Nvidia would have to drop 20 percent for it to be a buy, Miller Tabak says

Nvidia shares surged Tuesday, after a three-day sell-off pushed the stock into a correction.

Even that steep decline has not made its valuation reasonable yet, says Matt Maley, equity strategist at Miller Tabak.

Nvidia stock surged 490 percent over 2016 and 2017. That was nearly 10 times more than the XLK Technology ETF's gain over the same period. In January, its shares rocketed 27 percent higher in its best monthly gain since May.

"It was ridiculously overbought," Maley told CNBC's "Trading Nation" on Monday. "I think the stock has to come back a little bit more. Even if it pulled back 20 percent, that's still nothing."

Nvidia shares entered a correction on Monday after selling off alongside broader markets. At its lowest during Monday's session, the stock was nearly 18 percent from its 52-week high set on Jan. 31. It is still 11 percent lower than all-time highs even as it spends Tuesday in a rebound.

Even after the sell-off, Nvidia has a price-to-earnings ratio of 45.7 times forward earnings, far from the XLK's 17 times forward earnings and the SMH Semiconductor ETF's 15 times forward earnings. Nvidia has one of the highest PE ratios in the chips space, bypassing Advanced Micro Devices, Texas Instruments and Micron Technology. It is the sixth largest U.S. semiconductor company by sales.

Its stock needs to see a little bit more pain until Maley could see it as a buy. He sees a return to its 100-day moving average at around $204 a share as a good entry point to the stock on a technical basis. Its shares are currently around 7 percent higher than those levels.

Before Friday kicked off the sell-off, the semiconductor sector as a whole had seen a multiyear rally on high demand in smartphones and a surge in cryptocurrency mining and trading. But, that demand has created an inflated sense of the industry's stock value, says Michael Bapis, managing director at The Bapis Group at HighTower Advisors.

"They've artificially benefited from great sales in iPhones, from great sales in other products, and from this whole blockchain technology that everybody is talking about," Bapis told "Trading Nation." "If they are going to benefit from that in the future, that's what remains to be seen."

The group rallied more than 30 percent in both 2016 and 2017 in their best back-to-back gains since 2010. Gains in semiconductors have outpaced broader markets since the U.S. election. While the SMH ETF added 43 percent since November 2016, the S&P 500 increased roughly half that at 23 percent.

"At this point, we think it's pretty richly priced as a sector," added Bapis.

Over Friday's and Monday's sessions, the SMH semiconductor ETF lost a combined 7 percent, slightly deeper than the drop on the S&P 500. The ETF tumbled Monday in its worst daily performance since December 2016.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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