PLEASE CLICK HERE TO SUBSCRIBE TO MY YOUTUBE CHANNEL @MoneyWithJames
#Money #Education #StockMarket #RealEstate #Learning #Finance #Investing #Learn #Wealth
Yesterday, Monday, January 27th 2025, we saw a significant pullback in many of the major tech high flyers, led primarily by NVDA (down 12.5% on the open and down 17% on the close, which is a serious move). Unsurprisingly, this makes many people nervous and worried about what to do and some people reached out to ask me what did I think. So today I want to break down how to interpret a snap pullback in a stock or sector and how do you decide what to do about it. Whether you have an open position in the stock or are considering opening one, how do you know when the pullback has ended or perhaps has only just begun!
And stick around to the end, as I highlight my personal opinion on yesterday’s specific event.
So let’s get into it!
First question to ask yourself is, what happened? Sometimes it’s a hard question to answer precisely, especially immediately or during the change in direction taking place as information can be limited. So, all you can do is try your best to understand as much as you can and then ask yourself, do I have enough information to make an informed decision now? OR… should I wait for more time to pass and more information to come to light? So, to be clear, almost always, it can be quite risky to make a change-of-direction decision instantly when something like this happens, because information is often quite limited and not sufficient to make a fair and informed decision. Therefore, unless you are a day trader, it is typically better to wait until more information comes to light to allow you to make a more informed decision. Although we all have to decide what level of information allows us to feel informed. Of course, I don’t need to spell out the downside in waiting is you remain in the position longer and may lose more (on paper at least) BUT… what is worth highlighting, is as often as losing more may happen, I propose that more often, the waiting approach prevents you making an ill-informed panic-fuelled decision.
Now, for context, it’s worth adding here that the market has a saying in these moments, it’s called the “three-day rule”… and it means… often it takes three days for new material information to become understood sufficiently by a majority of investors, to allow them to express their intentions (for example buy, hold or sell) and thus for the REAL TREND, and therefore consensus opinion, to reveal itself.
So back to the first question, what happened? In this case, a surprise announcement came from a potential, and now very likely strong, competitor which will likely affect NVDA’s future sales pipeline. That is, Chinese firm DeepSeek, for ease of understanding let’s call it the Chinese ChatGPT, launched a new version of their large language model and said it was already better than the leading US competitor, meaning ChatGPT, and it cost them a tiny little fraction to make it better. In other words, they said that anyone who wants to use or build one of these AI models will not need to buy as many chips from NVDA because DeepSeek has been able to build something better than the current best, meaning ChatGPT, for just $6M dollars worth of NVDA chips, whereas OpenAI, ChatGPT’s creator, has spent billions on NVDA hardware and so have many other tech firms building their own equivalent AI systems. Plus, they launched their AI model as an open-source product meaning anyone can see the code and use it. Therefore, it’s potentially really big news as it could mean many others can now build one of these AI models for a lot less money, and by a lot less we are talking billions less, and therefore billions less for NVDA.
Next key question, do I believe the news/current interpretation of the news? So while in this particular case this appears to be a somewhat simple and logical conclusion, it does NOT mean it is fact nor does it mean that a significant negative impact on NVDA’s future revenue is exactly what will actually happen. Many are already speculating that the claims from DeepSeek are not accurate, while their product appears great the cost for them to get there is not as clear. So as I have said previously, and in my most recent in-depth post and video on how to develop your own market view, link here, NOBODY CAN SEE THE FUTURE, plus and quite importantly, we all have a different investment timeframe, so we all need to get better at interpreting the news and taking our own personal view based on our own personal opinion and timeframe.
Next question, is quite closely linked to the previous question, does the current stock move (up or down) correlate proportionally to the news? Meaning, NVDA is now down 17% from Friday’s value, is that a fair move based on the new news? Firstly, knowing your stock and where it has come from over recent days, weeks, months comes in very handy here. Has it gone up or down a lot recently and therefore is today’s big move simply a correction from a previous, potentially excessive, move or perhaps is it creating a new trend? In NVDA’s case, it was up about 40% from the September lows, whereas the S&P500 was up about 13% over the same time period and the tech sector about 18% and the semiconductor sector about 27% (bearing in mind NVDA is one of the biggest constituents in each of these).
