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What to Know Before Jumping Into Nvidia Stock

Tezcan Gecgil

On Aug. 15, Nvidia (NASDAQ:NVDA) reported Q2 of fiscal 2020 earnings. Investors overall seemed pleased with the results. After hours, NVDA stock went up over 5% to close at $157.09.

Shield TV Won't Move Nvidia Stock Today, but Its Potential Is for Real

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Today, let us take a closer look at Nvidia stock’s results to see if long-term investors may find value in NVDA shares around these levels.

Nvidia Stock’s Q2 Earnings

Nvidia is a pioneering maker of graphics processing units for gaming and professional markets. NVDA sells two main products: graphics processing units (GPU) and Tegra processors. GPUs accelerate central processing units (CPUs), boosting the performance of video and graphics and improving computers’ overall output.

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Analysts are concerned about the recent slowdown in the chip sector coupled with worries over U.S.-China trade wars. However, globally there are important growth areas, such as artificial intelligence (AI), autonomous vehicles, 5G, as well as high-performance computing and gaming. These technologies depend on the bigger graphics processing capabilities of Nvidia, Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD). All three companies work hard to gain market share.

During the quarter, NVDA stock’s revenue rose 16.2% sequentially but fell 17.4% year-over-year (YoY) to $2.58 billion. Similarly, the adjusted EPS rose 40.9% sequentially but fell 36.1% YoY to $1.24.

In Q2, Wall Street was expecting Nvidia to report revenue of $2.55 billion and adjusted EPS of $1.15.

Over the past several quarters, Nvidia stock has experienced a steep decline in revenues post-crypto bust. Therefore, the better-than-expected results pushed up the stock price after hours.

Nvidia stock is trading at a forward PE ratio of almost 29. In comparison, Intel stock’s forward PE stands at about 11. Therefore, going forward, shareholders will want NVDA management to deliver even stronger results so that the stock price warrants the rich valuation metric.

How NVDA Stock’s Important Segments Reported

In the earnings report, analysts paid attention to five segments that drive its revenues: gaming, data center, professional visualization, automotive, and edge computing.

For years, NVDA has been a leader in the competitive graphics-card market. However, in recent months the battle for market share between Nvidia and AMD in that segment has intensified. As AMD launches its Navi cards, AMD’s GPUs will likely take market share from NVDA in the video-game chip sector.

Similarly, data center competition from Intel has increased. Nvidia recently spent $6.9 billion to buy the data center networking company Mellanox. In other words, Nvidia is telling the markets that it is not just going to be a GPU company any more.

In Q2 the group’s revenue data center revenue rose 3.3% sequentially but fell 13.8% YoY to $655 million. Nvidia’s data center business revenue missed analysts’ consensus estimate of $668.5 million.

Gaming accounts for about 40% of Nvidia’s total revenue. NVDA stock’s sales from the gaming segment went up by 24.5% sequentially but fell 27.3% YoY to $1.31 billion. Nonetheless, the segment revenue beat the consensus estimate of $1.3 billion.

In recent months, investors have been worried about the company’s growth outlook, which is mostly based on its GPUs for gaming and artificial-intelligence servers. Nvidia’s EPS and Nvidia stock price are very closely linked to the sales trends of its GPUs.

For Q3, NVIDIA expects to book revenue of $2.9 billion, plus or minus 2%. That number is below the projected $2.98 billion for the quarter.

Nvidia Stock Technical Charts Signal More Volatility

On Aug. 15, before reporting Q2 earnings, NVDA stock closed at $148.77. Over the past year, Nvidia stock price is down about 40%, and the shares have been quite volatile. Its 52-week range has been $124.46-$292.76.

As a result, the technical outlook of NVDA stock has been damaged. Its short-term chart still looks weak, and Nvidia stock price looks poised to exhibit even further volatility in the near-term.

NVDA’s momentum indicators, which describe the speed at which stock prices move over a given time period, have been in oversold territory for some time. Therefore, a relief rally is expected and likely to come following the quarterly results. My initial expectation is for NVDA stock to race toward $170, where it is likely to have significant resistance.

However, a couple of day’s move does not make a definite trend. More buy signals based on momentum indicators need to be confirmed before Nvidia stock can become a long-term buy from a technical standpoint.

It is important to remember that Nvidia is a momentum stock. Therefore, if you are worried about what would be a viable entry point into NVDA shares, I’d suggest that long-term investors wait until Nvidia stock builds a firm base between $165 and $145.

If you already own Nvidia shares, you may consider hedging your position with monthly ATM covered calls. Such a strategy would enable you to benefit from an upside move and give some protection in case of profit-taking after the initial move up following the results.

If the current trade tensions are swiftly resolved and the broader markets rally, Nvidia stock price could easily continue its rebound. In that case, the technical charts would need to be reevaluated.

Bottom Line on Nvidia Stock

Despite the semiconductor industry’s headwinds and cut-throat competition from AMD, there is strong demand for Nvidia’s graphics processors, for use not only in video games but also in data centers and work stations. Industry experts also regard NVDA as a top player in the AI chip space, and its graphics chips are highly sought after for use in deep-learning applications.

Nvidia is also exploring smart-city solutions, which exploit its proficiency in artificial intelligence and data analytics. In other words, the company is somewhat shifting its focus from processors to providing the full technical backbone for AI ecosystems. As the use of artificial intelligence and machine learning continues to rapidly grow, NVDA’s AI business could expand exponentially.

However, given the volatility of Nvidia stock price over the past year due to the ongoing questions about the fundamentals of the company and its sector, I would urge investors to be cautious about NVDA stock.

The U.S.-China trade war has not helped NVDA, either, as China accounts for nearly a quarter of Nvidia’s sales. The headwinds of the sector make many analysts wonder whether NVDA can, in the near future, regain the kind of rapid and sustained growth that investors got used to in recent years.

Although Nvidia stock will likely reward long-term investors, tech stocks may remain volatile over the next few weeks. A couple of negative macro or global news headlines may drive the Nvidia stock price down. If that occurs, long-term investors will be given a better entry point in Nvidia stock.

As of this writing, Tezcan Gecgil hold INTC covered calls (Aug. 23 expiry).

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