Despite a rough few weeks in the tech sector, graphics chip maker Nvidia (NASDAQ:NVDA) may be set for a bounce. Reporting both revenue growth and an increased net income, the Nvidia stock price rose 7% after the company released second-quarter earnings today that beat analysts’ estimates. And those estimates were already on the optimistic side.
Yet, despite the strong operating performance, NVDA stock has somewhat lagged the market for most of the year, and even now, with this surge, isn’t impressing too much. Nvidia stock is now trading at $159, showing about an 19% increase for the year. That compares to the 15% gain year to date for the S&P 500 Index and 20% for the Nasdaq Composite.
Nvidia reported adjusted earnings per share of $1.24 for its fiscal second quarter, versus the Wall Street consensus of $1.15. Revenues increased slightly from $2.222 billion in the first quarter to $2.58 billion for the quarter ending July 29. The overall improved performance suggests that the recent slump in orders of high-end graphic chips has eased. The chip market may be headed towards a revival in demand from video game makers as well as large data centers.
So are we set for a longer-term rebound in NVDA stock? The fundamentals certainly look strong.
Here are three reasons why Nvidia may be a buy after the recent solid earnings release.
Strong Revenues for Nvidia Stock
Revenues across all business units increased from the previous quarter, according to Nvidia’s earnings release. Chief Executive Officer Jensen Huang explained on the earnings call that the recent slowdown in sales of video-gaming chips and processors for artificial intelligence computing was temporary. In recent quarters, revenues had shrunk slightly for three straight quarters. Huang attributes this to the fact that customers had been working through stockpiles of unused inventories.
But now, Huang sees that customers are starting to buy again.
The Hugh Bet on AI May Soon Pay Off
The often overlooked driver of future NIDIA stock price is it’s up and coming product offerings in artificial intelligence (AI), a gargantuan market that is only beginning to take off. Nvidia’s is carefully investing in domination in the AI market, which may be worth over $15 trillion by 2030.
Indeed, the AI sector faces brutal competition, particularly from rival chip markets such as Advanced Micro Devices (NASDAQ:AMD) and the giant Intel (NASDAQ:INTC), who are all aggressively investing in offering products in the AI market.
However, the AI market will grow to such an enormous size, that there will undoubtedly be room for more than one winner. “The competition should show up with something,” CEO Huang said. “AI is going to be a large market for everybody, and the growth is ahead of us. The bottom is behind us.”
To some extent, NVDA has a bit of a first-mover advantage. For example, Nvidia pioneered the use of graphics chips to run AI software in the data centers that offer cloud computing. Its line of GeForce processors have proven to be the top choice for PC gamers demanding the highest performance and the highest resolution.
Timing in Chips is Everything — and Now May Be the Time for NVDA
The chip market is notoriously cyclical. Between the specter of a trade war with China, concerns about an upcoming consumer recession in the US, to the feast or famine culture of computer hardware supply chain – particularly in the video gaming industry — chip stocks are highly volatile.
For example, last year, Nvidia stock dropped from a high of $292 in September down to $129 just three months later. More recently, the NVDA stock price went from $178 in late July to $147 just before the earnings release. At the present level of $149, Nvidia stock has probably bottomed out for the time being. With whatever doubts about a chip market slow down behind it, the stock may now be at the beginning of an upcycle.
Certainly, Nvidia is operating in a tough market with formidable rivals. However, most all the bad news about a market slow down, and aggressive pricing by its rivals is now baked into the price. Investors in chip stock focus on cycles and are well prepared for a ride. For Nvidia stock, we may have passed the market bottom and set for an eventual upswing.
As of writing, Theodore Kim has no exposure to any of the above-mentioned stocks.
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