Nvidia Corporation (NASDAQ:NVDA) has been one of the hottest plays in the U.S. stock market this year. But of late, NVDA stock also has been one of the most volatile. Momentum plays are tricky enough, but even more so in the midst of stalling action, and when valuation concerns are part of the calculation.
So is now the right time to jump aboard Nvidia, or should investors wait for some kind of resolution?
Nvidia’s Current Setup
Nvidia reported second-quarter earnings earlier this month and absolutely clobbered expectations. Earnings of $1.01 per share came in 31 cents ahead of estimates, while revenues grew 56% to $2.23 billion, which was $270 million higher than the consensus bar. Sales guidance for Q3 surprised to the upside, too.
How do analysts keep underestimating Nvidia so much? Even the Street’s above-consensus expectations weren’t close.
NVDA stock initially fell by about 7% despite this excellent report. However, shares clung to the 50-day moving average before being propelled back higher. This is a bullish development that washed out some of the “weak hands.”
I also like that we got a high-volatility event out of the way, with Nvidia showing us business still is strong. Plus, we also have a risk/reward setup to trade against that I’ll discuss in a minute.
Nvidia still has some momentum on its side. Hedge funds like it. The public likes it. It’s positioned in high-growth markets including artificial intelligence, autonomous driving, video games, the datacenter and even cryptocurrency.
Valuation might typically be a deterrent to investors, but with Nvidia, that doesn’t seem to be the case. NVDA stock trades at more than 11 times sales and more than 40 times next year’s earnings estimates, so it isn’t cheap. Yet like Tesla Inc (NASDAQ:TSLA) and Amazon.com, Inc. (NASDAQ:AMZN), Nvidia doesn’t really trade on valuation.
Analysts do expect sales to taper off to just 9.5% growth in 2018 after a 40% ramp this year, but I believe those estimates are conservative given just how many fields Nvidia is creeping into. So while Nvidia stock isn’t cheap, underestimation is a big part of the bull case.
As long as expectations remain tepid, Nvidia has room to impress investors, sending shares even higher.
Competition
Yes, Nvidia’s competition is baring some fangs. Intel Corporation (NASDAQ:INTC) recently closed on its Mobileye deal, which will propel it into self-driving cars. Advanced Micro Devices, Inc. (NASDAQ:AMD) has come out with new Ryzen Threadripper to take share in the high-end CPU market.
Again, I normally would be worried, especially with Nvidia’s valuations as high as they are. NVDA would need everything to go right to justify its multiples, and resurgent rivals don’t help that.
However, Nvidia isn’t just a dominant presence in key markets — in fact, a market leader in some — but a constantly innovating presence. While some may defect for, say, AMD’s lower-priced Ryzen products, Nvidia still has it where it counts, and that’s high-end performance. (This isn’t a knock on Advanced Micro — its products aren’t just cheap, but boast some quality, too — but I think it will cause more headaches for Intel than Nvidia.)
Trading NVDA Stock
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Momentum is the sole driver in Nvidia right now. So long as investors want to own the stock and business remains strong (which we can say it is for a couple months until Q3 earnings), the stock’s natural path is higher.
In situations like this, it’s often best to follow the path of least resistance. Right now, up is the path of least resistance.
It might seem tough to buy in now if you already missed the move from $95 to $165, but we do have a defined risk-reward setup. Using the recent earnings-day low as our stop-loss, short-term traders have a downside level against which they can trade.
Long-term investors may be waiting for a better price, which may happen on a market-wide correction. You could consider buying NVDA stock on a decline to $140, or $120 if you’re both patient and insistent on being able to wring out some serious value.
Nvidia is a buy-worthy company that will grow for years to come. Some of us just need the dip.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell held a position in AMD.
