Share Prices, Fundamentals & Other Mysteries

Shares in Nvidia have just plunged from a peak $480 to $404 in a matter of days.This is a fall of 16pc. Those unfamiliar with stock market behaviour might suppose this means something. If so, it is very hard to discover what.

It has not affected the strength of the chart which is still trending strongly higher and by all accounts it has not affected the fundamentals.

This is what brokers were saying just hours ago.

** UBS hikes PT to $540 from $475 and Wells Fargo raises PT to $500 from $450, ahead of company’s Q2 results on Aug. 23

** NVDA is quite literally serving as “kingmaker” as a huge wave of capital and new financing vehicles are chasing new AI software and specialized cloud infrastructure models – UBS

** Both brokerages note a recent pullback in the stock 

** On Friday, the stock was down 15pc from its month-ago record high

** Stock jumped 7pc on Monday after Morgan Stanley named the chipmaker its “top pick” ahead of earnings

** Also on Monday, a report said Saudi Arabia and the UAE are buying up thousands of the high-performance Nvidia chips crucial for building AI

Reuters, 15 August 2023

What an Opportunity for a Kamikaze Investor

Imagine you had been adding to your holdings to the max all the way up to the $480 peak. You would have been hurting on the way down. Absent new funds your equity would have fallen below 50pc of your margin. But suppose you had hung on in there and added funds to prevent your margin dropping below 60pc.

These additional funds mean that you will be able to start adding to your Nvidia holding even when the price is below $480 and that is going to be an exciting moment. Even more exciting will be when they top $480 as they surely are going to, probably sooner rather than later.

At $480 Nvidia shares had become extremely overbought and there were huge profits to be taken. NOBODY sells faster than an investor watching his profits disappearing so this can trigger a temporary cascade of selling, just as we have seen.

Now all eyes are on the next set of results, Q2, 2024, due to be reported on 23 August. Not only are these likely to be good but we are going to hear a pumped up Jensen Huang talking about the glittering future for generative AI and Nvidia’s critical role in making it happen.

My guess is that Nvidia, the world’s most exciting business, the world’s most exciting share, is going to be firing on all cylinders.

I Am E.L.F.ing excited about E.L.F. Beauty

I think anyone doing Kamikaze with Nvidia should be doing Kamikaze with ELF. It is another incredibly exciting business. Of course, you can Kamikaze ELF even if you are not doing Kamikaze with Nvidia but I think doing both, in separate spread betting accounts (IG allows three such accounts on request and two as standard) is a really fun thing to do.

Why am I becoming so excited about ELF. I have tried one of their skin care products, a face moisturiser (I am not a complete dinosaur, I can do this new man stuff, find my sensitive side) and I thought it was excellent and incredible value.

That is not the reason though. ELF emphasises three things in its strategy – value, innovation and marketing. All three are important but what I can see is that the marketing strategy, which is all about social media and engaging with the customers, is not only amazing but has been transformed since 2019.

The importance of 2019 is apparent from the chart. Something happened in 2019 that changed the outlook for ELF in a dramatic way. Well, now I know what that was. In May 2019 the company hired a new CFO, Mandy Fields. She ticks all the boxes for a company like ELF. She is female, black, young, happily married with two children and very vocal.

Women should not be afraid to tout their accomplishments. I believe very strongly that you need to get out there and share your story. You are your own greatest cheerleader, and it is up to you to network and let others know what you have achieved. Nobody can be a better you than you, so you need to own it.

Birdie, 13 January 2021

She also had this to say after joining ELF.

As I round out my first full quarter with the company, I can’t tell you how proud I am to be a part of the amazing team behind this extraordinary brand

Mandy Fields, CFO, ELF, Q1 2020 7 August 2019

But something else happened in that critical year, maybe even more important. In February 2019, just before Mandy Fields arrived, the company hired a new CMO (chief marketing officer), a lady called Kory Morissette, and what an impact she has had.

