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Nvidia Earnings On The Horizon: Can The Semi Rally Continue?

Daniel Laboe

My favorite semiconductor pick, Nvidia NVDA, is releasing its Q3 earnings after the bell Thursday, November 14th. This report is on the heels of a strong resurgence back into the chip maker’s space. Industry leaders Intel INTC and TSMC TSM both put year-over-year growth back on their income statements in earnings releases last month, propelling the sector to all-time highs.

Nvidia's primary competitor in the GPU space, AMD, reported earnings at the end of October. The company missed revenue estimates and just barely met EPS expectations, though the market still bought up this chipmaker's shares.

AMD is up almost 14% since its earnings report, and the reasoning its year-over-year growth in GPU and CPU segments. Whether this means it gained market share or the market itself is expanding will be illustrated in Nvidia's earnings tomorrow evening.

NVDA is up almost 20% since the beginning of October, far outperforming the sector and the broader market. The market has priced in a strong Q3 report following good results from its cohorts. Now the question is whether or not Nvidia can meet the market's sizable expectations in their report tomorrow?

NVDA has the potential to be a big mover on earnings, with two substantial double-digit moves in the past 10 quarterly reports. Zacks Consensus estimates for Q3 are an EPS of $1.24 on sales of $2.9 billion, which would represent a decline in both metrics.

The semiconductor industry has seen a cyclical decline as customers needed time to digest its most recently acquired tech. This chip demand stall is coming to an end, and growth is coming back into the space propelling stock prices up. 

The Business

Nvidia invented the GPU and is the largest producer of GPUs globally. For those of you who don't know, GPU stands for graphics processing unit with its primary function being to render images. Nvidia's high-quality GPU's are unmatched in functionality, though AMD typically beats them on price point. Nvidia's chips are beginning to have utility far beyond just rendering images with its speed and functionality become essential in machine learning and the development of AI.

According to Market Watch, 97.4% of infrastructure-as-a-service (IaaS) cloud-based technology uses Nvidia's GPU. Though the gaming community is still driving most of the firm's revenue, its data center potential is enormous. Below is a breakup of Nvidia's primary revenue drivers, taken from its investor relations site.

Nvidia is broadening its gaming product offering with a cloud-based system that could change the future of this industry.

Cloud Gaming

Like cloud computing is the future of business data and analytics, cloud gaming is the future of gaming. Nvidia is making a big bet in this field with its cloud platform, GeForce NOW. This platform allows gamers to use their Macs or PCs for gaming anywhere with the high-speed, low-latency technology of Nvidia’s GPUs without needing Nvidia’s hardware locally.

Nvidia is teaming up with telecommunication providers “to expand and improve the cloud gaming experience globally.” Getting in front of the 5G wave to be prepared with a ‘turnkey solution’ once 5G is widely available.

GeForce Now is currently in the beta stage, but gaming forums are already calling this the best cloud-based gaming platform. The anticipated price of this subscription-based service is $10 monthly.

Subscription-based revenue is king in the tech-space today with a consistent stream of sales that grow quarter-over-quarter. This new topline driver may be just what Nvidia needs to take its share price to new highs.

Google GOOGL and Microsoft MSFT are working on their own cloud gaming services though I believe that Nvidia and its PC gaming community are niche enough not to lose much market share in their space.

Take away

Nvidia is starting to show quarter-over-quarter growth as the semiconductor sector begins to pick up. Expect this trend to continue in this upcoming earnings release.

There is a substantial amount of growth potential in deep learning and cloud computing with the expanding use of GPUs over CPUs in this space. The AI economy is estimated to be worth $15 trillion, and NVDA could be a sound ground floor investment.

Nvidia's diverse portfolio of GPU functionalities gives me confidence that this firm is going to continue to impress the markets in the years to come. Regardless of what happens in this earnings report, NVDA is a robust long term investment for your stock portfolio of the future.

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