Editor’s note: This column is part of our Best Stocks for 2018 contest. The readers’ choice pick for the contest is Nvidia (NASDAQ:NVDA).
September was an interesting month for the stock market. We experienced a big “mean reversion” rally in September. In other words, the stocks that were leading the stock market for the better part of the year became the laggards, and the laggards became the leaders.
So, if you’ve been wondering why technology stocks — especially those with stunning sales and earnings — fell to the back of the pack in September, this is why. Small- and mid-cap stocks, as well as stocks with the best analyst ratings, fizzled a bit in the recent mean reversion.
But chasing stocks that were previously lagging, particularly insurance and utility stocks, will have you chasing your tail. Instead, I recommend patience and staying focused on fundamentals.
The reason why is simple: “Crap stocks,” or stocks with poor fundamentals, cannot lead the market for long. Personally, I am betting on fundamentally superior stocks with great valuations. Stocks like Nvidia Corporation (NASDAQ:NVDA), my best stock pick for 2018.
Nvidia has been a pioneer in the technology industry for years. The company is most well-known for inventing the world’s first GPU. As the soul of a PC, GPUs are used to speed up the production of images on electronic devices. GPUs power practically everything, from supercomputers to data centers, from drones to vehicles.
Yet, the company refuses to sit on its laurels. It’s constantly innovating and developing new products.
Nvidia has gone from a niche graphics card maker to one of the most powerful semiconductor companies in the world, in a relatively short amount of time.
In fact, in August, Nvidia introduced the world to its newest GPU platform, Turing. This new platform makes ray tracing a reality. Never heard of ray tracing? It’s an advanced method of processing light rays to display realistic and lifelike reflections and shadows.
Company management dubbed Turing “Nvidia’s most important innovation in computer graphics in more than a decade.”
Nvidia also unveiled the GeForce RTX series, which are the first gaming GPUs that use Turing. The new GPUs deliver six-times more performance than the company’s current gaming GPU, Pascal. Video games utilizing Turing will experience improved image quality, enhanced graphics and accelerated video processing. Clearly, Turing is taking computer graphics to the next level.
So it’s not surprising that analysts are very excited about Turing. It’s expected to drive a major upgrade cycle over the next year, as video gamers will be scrambling to update their gaming computers. And you know what that means: Big sales and earnings growth for NVDA.
Nvidia’s rise is a metaphor for the growth in the next phase of the digital age. Tapping the power of the internet, making more powerful machines that could deliver an increasing array of content and information, was the first phase.
The second is about mobility. To achieve that mobility, the desktops and networks we came to rely on were transitioned into the cloud where laptops and smartphones could access and process even more material.
The servers became server farms where information was stored and processed and delivered (and analyzed). Gaming has become one of the fastest-growing spectator sports on the planet due to the processing power available.
Artificial intelligence, virtual and augmented reality are now becoming concepts that aren’t relegated to geeky niches but are providing opportunities to consumers and retailers alike.
This and much more are all sectors where NVDA holds sway.
The semiconductor sector as a whole has had a decent year, given all the trade war talk and action, of late. The PHLX Semiconductor Sector (NASDAQ:SOX) is a capitalization-weighted sector index of most of the big semiconductor stocks. It’s up about 9% year to date and about 21% in the past 12 months.
NVDA is up about 38% year-to-date and 52% in the past 12 months.
The trade war talk, while hitting some chip makers hard, is barely a footnote for NVDA at this point.
It’s likely that its outsized performance has something to do with its ability to grow its markets without over-relying on China to deliver significant sources of revenue.
Earlier this month, Nvidia CEO Jensen Huang spoke at the GPU Technology Conference in Japan about where NVDA expects to grow to stay competitive for the next decade.
His vision shows that while many semiconductor companies are working on iterative improvements in a commoditized market, NVDA looks to take on the big ideas and create pioneering products that it can sell at a premium.
Huang had three key sectors that NVDA is targeting to be a significant part of the future for the company.
The first is to build new hardware to power inference to the next level. Smartphones are currently more image- and content-driven than voice-driven, and we have just begun to scratch the surface of digital voice-driven AI like Alexa and Google Assistant. All this data needs to sorted, stored, acted upon, etc.
The second is to power its AGX line toward autonomous vehicles and robotics. This will have lower level offshoots in manufacturing, agriculture and a host of other markets.
The third is to further develop better medical instrumentation. This is a $100 billion industry and the fact that NVDA is looking to grab some of that market share on its own or with partners is very exciting.
Bottom Line on Nvidia Stock
As a result, analysts have revised their fiscal year 2019 earnings estimates higher. For full-year 2019, Nvidia is expected to report 51.5% annual earnings growth and 33.9% annual sales growth. Adding to this top- and bottom-line growth will be stunning results in the third quarter.
Nvidia is scheduled to report third-quarter results on Nov. 15. The analyst community is currently expecting earnings of $1.73 per share on $3.25 billion in sales. That represents 23.5% annual sales growth and 30.1% annual earnings growth.
Considering Nvidia’s superior forecasted earnings and sales, it’s no wonder that the stock has rebounded strongly from the recent tech pullback. NVDA is up nearly 10% in the past month alone. And while NVDA has rewarded shareholders with more than 500% gains in the past two years, it still has a lot more room to run.
Nvidia stock remains my top stock pick for 2018. Look for a strong finish to the year from this computing powerhouse.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
