Should you buy Nvidia Corporation (NASDAQ:NVDA) ahead of earnings on Thursday afternoon? Some investors are no doubt tempted, given how much hot money has poured into this name. But ahead of Nvidia earnings might not be the best time to buy.
Am I saying Nvidia stock is undeserving of its rally? Of course not.
Nvidia earnings come out on February 8th after the close. Given that Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD) both reported good results, I expect strong numbers from Nvidia earnings as well.
But Nvidia is so much more than just numbers.
The company has put itself into seemingly every powerful growth segment imaginable. Be it machine learning and artificial intelligence, gaming, computing and cryptocurrency mining, self-driving cars or cloud computing and data storage. It’s incredible what Nvidia has done under the leadership of CEO Jensen Huang. It’s no surprise shares are up more than 1,000% over the past three years. Seriously, think about that for a second.
Nvidia Has Made Itself Integral To The Self-Driving Revolution
At the press preview portion of the Detroit Auto Show, I had the chance to sit down in a one-on-one with Danny Shapiro, Nvidia’s senior director of automotive. The strides the company is making in self-driving cars is breathtaking.
Nvidia is inside the car cabin too, powering the AI behind Mercedes Benz User Experience (MBUX). While cabin AI is impressive, the self-driving aspect is a game-changer. Further, at the CES event in Las Vegas last month, Huang showed off a platform with more computing power on a smaller chip than I thought possible.
Nvidia’s latest partnership with Continental AG (ADR) (OTCMKTS:CTTAY) — a large German automotive supply company — shows just how fast it’s moving. By combining Continental’s sensor technologies (Lidar, radar, cameras, etc.) and Nvidia’s processing power (now capable of 30 trillion operations per second while consuming just 30 watts of energy), the two companies are aiming to create a “top-to-bottom AI self-driving vehicle system.” This system, to be delivered by 2021, should be capable of full Level 5 autonomous driving.
That’s incredible and shows just how close the technology is to hitting the streets. Shapiro told me that computing power is the first major hurdle in Level 4 and Level 5 autonomous driving systems. Beyond that though, training the computer on how to drive is getting faster too.
Rather than having to log physical miles over and over to see a situation, programmers can create simulations for the car’s driving system. Rather than driving to a stop sign at dawn, midday, dusk and night, then finding them in different environments (urban vs. rural, partially covered by a bush, etc.) programmers can create these scenarios and run it on the car countless times. They can put the platform through thousands of scenarios — a kid running into the street, a biker approaching from the rear, a driver running a red light — and test it millions of times so that it actually learns.
Incredibly, there are doubters of this technology. But it won’t be long before they’re proved incredibly wrong.
Nvidia Earnings Should Impress, But That’s Not The Most Important Thing
Like I said, Nvidia is more than just self-driving cars. But as the auto industry is using Nvidia to power its AI needs, other industries and sectors will eventually do the same. As AI becomes more robust, a common name will be the one powering it: Nvidia.
So I don’t think of Nvidia in a quarter-to-quarter manner. I want to see what it’s doing in 2021 with Continental. I want to see what other industries are adopting AI and using it in 2020 or 2022. Where does that put Nvidia stock in 2025? Presumably somewhere higher than today.
With a market cap of almost $140 billion, it’s not as if investors are discounting it. With that said, what should we pay for NVDA stock? Trading at 47 times 2019 earnings and 15.5 times trailing sales is anything but cheap. But I don’t think there’s a company that’s beat analysts’ estimates as handedly as Nvidia stock has over the past two years.
Given that the sector’s reporting has been good so far, Nvidia earnings should impress.
The question is, will the market care?
Trading NVDA Stock
Nvidia has reported good numbers before, only to see its stock selloff or trade sideways as a result. I don’t want to chase NVDA stock. Instead, my hope will be that it comes down after earnings. For the same quarter last year, Nvidia stock had fallen from its late-December high and rallied back to it ahead of earnings. We have almost the same situation right now, although Nvidia stock hasn’t quite reached its prior highs near $250.
What ensued was a 30% drop and three month lull. We probably won’t get a 30% decline, but if we do it’s certainly a buy.
Let’s put it this way: Nvidia is changing the world and its stock will never be cheap as a result. The question isn’t whether investors will pay a premium for NVDA stock, but how much of a premium will they pay. If we get similar price action to calendar Q1, I suggest long-term investors buy the pullback and lull.