Nvidia Corporation (NASDAQ:NVDA) possibly ranks among the most contentious enterprises currently from an anticipated capital-gains perspective. 

The core relevance underlying NVDA stock is not in doubt. Thanks to the company’s advanced graphics processing units (GPUs), Nvidia has become one of the top brands in the artificial intelligence ecosystem. Still, with shares rising over 170% on a year-to-date basis, many have naturally developed valuation concerns.

At face value, the circumstances may not seem entirely favorable for NVDA stock. Currently, the market prices its shares at 77.2X trailing-year earnings, while against revenue, NVDA clocks in at over 41X. However, many optimists also point out that by the end of the current fiscal year, earnings per share could land at $2.53, up 109% from the prior year. Also, sales could hit $112.36 billion, up nearly 98% year-over-year.

On the other hand, investors also need to consider the cost of digital intelligence. Without improved energy efficiency, artificial intelligence (AI) data centers could potentially reach a quarter of the U.S. power requirements by the end of the decade, according to Arm Holdings CEO Rene Haas. Furthermore, as researchers at the University of Southern California pointed out, AI makes mistakes, leading to uncomfortable productivity and even legal concerns.

With so much dynamism present in the Nvidia narrative, traders may want to consider two Direxion exchange-traded funds: Direxion Daily NVDA Bull 2X Shares (NASDAQ:NVDU) and Direxion Daily NVDA Bear 1X Shares (NASDAQ:NVDD). The former ETF applies 2X leverage on NVDA stock, appropriate for those who are extremely bullish on the semiconductor specialist. The latter fund attempts to rise in an inverse proportion should NVDA stumble.

Both products represent high-risk wagers that should only be deployed under a short-term framework. With both leveraged funds and inverse ETFs, the risk of the compounding effect – where the daily resetting of the leverage or the inverse exposure (in the case of NVDD) – may eventually disassociate the expected return of the fund versus the actual return.

The NVDU Chart: Since gapping up on May 23 following Nvidia’s blowout earnings for its first quarter, NVDU has been marching higher as largely expected. In the trailing month, NVDA stock gained 42.6% of equity value. In sharp contrast, NVDU is up almost 98% during the same period, thus exceeding expectations.

• On Friday’s close, NVDU hit $129.60, up almost 29% against its 20-day exponential moving average (EMA). Furthermore, the 2X leveraged fund is up 74% against its 50-day moving average (DMA), which is a common barometer of near-term market health.
• A potential risk indicator to consider is the volume trend. Between May 23 to June 14, acquisition volume declined while the price action rose. Ideally, volume should confirm a rally, not contradict it.

The NVDD Chart: Critics who believe that NVDA stock is overvalued have not had their thesis proven right in the market thus far, with NVDD down more than 30% in the trailing month. Nevertheless, the sharply reduced price of the inverse ETF might attract contrarian speculators.

• At the moment, the “bullish” argument for NVDD – which is effectively bearish against NVDA – seems difficult to swallow, with the inverse fund down 15% against its 20-day EMA and down 29.3% against its 50 DMA.
• However, it’s interesting to note that the volume metric for the June 14 session was down nearly 23% from the prior session. That may imply that bearish pressure against NVDD is fading, which may set the table for a possible near-term reversal.

Featured photo by Jacek Abramowicz from Pixabay.