Replaying last June's adjustment? After a rise of over 80%, NVIDIA shows signs of overheating

NVIDIA's stock price surged 83%, signaling overheating. How long can the new round of gains driven by the recovery of chip sales to China last?

NVIDIA's stock price skyrocketed 83% in less than four months. NVIDIA's 14-day Relative Strength Index (RSI) briefly broke 80 on Thursday, reaching its highest level since June 2024. At that time, NVIDIA became the third company in history to surpass a market capitalization of $3 trillion, with its stock price hitting an all-time high. However, investors quickly took profits, leading to a decline of over 20% in the following six weeks.

As for the key factors driving this strong rise, according to CCTV News, Jensen Huang announced two important developments during an interview with Chinese media on the 15th. He stated that the U.S. has approved the sale of H20 chips to China, and NVIDIA will also launch a new graphics card called RTX Pro.

NVIDIA currently has a market capitalization of over $4.2 trillion, once again becoming the world's most valuable company. Despite the strong upward trend, analysts are issuing cautious signals regarding technical indicators, suggesting that buying has reached extreme levels.

Technical Indicators Show Overheating Risk

NVIDIA's 14-day Relative Strength Index (RSI) briefly broke 80 on Thursday, reaching its highest level since June 2024. The RSI tracks the speed of recent price changes, with readings above 70 seen by some analysts as a signal that buying has reached extreme levels.

"The stock has definitely become overbought, although that doesn't mean a reversal is imminent, but it's something to watch," said Jonathan Krinsky, Chief Market Technician at BTIG. "It feels like market sentiment has shifted from optimism to near euphoria."

NVIDIA's stock price has risen for eight consecutive weeks, adding approximately $1.9 trillion to its market capitalization since the low in April, a figure that exceeds Meta's market capitalization. Currently, NVIDIA's market capitalization exceeds $4.2 trillion, leading second-ranked Microsoft by about $400 billion.

James Abate, a fund manager at Horizon Investments, stated, "Every time there is incremental good news, buyers rush in, and the stock price goes up another notch." However, he has sold some NVIDIA shares during the rally, concerned that investors are underestimating the potential risks of "cyclical nature of the AI business in the future."

NVIDIA's current expected price-to-earnings ratio is 34 times, up from a low of less than 20 times in April, but still far below the average of about 40 times over the past five years.

AI Demand Continues to Drive Long-Term Outlook

Despite concerns about technical overheating, Wall Street remains optimistic about NVIDIA's prospects. Among the 79 analysts tracked by Bloomberg, only one has given a sell rating, while nine have rated it as neutral TSMC's strong guidance released on Thursday further enhances market confidence in AI demand. Investors will closely monitor the earnings reports of major tech companies in the coming weeks for clues on capital expenditure plans. Google's parent company Alphabet will announce its earnings on July 23, while Microsoft and Meta will release their financial reports on July 30.

This week, Trump also announced a commitment of over $92 billion in AI and energy infrastructure investments, and Meta CEO Mark Zuckerberg confirmed plans to invest "hundreds of billions of dollars" in data centers. Meta is NVIDIA's second-largest customer after Microsoft.

Rhys Williams, Chief Strategist at Wayve Capital Management, believes that with all signs pointing to continued AI spending, there is no reason to take profits on NVIDIA.

"The data center may continue to grow strongly over the next one to two years," he said.

However, some investors remain cautious. Vey-Sern Ling, Managing Director at Union Bancaire Privee, stated that NVIDIA's resumption of H20 sales to China is "clearly positive," not just for the company itself