Two of our key initiatives go hand-in-hand, driving demand in the brand and a major step up in digital. As you know, in February, our Chief Marketing Officer, Kory Marchisotto joined us from Shiseido. Kory has hit the ground running in redefining our marketing strategy and bringing more consumers into the brand. e.l.f.’s core value proposition making the best of beauty accessible to every eye, lip and face still resonates with consumers.

What’s changing is the way we are telling our story. Kory and the team are crystallizing a campaign to reinvigorate what we have called e.l.f.’s super powers. These are unique brand tenets that e.l.f. users love, our premium quality, unbelievable value, universal appeal, first-to-mass capabilities, and of course, the fact that we are vegan and cruelty free.

We plan to activate these core tenets by integrating behind fewer, bolder product stories, driving a constant drumbeat of influencers and events and transforming our approach in digital and social.

To measure our progress we are looking at metrics such as, our year-over-year search on Google, which we see as a proxy for consumer awareness and interest in the brand and which was up double-digits when compared to the same period in fiscal 2018.

Our earned media value or EMV, which tracks organic influencer mentions was up close to 18pc compared to the prior year and our reach on Instagram, which passed 4.5m followers, was up about 30pc year-over-year. These metrics reflect our move to double down on digital, which is already making a difference.

Tarang Amin, CEO, ELF, Q4 2019, 8 May 2019

A lot of hard work has gone into making ELF the incredible success story it is now with sales in the last two quarters growing at 78pc and 76pc respectively and eps exploding.

We have talked a lot about a third key initiative which is improving productivity in our national retailers. The primary driver behind this is Project Unicorn, which is aimed at shrinking our packaging footprint, elevating our brand presentation and improving the consumer’s abilities to navigate our sets.

During the transition period, we implemented the first phase of Project Unicorn, which impacted 350 SKUs [stock keeping units]or are over half of our volume. Our productivity trend improved during the period due to Project Unicorn and our marketing activations. You can see our retailers are incorporating Project Unicorn when you walk the stores.

At Target, in addition to better shelf sets, we have flex towers elevating our position as number one in brushes and primers. Also beauty has increased our space in a number of their stores as has Walgreens. At Walmart, we are seeing better in-stock results on our four-way innovation centers.

Phase 2 of Project Unicorn will roll out in the fall and converts our market-leading brushes to new designs. Along with the impact of Unicorn, our new integrated marketing approach is reflected at Superdrug in the U.K., where we are seeing strong comp growth behind the marketing and merchandising of our 16 hour Camo Concealer. We are also seeing traction at Boots as we begin to roll out in stores across the U.K.

Tarang Amin, CEO, ELF, Q4 2019, 8 May 2019

They also focussed more intensely on their success in delivering first-to-mass prestige quality products at extraordinary value prices.

Our fourth key initiative is to focus on first-to-mass by providing prestige quality products at an extraordinary value. This initiative is less about pivoting and more about focus. We are proud of our ability to innovate in as fast as 13 weeks.

Going forward we plan to use our innovation capabilities to reinforce our strength in key product categories such as brushes, primers and brows. We are also making sure that each of our products regardless of price point is meeting our core value proposition of prestige quality at an extraordinary value.

In the past we primarily marketed our new products when they went on elfcosmetics.com. We are shifting our go to market approach by also supporting these products with integrated marketing campaigns as they are rolled out into our national retail partners.

Recent examples include Poreless Putty Primer, which has over 70,000 NotifyMe sign-ups in elfcosmetics.com, Camo Concealer which is helping build our leadership in complexion at a $5 price point and Hello Hydration which offers a prestige quality skincare cream at just $12.

We plan to support these key first-to-mass products throughout the year. To measure how we are doing on this initiative we will track relative rankings by product segment. 

Tarang Amin, CEO, ELF, Q4 2019, 8 May 2019

They are also tightening up on costs to make ELF a lean machine; that is no doubt the reason why they closed the ELF shops which were a distraction and had many employees.

