If you want solid proof that investors’ unspoken, subconscious expectations are more important than relative results, look no further than Nvidia Corporation (NASDAQ:NVDA). Despite massive revenue and earnings growth for its second quarter of the year — both of which topped analyst estimates — and guidance that was also stronger than anticipated, NVDA stock managed to lose more than 5% on Friday after its Q2 report was released.
What gives?
Perhaps without even knowing it, Nvidia shareholders were looking for something more. Still, it begs the question, what’s next for NVDA stock now that it’s clear even good news is no guarantee that the rally will continue?
A Trio of Tailwinds
For the record, Nvidia bounced back 4% on Monday — the first trading day back from its post-earnings plunge. That’s a clear message the chipmaker isn’t down for the count yet. Some encouraging words from Goldman Sachs and Canaccord Genuity forced traders to rethink their outlook.
Still, the bears tipped their hand, making it clear Nvidia stock is anything but infallible after gaining 67% between the end of April and this month’s pre-earnings peak. Shares were, for all intents and purposes, priced for better than perfection.
While the market’s true view of NVDA stock may not be clear, at least one thing is: If Nvidia is going to sustain its red-hot growth pace, it’s going to do so largely on the back of its graphical processing technologies that support high-performance video gaming.
It’s still the market leader, though the market is shrinking. As of the end of the first quarter, Nvidia still held control of more than 70% of the GPU market, stealing some market share back from rival Advanced Micro Devices, Inc. (NASDAQ:AMD).
It’s conceivable that GPU aficionados and AMD loyalists were holding off on making a purchase of a new graphics card until the release of Advanced Micro’s newest Vega hardware, which just became available in the past few days. It’s a beast to be sure. On the other hand, gamers could have been just as likely to be waiting for Nvidia’s upcoming Volta series of graphics processors, which already out-spec Vegas (albeit at what’s sure to be a noticeably higher price).
And there’s the rub: The race never technically ends.
Assuming today was the finish line, though, AMD’s hardware has a leg up on Nvidia’s currently marketed graphics processing units. As Forbes contributor Antony Leather put it, “Overall it’s a resounding win for AMD here in the Radeon RX Vega 56 versus GeForce GTX 1070.”
The lead may not last with Volta on the horizon. In the meantime, the advent of cryptocurrency mining favors Nvidia right here, right now.
You know what cryptocurrencies are, even if you don’t know you know. Ever heard of Bitcoin? That was the prototypical cryptocurrency, though new ones are being unveiled on a regular basis now. All of them have to be digitally “mined,” though, and Nvidia’s wares are perfectly suited to do that isolated but in-depth task.
And according to analytic outfit RBC, NVDA stock is the best way to make that play. Its analysts recently noted:
“Given Nvidia’s performance lead across numerous categories (gaming and data center) we think the Company is best positioned to become the market leader in GPU based cryptocurrency mining if a new product is released.”
Volta may well be that unnamed product.
Nvidia is also winning the burgeoning artificial intelligence market, though it’s only scratched the surface. Between 2020 and 2025, NVDA believes the advent of AI will put roughly $40 billion worth of business up for grabs. Nvidia is well-positioned to capture more than its fair share of that pie simply because it has such a head start on its competition.
Bottom Line for NVDA Stock
Perhaps more than anything else, Nvidia’s rise and fall and then rebound isn’t a reflection of the company’s performance. As SunTrust Robinson Humphrey analyst William Stein noted after earnings, “Buy this dip. We understand the selloff, but take the other side of that trade.”
Rather, the recent swings are almost an entirely a reflection of the disconnect between the company and Nvidia stock. NVDA shares have become a pawn in something of a psychological chess match. That volatility can work to your advantage though, opening the door to nice entry points for those who want in, as well as opening the door for those who want out by shoving the stock higher.
Make no mistake either way, though. The fundamental undertow is a bullish one that will win out in the end, even if the stock is ripe for near-term profit-taking.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. Follow James on Twitter.