Roughly (Sep 2024 lows to last week)
NVDA: $103 => $140 = +36%
S&P500: 5,400 => 6,100 = +13%
XLK (TECH): $204 => $240 = +18%
XSD (SEMIS): $212 => $270 = +27%
So NVDA had outperformed significantly relative to all its main reference indexes over that time period and across a number of time periods. Therefore dropping 17% yesterday, while immense, is now bringing it closer to its peers’ performance over recent time periods. This does not mean the move is accurate but it certainly helps explain a big part of the move. Why is that? Because NVDA had moved up 40% on really good news, meaning a great outlook for huge AI growth and therefore NVDA chip sales, so NVDA’s stock price was based on a really really good outlook. But now that great outlook has come into question so it certainly had a long way to fall, as it was priced for perfection, as they say. So here we are. A clear challenge to NVDA’s perfect outlook and boom out the window NVDA goes, down 17% in a day. Ouch.
The second part to this question, of assessing the proportionality to the move, is a much harder question to answer quickly. That is, how much do you think this news will affect NVDA’s future sales and/or earnings? As the news is suggesting a hit to future sales so now we need to quantify that as best we can. And also decide whether you see this as lowering NVDA’s premium market dominance position and therefore challenging its premium valuation multiple? So the first part of this question, regarding sales, that one seems likely, so it more a matter of how much impact and maybe more important, how quickly that flows through to NVDA’s income statement? My impression is this will feed through in late 2025 and therefore most analysts on the street will likely reduce their sales and earnings forecasts for second half of 2025. Therefore the 17% drop is unlikely to bounce back very quickly, based on what we know today.
Now to the second part of this question, does this news impact NVDA’s premium position and valuation? Well probably not in terms of its product dominance. The news is not saying that NVDA’s chips are no longer as useful or best-in-class, it is simply saying there is now today a greater chance the broader tech industry, and therefore NVDA’s current customers, will potentially need fewer of NVDA’s best-in-class chips to achieve their goals. So perhaps the premium position is largely unaffected but the probability of estimated earnings growth is now lower and therefore the premium valuation should probably come down. So we are likely to see a lower E estimate for 2025 (meaning earnings estimate by many analysts, how much is hard to know at this stage) and also likely to see a contraction of its premium multiple, as its earnings growth is less certain today than it was on Friday.
Final question for today, what do you do now? This is the most important question and often the hardest one to answer. Which also means, do you still believe in your VIEW…over your TIMEFRAME? To help you reframe this question a different way I will share another common market phrase, “if you remain long overnight then that is the same as buying that position today.” Meaning…if you owned NVDA Friday and still own it today then remaining long for tomorrow (or any new day) is just the same as making the decision to buy it today. So…if you own NVDA today and have seen your position drop 17% overnight, based on this new information, are you willing to buy it today 17% cheaper around $118 when on Friday is around $140? If yes, then remain long. If a strong yes, then potentially add more today, as now you can own it 17% cheaper than you could on Friday when you also said yes to owning and therefore buying it.
There is obviously no right answer here, as everyone needs to make their own decision based on their own risk tolerance, market view and importantly their timeframe. That said, I do have to throw in one of my favourite phrases for most investors to remember, time IN the market is often more important than timING the market. And a new fun market phrase for today, those who try to pick bottoms, often get dirty fingers!
So while this is not a comprehensive approach to dissecting material market news, it is hopefully enough for most to get through today. And as promised, what do I think of this nes? I think the 17% down move and broader negative impact across the US tech sector is excessive based on what we know right now and will therefore almost certainly be bought over the coming days and weeks. As I think this actually allows AI growth to expand wider and faster than previously thought and the overall impact of AI growth on tech and the market as a whole should outweigh this news, in my humble opinion. That being said, the new information, meaning the potential challenge to US tech / AI dominance and 2025 demand for NVDA’s chips, is still very fresh and every moment new information can come to light and impact that view. So my final question for you, do you want to continue to own NVDA and US tech today? I hope I have helped you start to answer that question for yourself by putting a framework around analysing this mini crisis, and any future one, as they will most certainly come up from time to time. But remember, one investor’s crisis is another investor’s opportunity, so it’s up to you to decide what you consider this to be.
Thanks for reading to the end! If you like this kind of information… then please consider bookmarking my website and subscribing to my YouTube channel as new posts and videos to come each week!
Leave a Reply