Nvidia Corporation (NASDAQ:NVDA) is on deck to report fiscal 2018 first-quarter earnings on May 9, 2017. Wall Street sees the graphics card maker reporting revenue of $1.91 billion and earnings-per-share of $0.66, good for 47% and 69% year-over-year growth, respectively. Investors will be eagerly waiting for that report because it could help to re-ignite the fading rally in NVDA stock, which now appears range-bound.
The most recent candlestick pattern on the Nvidia stock chart is the doji, which represents indecision in the market. The stock rallied hard in 2016 and the early part of 2017, more than tripling in the process.
But the stock has since then fallen on hard times.
After hitting an all-time high in early February, NVDA stock has been a rollercoaster ride and is currently sitting nearly 15% off that high-watermark.
Good Tidings Baked in for NVDA Stock
Nvidia stock certainly looks like a nice earnings play due to the fact that the company has only missed Wall Street estimates just twice over the last 10 quarters, with its winning streak stretching back six quarters.
But the easy pickings might now be over, and a huge shot in the arm might be needed for the stock to return to those dizzying heights. The investing universe has come to expect miracles from NVDA stock, but a reality check might be served when the company reports earnings.
Several catalysts helped Nvidia stock put up that kind of tour de force performance in 2016. These include positive secular trends in virtual reality, gaming, machine learning, artificial intelligence and automotive. These trends helped Nvidia’s top line expand by an impressive 38% in 2016, up from single-digit growth over the previous two years.
But the good news could now be fully baked into NVDA stock.
Speculative Premium for NVDA
There are real concerns that that kind of robust growth that Nvidia has been enjoying might not be sustainable over the long-term. Famous Wall Street short seller Citron Research called NVDA stock in late December saying that whereas the company had been touting newer plays such as AI and VR, much of the company’s gains in 2016 actually came from stealing market share in traditional markets, including PC and gaming graphic chips. Citron observed that Nvidia would be hard-pressed to continue stealing market share against incumbents which limits future growth potential and leaves the company open to competition from the likes of Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD).
Indeed, several analysts have recently fired a warning regarding the vulnerability of Nvidia. The stock tumbled 7% in early April after Pacific Crest’s Mike McConnel warned of a possible pause in the datacenter business. Data center revenue accounted for just 13% of NVDA’s revenue during the fourth quarter, but is easily one of the company’s most important growth engines with a growth rate of 200%.
But what’s particularly worrying is the softness in Nvidia’s core GPU business. BMO Capital Markets has reported that channel checks suggests that the company’s super-charged graphics cards business might slow down earlier than expected. The analyst found that Q1 desktop graphic cards shipments were down 16% quarter-over-quarter, a much bigger drop than the three-year seasonality drop of 6% QOQ.
Stakes Are High for Nvidia Stock
The stakes remain high for NVDA stock. Investors will not only be looking for the company to continue its robust top- and bottom-line growth, but they will also be waiting for solid guidance. Any weakness in that report could open up immediate downside risk for the stock.
Nvidia stock could therefore be standing on shaky grounds. Investors are likely to be feeling particularly squeamish after AMD stock recently tanked 24% post Q1 earnings, the biggest single-day hammering in almost a decade. AMD actually delivered a decent quarter with solid financials, but it still wasn’t enough to support the huge speculative premium, hence the drop. It would of course be unfair to compare Nvidia with AMD, but the stock could be trading on a good chunk of speculative premium as well. This heightens the risk of a big correction after earnings.
NVDA stock has major support at $97.3, which is more than 6% below its current price. However if the Nvidia earnings report is hugely disappointing, the stock could fall off a cliff before testing the next major support level of $82.6. That’s a jaw-dropping 20% downside potential.
As of this writing, Brian Wu did not hold a position in any of the aforementioned securities.
