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How Will Nvidia Stock Hold Up Amid Tough Competition From AMD?

Tezcan Gecgil

Nvidia (NASDAQ:NVDA) is a pioneering maker of graphics processing units for gaming and professional markets. Since Oct. 2018, Nvidia stock price has been under pressure and over the past 12 months, Nvidia stock has slumped about 32%.

Nvidia (NVDA) Is Encountering Tough Competition From AMD

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For years, NVDA stock has been a leader in the increasingly competitive graphics-card market. Today, I want to discuss the recent battle for market share between Nvidia and Advanced Micro Devices (NASDAQ:AMD), which has been regarded as the perennial runner-up to NVDA.

AMD is expected to report its Q2 earnings on July 24, about three weeks before the expected release of Nvidia’s earnings. Therefore, in addition to paying attention to Nvidia ‘s fundamentals, investors may want to pay close close attention to AMD’s results, which may very well impact Nvidia stock price.

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Investors Regard NVDA as the Premiere Graphics Chip Stock

Previously much loved by investors, especially in 2017 and most of 2018, Nvidia stock gets a lot of attention, compared with other chip stocks. In 2015, Nvidia stock price was hovering around $20. In Oct. 2018, it hit an all-time high of $292.76. On Dec. 26, 2018, it reached a 52-week low of $124.46. In late morning trading today,  Nvidia stock price was about $170.

NVIDIA 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 performance.

Nvidia’s GPUs are used in PCs and data centers. Tegra is a system-on-a-chip (SoC) suite developed by Nvidia for mobile devices. For example, Nintendo’s (OTCMKTS:NTDOY) Switch uses Tegra. But  Tegra only accounts for about 10% of NVDA’s total revenues.

The company’s GPUs have earned a superior reputation compared to competing products, particularly within the gaming industry

Gamers have not hesitated to pay considerably more for better performance. And for years, NVDA’s superior product quality and performance have translated into large revenue and market share, boosting Nvidia  stock price.

What to Expect From Nvidia’s Q2 Earnings

NVDA is expected to report its earnings on Aug. 15. When NVDA reports its results, Wall Street will pay attention to the company’s five segments that drive NVDA’s revenues, i.e., gaming, data center, professional visualization, automotive, and edge computing.

Gaming accounts for over 40% of Nvidia’s total revenue. During Q1, the unit’s revenue tumbled 39% YoY. Investors are quite worried about the company’s fundamental 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.

NVDA’s chips had been dominant in PCs. However, a higher percentage of the industry’s  games are being played on consoles now, and NVDA’s GPUs aren’t usually incorporated into consoles. Sony (NYSE:SNE) is, for example, using AMD’s products in its consoles.


Analysts have noted that the crypto craze, which for the most part waned in 2018, can no longer be relied upon to further boost Nvidia’s GPU business. Long-term owners of Nvidia stock may well remember that the increase in Nvidia stock price in 2015 largely coincided with the popularity of cryptocurrencies like Bitcoin. Indeed, NVDA’s fall from grace started with the collapse of the cryptocurrency craze, which has dealt a blow to the top and bottom lines of NVDA.

Wall Street it also concerned that NVDA’s automotive business, based on the advent of artificial intelligence (AI)-powered autonomous vehicles, may suffer in coming months. Currently, automotive is the smallest of all of NVDA segments, accounting for just over 5% of its revenue.

The current U.S.-China trade war has not helped NVDA, either, as nearly a quarter of Nvidia’s sales comes from China. 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 had grown used to in recent years.

In its Q1 results, reported in May 2019, NVDA beat analysts’ average revenue estimate by 1 %. Furthermore, NVDA expects its full-year revenue to be flat in fiscal 2020. In recent  years, Nvidia has managed to keep its revenues intact, in part by increasing its prices. But now that AMD is becoming a serious contender, can NVDA continue to rely on price hikes?

Could NVDA Be Dragged Into a Price War?

Nvidia is dominant in graphics processing units (GPUs).  And until 2019, Advanced Micro Devices (NASDAQ:AMD) mostly played catch-up with Nvidia in GPUs.

But during the current quarter, AMD is expected to start selling graphics cards utilizing its 7-nanometer (nm) chips, which are touted as highly power-efficient. As AMD launches its Navi graphics cards featuring the company’s 7-nanometer chips, it’s confident that its GPUs will take market share from NVDA’s chips in the gaming segment.

Over the past few weeks, responding to AMD’s new products, Nvidia’s management has taken several steps,. Specifically, NVDA launched new “Super” versions of its RTX  GPR offerings, i.e., RTX 2060, 2070, and 2080. These new versions are  considerably faster than their predecessors, but NVDA is selling the new chips at the same prices as the old ones, effectively cutting its prices.

AMD responded by reducing its own prices, making investors wonder if either chip maker  will benefit from these recent developments.

Should Long-Term Investors Buy Nvidia Stock Now?

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.

NVDA 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.

As new frontiers in technology, such as the internet of things (IoT), artificial intelligence, autonomous driving, and 5G, are developed, I am hopeful that Nvidia’s earnings will climb tremendously, lifting Nvidia stock price. Thus, I am also upbeat on the long-term outlook of NVDA.

However, in the short-term, effectively lowering its prices to compete with AMD may not necessarily translate into larger market share and a higher stock price for Nvidia.

Although Nvidia stock will likely reward long-term investors, tech stocks may remain volatile over the next few weeks. A couple of negative earnings-related or macro-economic news headlines may drive many stocks, including Nvidia, down. Such a decline of Nvidia stock price could provide long-term investors with a better entry point.

Investors may consider waiting on the sidelines if they do not currently have any positions in Nvidia stock. I’d consider going long the stock if its price drops back below $150.  The shares will be even more attractive on a drop toward $125.

Investors who already own NVDA may consider either taking some money off the table or hedging their positions. As for hedging strategies, covered calls or put spreads that expire on Aug. 16  could be appropriate, as straight put purchases are likely to be expensive due to the heightened volatility of NVDA.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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