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A Deal with VMware Helps Nvidia, But Not NVDA Stock

Will Healy

Nvidia (NASDAQ:NVDA) will partner with VMware (NYSE:VMW) and Amazon’s (NASDAQ:AMZN) Amazon Web Services on an artificial intelligence initiative. The graphics chip maker will provide an accelerated GPU technology for VMware Cloud on Amazon Web Services. This partnership is designed to help customers of Nvidia and VMware streamline work.

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One might think that such a deal would boost Nvidia stock. However, with economic and trade concerns looming, investors should not buy NVDA on this news alone.

VMware Deal Helps, But Competition Looms

The new release, called vComputeServer, will support large businesses who use AWS. This technology will facilitate VMware’s vSphere-based applications move to the cloud. It will also give customers access to features such as data analytics, video processing and machine learning.

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This also enhances Nvidia’s strategy to explore new markets and partner with large enterprises on AI. Only time will tell how much help that offers to Nvidia stock. Advanced Micro Devices (NASDAQ:AMD) does not sell a dedicated AI chip, for now. However, this puts NVDA in direct competition with Intel (NASDAQ:INTC). Intel recently announced that it would develop a Nervana AI chip for deep learning and deep learning inference.

Nvidia will also have to worry about competition from China. As InvestorPlace contributor Dana Blankenhorn mentions, Chinese tech giant Huawei will soon launch a competing AI chip. Huawei is also planning an expansion of its industrial layout. This is important to Nvidia stock because of competition. It also holds implications for the U.S.-China trade war, a phenomenon that many see as the biggest driver of NVDA stock currently.

From a short-term standpoint, I agree with Blankenhorn’s trading strategy. Buy Nvidia stock when President Donald Trump tweets negative things about China and sell when he speaks nicely of the country. However, this is InvestorPlace, not TraderPlace. As such, readers also want to know about the long term.

NVDA Could Go Either Way

At these levels, I see NVDA as fairly valued. The equity trades at a forward price-to-earnings ratio of about 22.7. On the profit front, a chip glut has reduced profits across the industry. Still, over the next five years, Wall Street predicts average annual growth of 12.5%.

I see this multiple as low for a company that will define the cutting edge of technology in many respects. Once consumers and businesses adopt this technology on a broader scale, Nvidia stock will see significant benefits.

However, macroeconomic conditions may not support higher multiples in the near term. Yield curve inversion, a sign of a looming recession, continues to worsen. Moreover, the length of the current economic expansion, almost 10.5 years and counting, increases the risk of a downturn. The 0.4% dividend yield is no reason to stay in Nvidia stock under these conditions.

Further, Trump has spoken nicely of Chinese President Xi Jinping this week, something that has set up NVDA for a fall in coming months. Admittedly, a true end to the trade war would probably boost Nvidia stock. However, rhetoric and deals are two different things. Until we see a signed trade deal, NVDA stock will see limited potential even with the VMware partnership.

My Final Thoughts on Nvidia Stock

The VMware deal will help Nvidia but may not boost NVDA stock. Without a doubt, partnering with both VMware and Amazon raises the profile of the leading graphics chip maker. However, Nvidia stock will continue to trade on China worries. If anything, those worries may have become more acute. With Huawei emerging as a competitor, the job of penetrating the Chinese market becomes that much more difficult.

Nvidia stock faces other challenges as well. A possible recession will probably bring struggles with multiple expansion. Although most would not consider a 22.7 forward multiple high for this stock, it still leaves room for contraction.

I think the deal with VMware will further raise the profile of NVDA, and those benefits will eventually accrue to Nvidia stock. However, at current levels and conditions, the stock could just as easily fall as rise.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.

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