Our last key initiative is cost savings, where the strategic move to close our e.l.f. stores reduced our headcount by around 50pc and is expected to provide G&A [general and administration] savings on an ongoing basis that should help us fund our marketing and digital investments.

Additionally, our tariff mitigation strategy, with the help of vendor concessions and improvements in our China operations will help to offset the 10pc tariff impact. If tariffs rise to 25pc, we look to a mix of further operational savings, selective price increases and FX [oreign exchange] offsets to mitigate the higher tariff rate.

Our other ongoing projects to improve operational efficiencies include our Columbus and Ontario California warehouse automation and U.S. liquid fuel manufacturing, which we expect to generate $3m in cost savings in fiscal 2020.

Tarang Amin, CEO, ELF, Q4 2019, 8 May 2019

Now, let us fast forward to the latest quarterly results which sent the shares up almost 20pc in a day. Let’s just take one item from many exciting initiatives, their international strategy.

Looking outside the U.S., we grew our international net sales 79pc in Q1, fueled by strength in both the UK and Canada. e.l.f paced category growth by nearly 10x in the UK and by over 3x in Canada, fueling market share gains in each. e.l.f. is the number six brand in each of these markets with about a 5pc share as compared to the number one brand which has over 17pc share. We continue to build our international team as we aim to expand our brands globally. Across categories and geographies, the three fundamental drivers of our business remain the same. Our value proposition, powerhouse innovation and disruptive marketing engine.

Tarang Amin, CEO, ELF, Q1 2024, 1 August 2023

Their marketing is amazing.

We had celebrity media buzzing and viewers captivated collectively earning over 20bn impressions from our two new digital content series. I’m proud how we continue to lead with purpose as we strive to create a different kind of beauty company. We recently launched a new purpose-driven series named Show Your(s)e.l.f. featuring role models who have overcome adversity to bring more positivity, inclusivity, and accessibility to the world. The series kicked off with Anastasia Pagonis, a 19-year old blind paralympic swimmer and world record holder who proves that anything is e.l.f.ing possible even in the face of the toughest obstacles.

Tarang Amin, CEO, ELF, Q1 2024, 1 August 2023

Strategy – Dealing With That Kamikaze Dive

If shares fall but nothing has changed to affect your reasons for buying them hang in there and do the kamikaze thing, pump your account with money either to wipe out the margin call completely – the insane kamikaze approach or just to make sure that your equity stays above 50pc so IG does not liquidate your position – the standard kamikaze approach.

If the stock lives up to your long-term expectations these will be fantastically profitable strategies. Remember that shares can fall a long way for technical reasons which have nothing to do with their long-term potential. Particularly if the fall is just a reaction after a steep rise it is especially likely to mean nothing.

Share Recommendations

Nvidia NVDA. Buy @ $444

E.L.F. Beauty. ELF. Buy @ $132.50

Another thing to remember is that like stock markets individual shares climb a wall of worry. There is a constant barrage from commentators who think the shares are overpriced and worry that the next set of quarterly figures might somehow disappoint when expectations are high. Maybe they will a little bit but that is so normal because of the short term horizons of day traders and other stock market participants that usually you do not need to worry.

As long as the story remains intact and the company is delivering the sort of performance that goes with that story and the chart is clearly portraying a share in a long-term uptrend, just hang in there. It is the only way to win big in the stock market and it works for the guys who own and/or manage the company . They have to hang in there and very often that is the right thing to do.

I notice that Kory Morrissette, the incredibly talented chief marketing officer of ELF, who is making waves outside the company with her text book reinvention of ELF’s marketing and brand management strategies, is already worth over $16m. In America there are great rewards for top talent and that is important because it makes it likely that she will stay in a job she does so well and which she obviously enjoys.

Think of companies as football teams trying to make waves in a corporate equivalent of the Premier League and they need their equivalent of star footballers, top talent who are going to command high salaries and make great returns. In America they don’t all go around moaning about C-suite pay [executives with a C for chief in their job title] being too high; they try to be one of them. Aspiration beats envy every time.