Since rallying to above the $170 level at the start of July, Nvidia Corporation (NASDAQ: NVDA) stock quickly retreated, trading recently around $160. Investors are getting nervous about NVDA despite its preemptive launch of its RTX Super Graphics Processing Units (GPUs). Even though Nvidia is stealing the headlines ahead of Advanced Micro Devices’ (NASDAQ: AMD) Navi release, NVDA could lower its outlook for the second half of 2019.
Analysts have an average earnings per share estimate of 88 cents for NVDA’s quarter that ended last month. And ahead of Nvidia’s quarterly earnings that will be reported sometime in August, some owners of Nvidia stock are taking profits.
On the chart, Nvidia stock appears to be weak. Though Nvidia stock price tested and bounced off its $130 low three times this year, it failed to break above its 200-day simple moving average. At 22 times average forward earnings estimates, Nvidia stock is relatively expensive compared to other chip names.
Nvidia’s RTX Super graphics card offers far more performance and value than NVDA’s previous graphics cards. Gamers get performance gains over, for example, NVDA’s GTX 1080, helped by a 33% increase in memory bandwidth. Expect NVDA’s GPU sales to bounce back strongly, thanks to this product refresh. But the biggest acceleration of NVDA’s sales growth may not happen until the holiday quarter.
A short-term negative for Nvidia stock is that NVDA has no other new product announcements scheduled for this summer. As a result, Nvidia stock price is unlikely to bounce back to the $200 – $240 level just yet.
Still, investors need to wait patiently for Nvidia to build its software platform. As enterprises embrace its Quadro line, Nvidia will focus on both the RTX and the next generation of image generation. Adoption for Ray Tracing, a type of image generation, will eventually pick up in both the gaming and the enterprise space. Nvidia’s software platform will be needed to process the enhanced forms of image generation.
The Mellanox Acquisition
Mellanox doesn’t overlap with Nvidia in terms of the work it does. And since each company provides a unique input to the data center, Nvidia has expanded its potential addressable market with the deal. As the combined firm develops new products, its opportunities for sales growth will improve. Adding Mellanox strengthens Nvidia’s positioning in the enterprise server computing space.
Although NVDA offers a number of high-end GPUs for serious PC gamers, its new GeForce NOW offering targets a different set of gamers. Streaming game play allows Nvidia to expand its market. It allows the company to offer game play to those who do not have dedicated machines for gaming. Still, Nvidia’s streaming-game strategy is in the early innings. It needs to wait for telcos to upgrade their infrastructure.
The Valuation of Nvidia Stock
Analysts have a $183 price target on Nvidia stock. Using a 10-year DCF Growth Exit model, the stock’s fair value is $181.62. Realistically, for the stock to appreciate by 16.5%, the company needs to grow its revenue from the gaming and OEM & IP markets.
Click to Enlarge Though Nvidia still expects its data center revenue to lag, data center customers may order more chips from NVDA than expected, lifting its sales.
The Bottom Line on Nvidia Stock
Nvidia’s latest GPU refresh has a good chance of boosting overall sales, but it will take some time for that to occur. The industry recently worked down its excess inventories. With game title refreshes ahead and NVDA’s GPUs providing more power at lower prices, expect Nvidia’s revenues to bounce back through the course of the year and into 2020.
As of this writing, the author did not hold a position in any of the aforementioned securities.