All seems quiet for Nvidia (NASDAQ:NVDA) now. And that’s been a good thing so far for Nvidia stock. NVDA has gained 28% just since the beginning of June.
But news is on the way. Nvidia’s fiscal second-quarter earnings should be reported in the middle of next month. And the company’s guidance for the second half of fiscal 2020 will be closely scrutinized. NVDA – like many of its chip peers – has promised to deliver better results in the second half of the year. If it can deliver on its guidance, Nvidia stock price, which still sits 40%+ below its October highs, can continue to climb.
What’s helped Nvidia stock of late is that there’s been no reason,apparently, for the company to cut its outlook. Its disappointing performance last year, when the company misjudged cryptocurrency demand and accumulated excess inventory as a result, no doubt drove skepticism toward Nvidia’s outlook for this year. Surely there was at least a possibility that the company was overly optimistic about fiscal 2020 after its FY19 guidance proved to be excessively upbeat.
But as of right now, at least, NVDA looks like it’s back on track. That’s why Nvidia stock price has rallied in recent weeks, indicating that it could continue to climb for the rest of the year.
The Big Second Half
As I wrote back in March, NVDA is a second-half story. That’s not exactly news. Nvidia’s management has made that point repeatedly, even taking the unusual step of providing expectations for each half of the year. Year-over-year comparisons are notably easier in Q3 and Q4, thanks to the company’s self-described “crypto hangover” that hit demand for its products in those quarters last year.
Nvidia isn’t the only chip maker that expects a second-half rebound. Intel (NASDAQ:INTC) forecast a second-half recovery in the sales of its data-center business, which is fending off competition from Nvidia and Advanced Micro Devices (NASDAQ:AMD). Chip leader Texas Instruments (NYSE:TXN) gave a similar outlook this spring, though recent commentary from Broadcom (NASDAQ:AVGO) after its fiscal Q2 report was more circumspect.
Nvidia’s guidance certainly appeared logical and still does. Again, its comparisons are easier. And it does seem like data-center demand paused earlier this year, but there’s no reason to believe that demand from datacenters is stopping any time soon. However, the question was whether Nvidia’s guidance would be accurate, given competition and its big miss in Q3 of last year. Increasingly, it seems likely that the company’s guidance will be on target.
A Bit of Good News for NVDA
Two key factors should make investors optimistic about NVDA’s Q2 results and Q3 guidance. First, Nvidia hasn’t changed its tune. At a conference last month, CFO Colette Kress reiterated her call for a recovery in data-center demand. Q2 is “still a little cloudy”, she admitted. But the company kept its broad forecast intact.
That’s important. In light of the haircut given to Nvidia stock last year – the stock dropped over 50% in less than three months – Nvidia management knows its credibility is on the line in the second half of this year. If NVDA’s top executives were at all uncertain about its outlook, it’s likely that the company would be signaling that uncertainty ahead of next month’s earnings release.
That doesn’t appear to be the case, at least in public. And Nvidia isn’t sending those signals to Wall Street, either. Rather, analysts are becoming more upbeat on Nvidia stock. Wedbush initiated NVDA with a “buy” rating. A survey from Piper Jaffray (NYSE:PJC) highlighted strong gaming demand ahead for NVDA. Cascend Securities upgraded Nvidia stock this month. Oppenheimer (NYSE:OPY) forecast a second-half gaming recovery, underpinning its upgrade of Nvidia stock last month.
Analysts can be wrong. But ahead of NVDA’s bloodbath last year, Wall Street was warning of crypto weakness. ( AMD, which reported earnings three weeks before Nvidia, identified the crypto plunge, helping those calls.)
This time, however, Wall Street seems to getting more positive on Nvidia stock. That would seem to bode well for its performance during the rest of the year.
Questions About the Valuation of Nvidia Stock
The one worry about NVDA at this point might be valuation. Again, Nvidia stock price has rallied sharply in the past seven weeks. The stock now trades at 24 times next year’s average EPS estimates, which reflect a quick return to growth.
24 times isn’t a huge multiple in this tech market, but it’s still a big number for a chip stock. Increasingly, the valuation suggests that NVDA will definitely recover in the second half, and it also reflects the company’s easy comparison in the first half of FY21.
In other words, at least some of the recent lack of news probably is priced into NVDA stock. And that might suggest rising expectations ahead of Q3 – and maybe something closer to a ceiling on NVDA stock.
Still, NVDA long-term opportunity still looks intact. Nvidia should be able to take share from a struggling Intel. And its valuation is acceptable, since its P/E multiple was 35+ less than a year ago. If Nvidia truly is back on track, NVDA stock can keep rallying. Increasingly, that looks like the case.
As of this writing, Vince Martin has no positions in any securities mentioned.
