Managing Editor’s Note: When stocks keep hitting new highs, it can be hard to take a step back… breathe… and not join the fray.
Yet when everyone is piling in, sometimes that’s the moment you should have second thoughts.
And that’s why it’s worth reading today’s guest essay from fellow trader Jeff Clark.
Jeff digs into one reason high-flying Nvidia might be worth some caution…
Jensen Huang is a rock star.
More than that… The CEO of Nvidia (NVDA) has achieved a cult-like following.
And why not? Huang has sailed the NVDA ship to become the third most valuable company in the world.
He’s the leading force in the artificial intelligence industry and has created vast wealth for his shareholders.
So, it’s no surprise that women line up to ask Huang to autograph the front of their T-shirts.
The problem for NVDA shareholders, though, is this sort of CEO notoriety often occurs near a peak in the share price.
Let me explain…
Peak Popularity = Peak Prices
Think back to 2020-2021.
Tesla (TSLA) was the best-performing stock in the market back then. It rallied from $25 per share (split adjusted) at the beginning of 2020 to $400 per share at the end of 2021.
Elon Musk, Tesla’s CEO, was arguably the most popular person on the planet.
A single tweet from him – “To the moon” – helped GameStop (GME) rally from $20 per share to over $400.
When he acquired a Shiba Inu puppy, the value of Dogecoin – a cryptocurrency that was started as a joke – rallied from $0.07 to over $0.70.
And his appearance on Saturday Night Live gave the show its best ratings in years.
Musk became a cult-like icon. Indeed, it would be hard to imagine anyone becoming more popular than Musk was in late 2021.
And that’s when TSLA peaked.
In 2022, TSLA shares fell from $400 at the start of the year to $110 by the end of the year. Much of the wealth that Musk’s popularity created was wiped out.
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And that should serve as a cautionary note to folks who own NVDA right now.
NVDA has been the best-performing stock in the market over the past two years. That performance has granted Jensen Huang cult-icon status.
It’s hard to imagine his popularity increasing even more from here. That might make it hard for NVDA shares to increase much from here as well.
Granted, there are only a few examples of corporate CEOs achieving cult-icon status – Musk, Steve Jobs, and Bill Gates, to name a few.
So, we don’t want to draw too broad a conclusion based on a small sample size. But in those few cases, the CEO’s peak popularity coincided with a peak in the company’s share price.
NVDA shareholders should be careful right now. If Huang adopts a Shiba Inu or takes a gig as guest host on Saturday Night Live, it might prove to be a sell signal for the stock.
Best regards and good trading,
Jeff Clark
Editor, Market Minute