A lot of super-geniuses who loved Nvidia (NASDAQ:NVDA) at $280 per share seemed to hate Nvidia stock at its pre-earnings report price of $150 per share. That’s not the way this game is played …
It is true that NVDA has had a rough time lately. The bitcoin boom became a bitcoin bust, crimping demand for Nvidia’s fast graphics chips that powered bitcoin “mining” devices. Nvidia’s revenue peaked at $3.2 billion in the quarter that ended last April. Its top line, expected under $2.4 billion, came in at $2.21 billion when NVDA reported earnings Thursday.
That’s down 24% from year-ago levels, but the rest of the demand equation for Nvidia looks sound. The company is still making money, posting a per-share profit of “just” 92 cents per share, around $567 million. That’s slightly less than the $614 million Nvidia made for all of 2016.
Watch the Dog
Don’t name your dog for a stock. You may end up kicking the dog when the stock falls. Worse, you may fall in love with the dog and refuse to sell the stock when it’s overpriced. What is happening with Nvidia stock is part of the normal ebb-and-flow of technology, which is no longer a boom-and-bust cycle but a boom and less boom one.
The primary uses for Nvidia graphics chips are in game machines. Gamers have been anxiously awaiting these lower prices. Nvidia is also now targeting laptop gamers.
The second big market is cloud data centers.
Graphics are part of the current cloud upgrade cycle, in which these centers get faster front-ends to handle new artificial intelligence applications. There are more graphically intense user interfaces, augmented reality (AR) and virtual reality (VR), to support, as well as self-driving cars and self-diagnosing machines that need these chips.
This market is not slowing down. Cloud capex rose 53% in 2018. There are now over 420 such centers with over 100 more in the pipeline. All these centers will upgrade to support AI. They’re going to be attracted to cheaper chips, like those Nvidia is now selling.
The cloud is the server side of modern computing. Intelligent devices are the client side. These include things like manufacturing robots, health care devices, and other products that deliver the benefits of AI, AR and VR.
These markets are also continuing to grow.
The Momentum Game
Index funds and ETFs magnified the impact of the bitcoin bust.
Once a stock falls, selling by machines matching the market accelerates the fall. Falling price targets become self-fulfilling prophecies.
You beat these sudden swings through patience, making time your friend.
Right now, you get NVDA stock for a price-earnings ratio of 21, slightly below the average S&P 500 stock. NVDA also had over $7.4 billion in cash on its balance sheet. It’s reasonable to expect its development efforts to continue.
How long will the trough in demand last? It may already be ending. bitcoin was always a sideshow. AI is the real show. Nvidia is still a leader in AI.
As revenue starts to grow again, Nvidia will be facing more competition for cloud contracts from Cloud Czars like Alphabet (NASDAQ:GOOGL) Microsoft (NASDAQ:MSFT) and Amazon.Com (NASDAQ:AMZN). They have been designing and producing their own graphics chips and software for processing graphics.
But the czars are not the only clouds in the sky. The hybrid cloud model has taken off among enterprises, which are building their own data centers and connect to the new ecosystem.
Bottom Line on NVDA Stock
A smart investor will sell when everyone else is screaming buy and buy when everyone else is screaming sell. They will have the patience to let the machines panic and move in after they settle down.
Nvidia stock bottomed near the end of January, at around $131 per share. NVDA stock has risen about $15 from there.
The price is reasonable, the prospects good. Your patience will be rewarded.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT and AMZN.
