffered backlash recently, as leveraged ETFs can also amplify losses.
The sharp decline of Nvidia in recent trading days has caused significant losses for US retail and day traders who were accustomed to betting on Nvidia's continued rise.
Previously, GraniteShares Fund provided investors with twice the long GraniteShares 2x Long NVDA Daily ETF (NVDL) for Nvidia. Last week, the daily rise and fall of this ETF was even greater than that of Nvidia stock, which was twice the rise and fall of this stock. As investors sought to expand the gains of this stock, known as the "most important stock in the world," the ETF's inflow of funds reached a record breaking $743 million. This $3.7 billion ETF was launched in December 2022, attracting $189 million last year and approximately $1.8 billion so far this year. But as Nvidia's trend reversed, the ETF has fallen by about 25% from its closing price on the 18th. However, due to the previous sustained surge, the fund still recorded an overall increase of about 329% this year.
Dave Lutz, head of ETF at securities firm Jones' trading, said, "Increasing leverage in Nvidia is a high-risk, high return approach. Given that the stock has been driven by the momentum and popularity of artificial intelligence (AI), it is difficult for investors to determine when the stock will ultimately retreat." He added that retail investors "need to truly understand the structure of these products in order to fully understand the risks hidden behind them.".
In fact, not to mention American retail investors, even Wall Street is unpredictable about Nvidia's valuation.
As a representative of this round of AI boom, Nvidia's stock price has risen by 140% this year. After adjusting its weight last quarter, it has become the second largest weighted stock in the $70 billion technology selected industry SPDR fund (XLK. US), with its shareholding ratio raised to over 20%.
According to data compiled by institutions, the average positive deviation between Wall Street analysts' forecasts of Nvidia's revenue and actual results over the past five quarters is as high as 12%. Meanwhile, according to Wall Street's expectations, Nvidia's revenue for this quarter will be approximately $28.4 billion, and profits are expected to reach $14.7 billion, an increase of 137% and 111% respectively compared to the same period last year. In contrast, Wall Street predicts that Microsoft's revenue will increase by about 15%, while Apple's growth rate will only be about 3%.
Previously, many analysts interviewed by First Financial reporters emphasized that considering Nvidia's high growth expectations, especially its strong earnings per share (EPS), it is sufficient to support the overvaluation of the stock. According to statistics from the London Stock Exchange (LSEG Datastream), Nvidia currently has an expected P/E ratio of about 45 times, only slightly higher than the 5-year average P/E ratio of 41 times. At the same time, the current valuation is significantly lower than over 84 times that of about a year ago.
However, after briefly winning the title of the world's largest stock by market value last week, Nvidia fell 13% for three consecutive trading days, exceeding the 10% pullback threshold. The cautious view on Nvidia's stock price is gradually growing, with the main concern being that Nvidia's future performance exceeding expectations may disappear.
Michael O'Rourke, Chief Market Strategist at Jone's Trading, stated that a greater concern is that Nvidia's ability to surpass Wall Street's growth expectations will inevitably begin to weaken, which may make it more difficult for Nvidia to justify the continued crazy upward trend in its stock price. "This is where the risk lies." He said, "You have paid a high price for a company with a huge market value, and the unexpected performance of the company may lead to a significant decline, and this trend may continue."
It is also worth noting that Nvidia CEO Huang Renxun himself seems to anticipate a pullback in the stock. According to documents from the US Securities and Exchange Commission (SEC), Huang Renxun reduced his holdings of 720000 Nvidia shares in a week from June 13th to 21st through the "10b5-1 Rule Trading Plan" adopted on March 14th, with a cash out amount of $94.6 million. In addition, several executives including Deborah Shoquist, Executive Vice President of NVIDIA, and Colette Kress, Chief Financial Officer, have also reduced their holdings and cashed out. According to data from agency Washington Service, excluding the impact of the 10 share split on June 10th, Nvidia's executives and directors have cumulatively reduced their holdings of approximately 770000 shares, with a cash out amount exceeding $700 million. Since Nvidia announced its first quarter results on May 22nd, more than one-third of insiders have also chosen to reduce their holdings of stocks, reaching a new high in many years.
This situation also occurs in other technology companies that have benefited from this round of AI boom. For example, it is reported that Sanjay Mehrotra, the President and CEO of Micron Technology, reduced his holdings of 4572800 shares through an option plan from January to June this year, cashing out a total of $52 million, with an average selling price of $113.65 per share. Cristiano Amon, President and CEO of Qualcomm, also reduced his holdings of 40500 shares from January to May this year, cashing out a total of $6.9 million, with an average selling price of $169.92 per share. So far this year, the stock prices of Micron and Qualcomm have risen by nearly 64% and about 40% respectively.