'Hot Runner' Nvidia To Hit Speed Bump In Second Half This Year? Here's What A Market Strategist Says

High-flier Nvidia Corp.’s NVDA rally has got the Street excited, with a bullish analyst issuing a Street-high forecast for the stock earlier this week. But at least one analyst has chosen to take the cautious route amid the stock’s gravity-defying climb.

Cautious on Nvidia: The prospects for Nvidia are phenomenal but they are predicated on the company maintaining 70% gross margins and on its ability to grow at a long-term compounded annual growth rate of 45% per year, said Thomas Hayes, Chairman and Managing Member at Great Hill Capital, in an interview with Channel News Asia.

The investment advisor said that the 45 to 50 times earnings multiple at which the stock currently trades might be a little overdone in the short term.

The recent spike could be attributable to retail investors, who apparently got carried away by the lower price following the stock split although the value is the same, he said. He expects the short-term strength to fade away.

Hayes is positive about the company’s long-term potential but cautioned regarding up-and-coming competition for AI accelerators and government inquiries on its market dominance. “So, I wouldn't count on them maintaining those type of margins forever,” he said.

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Top-Heaviness Set To Reverse? Small-caps, whether cyclical or companies with any type of leverage on their balance sheet, have been “trading like death,” Hayes. For those stocks to catch up and have some outperformance, the Federal Reserve needs to implement one or two rate cuts, he said.

Once that happens the outperformers like Nvidia and Microsoft Corp. MSFT will slow down, Hayes said. He, though, doesn’t expect these stocks to come crashing down but sees them underperforming in the second half of the year. “Those laggards from the first half because of the hawkish talk and the hawkish actions, will start to dramatically outperform and the credit markets will open for companies to refinance and we're going to see a rally under the surface for those companies,” he added.

Hayes expects rate cuts to materialize this year, citing the recent weak retail sales data, tamer-than-expected producer and consumer price inflation reports and the slowdown in job additions. The Fed rate cut, according to the investment advisor, will likely broaden out the rally.

What’s Next: Against the backdrop, Hayes said he would be inclined to slow down on exposure to the concentrated tech that has led the first half of the year. “I do think they're going to be more underperforming and I do think once we get that signal from the Fed and the data that continues to confirm that they have to move before the end of the year, the opportunity is going to be in those cyclicals, in those industrials, in some of the interest rate sensitive groups like small caps like selected REITs that have really been left for dead,” he said.

Hot runners of the first half such as Nvidia and Microsoft will likely have more flat performance, while those that have lagged will likely have a more outsized performance, he added.

Nvidia ended Tuesday’s session up 3.51% at $135.58, according to Benzinga Pro data. The Invesco QQQ Trust QQQ, an exchange-traded fund that tracks the performance of the Nasdaq 100 Index, trades at a record high, having gained 18.6% this year. On the other hand, the iShares Russell 2000 ETF IWM, which tracks the Russell 2,000 Index comprising small stocks, is up merely 0.6%.

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