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Take Advantage as Nvidia Corporation Stock Gets Punished for Success

Dana Blankenhorn

You know a company is hitting on all cylinders when a blow-out quarter causes the stock price to fall. But that happened after trading closed May 10 with Nvidia Corporation (NASDAQ:NVDA), the graphics chip maker that is leading the way in gaming, self-driving cars and cloud artificial intelligence. Here’s why Nvidia stock had a not-great day.

The shares dropped 2.3% overnight after it reported earnings of $1.24 billion, $1.98 per share, on revenue of $3.2 billion, with gross margins of 64.5%. Nvidia also said it will pay a dividend of 15 cents per share on June 15, payable to shareholders of record May 24 and send $1.25 billion to shareholders through dividends and buybacks during the current fiscal year.

What’s not to love? Net income up 145% year over year, revenue up 66%?

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Too much came from cryptocurrency miners, claimed the bears.

Their Profit Taking, Your Profit

In other words, some traders were looking for an excuse to take profits, and there’s no reason why they shouldn’t.

Over the last year Nvidia stock has gone up a whopping 105%, against the 18% gain in the Dow Jones average. The rise has been especially pronounced in the last month with shares going from $216 to $265 in just 11 trading days.

The cryptocurrency warning came from Nvidia itself. It broke out how much it got from “mining” companies, which use fast graphics to figure out answers to the numerical puzzles underlying Bitcoin and other forms of crypto.

Nvidia said those companies represented $289 million in revenue during the quarter, 23% of its total, and they expect it to fall by two-thirds in the current quarter.

This doesn’t mean there isn’t enormous demand for what Nvidia is offering. CEO Jensen Huang was complaining that gamers were unable to buy Nvidia’s GEForce cards for their computers because miners grabbed them all. Now they will be able to get them.

There are, in fact, no indications that demand for Nvidia products is slowing down. If anything, it is accelerating, as clouds are upgraded for AI applications. Gaming was Nvidia’s original niche. Huang was apologizing to his best customers.

It Is Pricey, Though

Of course, Nvidia stock is pricey. It opens for trade May 11 at over 50 times earnings. The market cap of $157 billion is about 17 times the company’s revenue. Facebook Inc. (NASDAQ:FB) sells at about 13 times revenue.

The market is also overpriced and wobbly. Analyst Barry Ritholtz noted on Twitter recently that stock buybacks are keeping shares high, and that’s a one-time thing caused by the tax cut.

In his morning call May 11, TV analyst Jim Cramer, who has nicknamed one of his dogs after the stock, explained how the current psychology could have caused Nvidia to fall.

He said he took profits ahead of the Wednesday close, after the company passed his own price target. “You do have to respect your own homework,” he wrote.

The blowout quarter caused him to raise his price target to $290 per share and look to buy back shares if they get anywhere near $240. The shares were due to open at $253.

The Bottom Line on Nvidia Stock

You need a little list of companies whose stocks you’re going to buy when the market panics as it has three times this year, starting in January, March and April. The Dow is currently 1,900 points from its all-time high, no longer in correction territory and rising, in general.

But it will panic again. It’s something you can expect to happen in the wake of an ever-changing news cycle. When it does, get out your list and start buying.

Just make sure Nvidia is on that list when you do.

Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.

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