Well, so much for that bubble popping. When Nvidia Corporation (NASDAQ:NVDA) announced blowout earnings last week and the stock proceeded to sell-off anyways, it seemed a lot of bears were saying that the NVDA stock bubble had popped.
For a brief moment, it looked like they were right. Nvidia stock had come into the report up 60% year-to-date, after a monstrous 200%-plus run in 2016, and it was trading at a rich valuation. A double-beat and higher guide just wasn’t good enough.
Pop. NVDA stock dropped.
But usually when bubbles pop, the sell-offs are huge. And they continue with ferocity.
But Nvidia stock only dropped 5% after its report. And it has since rebounded most of its losses.
That’s because Friday’s post-earnings sell-off wasn’t a bubble popping. It was just a natural pullback in a secular growth narrative.
And that means the sell-off is an excellent opportunity to buy NVDA stock at a relative discount.
Nvidia Didn’t Have A Clean Beat In Q2
When you do have the growth profile of NVDA stock going into an earnings report (up 60% YTD and with a rich valuation), not only do you need to beat and raise, but the beat needs to be clean. And by clean, I mean it has to be driven by the company’s secular growth segments.
That isn’t what happened with Nvidia in the second quarter. The big beat was driven by cryptocurrency mining. While that is a current tailwind, how long it lasts is a complete wild card.
Meanwhile, the company’s secular growth segments that investors really care about (Data Center and Automotive) actually fell short of expectations.
The Data Center segment, which has been on fire due to hyperscale data center demand ramp, reported revenues of $416 million versus expectations for $423 million. The Automotive segment, which has also been on fire recently due to demand ramp for autonomous driving technology, reported revenue of $142 million versus expectations for $146 million.
So it wasn’t a clean beat at all. It was actually more of a miss, because the beat was driven by what many are considering a one-off tailwind from cryptocurrency mining. That’s why the stock sold off.
NVDA: Long-Term Growth Looks Promising
But the sell-off was minor and short-lived because the Data Center and Automotive misses were just short-term noise in very powerful secular growth narratives.
On the DC side, the temporary slowdown in revenue growth was due to a pause in customer spending ahead of the launch of NVDA’s new flagship GPU, the Tesla V100. Essentially, customers stopped buying Nvidia’s prior flagship GPU, the Tesla P100, because they were waiting for the Tesla V100 to come out.
This is a natural and temporary headwind in a compelling upgrade cycle. Just think about Apple Inc. (NASDAQ:AAPL). iPhone shipments usually aren’t great ahead of highly anticipated iPhone launches because consumers are waiting for the next big thing. That next big thing launches, everyone buys it, and the growth story gains significant momentum.
That is what will happen with NVDA, and why I am confident the growth story will only get stronger from here.
On the Automotive side, Nvidia currently has a major dependence on Tesla Inc (NASDAQ:TSLA), so results will naturally be noisy on a quarter-to-quarter basis. But as the autonomous driving market scales, and more players enter the fold, this quarter-to-quarter noisiness will be largely muted.
In other words, the autonomous driving market is still in the first inning. A $4 million miss in the first inning doesn’t really say anything about the outcome of the game.
Bottom Line on NVDA Stock
It’s already bouncing back.
Clearly, the market does not want to sell this name, and with good reason. Yes, the company missed in its critical growth segments, but each only missed by small amounts. Those small misses are just near-term noise and are rather meaningless in the bigger picture.
This sell-off wasn’t a bubble popping. It was just a natural pullback in a secular growth stock. That pullback is now over, so it’s time to get back on the horse and ride this stock higher.
As of this writing, Luke Lango was long NVDA.
