Nvidia Corporation (NASDAQ:NVDA) stock has been on a huge rally recently. NVDA stock is up more than 15% over the past month and has solidly overtaken the $200 level.
It seems like this is a growth stock that just can’t be stopped.
But it pays to remember that every once and a while, earnings are a road bump in this growth story. Just look at the most recent earnings report. Despite big beats, NVDA stock dropped more than 5%. The same thing happened in February 2017, when a big earnings beat resulted in NVDA stock dropping.
What do those two earnings reports have in common?
NVDA stock had rallied big into both of those prints. But when NVDA doesn’t rally big into earnings, NVDA stock tends to jump big on solid numbers. See the May 2017 and November 2016 reports.
Overall then, NVDA earnings are a “sell the news” event when the stock has rallied big into the report. They are a “buy the surprise” event when the stock has been flattish into the report.
Watch Out For NVDA Earnings
Where does NVDA find itself today?
Well, the stock has rallied 33% since the last earnings report. That puts NVDA stock in the ballpark of where it was prior to the August 2017 and February 2017 reports. Prior to the August 2017 report, NVDA stock had run up 35% since the last earnings report. Prior to the February 2017 report, NVDA stock had run up 32% since the prior earnings report.
After both the August and February 2017 reports, NVDA stock dropped.
Consequently, it looks like NVDA earnings are a “sell the news” event this time around. I expect shares to drop in response to the quarterly numbers. My conviction in this is strengthened by looking at how Advanced Micro Devices, Inc. (NASDAQ:AMD) stock dropped after its strong quarterly report.
Its also worth noting that Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NADSAQ:GOOG,NASDAQ:GOOGL) jumped on strong quarterly numbers after those two stocks struggled heading into the print. Netflix, Inc. (NASDAQ:NFLX), on the other hand, fell on strong quarterly numbers. NFLX stock, like NVDA stock, had staged a huge rally into the quarterly print.
Buy Any Dips in NVDA
Obviously, those post-earnings dip in NVDA stock were terrific buying opportunities. After all, NVDA stock is currently 33% above its post-August earnings low and 83% above its post-February earnings low.
I think any post-earnings dip we see in NVDA stock this time around should be bought.
I’m comfortable with this stock below $220. Consensus street estimates call for 27% earnings growth per year from fiscal 2017 to fiscal 2019. NVDA always tops estimates, so those estimates are likely conservative. Growth will more realistically look like 30%.
The market is trading at 19.7-times 2017 earnings for 11% growth. That is a price-to-earnings/growth (PEG) ratio of 1.8. NVDA should trade at a higher PEG ratio, given significantly more robust growth in out years (2020 and thereafter). Consequently, NVDA should reasonably trade at a PEG ratio of 2.
That implies a “fair” 2017 earnings multiple of 60. A 60-times multiple on conservative Street estimates calling for 2017 earnings of $3.64 per share implies a year-end price target of $220.
Bottom Line on NVDA Stock
The stock has had quite a run, but I’m doing some quick profit-taking here. Given how much this stock has rallied since its previousd earnings report and given NVDA earnings are usually a “sell the news” event after a big rally, I think earnings will send NVDA stock lower.
But that dip should be bought.
I plan on re-entering my NVDA position after earnings. I am comfortable with NVDA stock below $220.
As of this writing, Luke Lango was long GOOG, AMZN, and NFLX.
