The stock price of Nvidia (NASDAQ:NVDA), the premiere graphics-chip maker, has been choppy in recent weeks. In August, semiconductor stocks, including Nvidia stock, were among the hardest hit by the recent selloff.
Despite the recent slide, it might still be too early to get back into NVDA stock. Its short-term risks make it a highly volatile investment. In other words, I recommend that investors wait for several weeks before buying shares.
Second-Quarter Earnings Pushed Nvidia Stock Higher
On August 15, Nvidia reported its second quarter of fiscal 2020 earnings. Investors overall seemed pleased with the results: Nvidia stock gained 15% in the few days following the earnings announcement.
Nvidia is a pioneering maker of graphics processing units for gaming and professional markets. NVDA sells two main products: graphics processing units (GPU) and Tegra processors. GPUs accelerate central processing units (CPUs), boosting the performance of video and graphics and improving computers’ overall output.
Analysts are concerned about the recent slowdown in the chip sector coupled with worries over U.S.-China trade wars. However, globally there are important growth areas. These include artificial intelligence (AI), autonomous vehicles, 5G, as well as high-performance computing and gaming. These technologies depend on the bigger graphics processing capabilities of Nvidia, Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD). All three companies work hard to gain market share.
During the quarter, Nvidia’s top and bottom lines were up sequentially. NVDA’s revenue increased 16.2% over the quarter but fell 17.4% year-over-year to $2.58 billion. Similarly, the adjusted earnings per share jumped 40.9% sequentially but fell 36.1% YOY to $1.24.
In Q2, Wall Street was expecting Nvidia to report revenue of $2.55 billion and adjusted EPS of $1.15.
Over the past several quarters, Nvidia stock has experienced a steep decline in revenues post-cryptocurrency bust. Therefore, the better-than-expected results inspired investor confidence.
Nvidia stock is trading at a forward price-earnings ratio of almost 31. In comparison, Intel stock’s forward PE stands at about 11. Therefore, going forward, shareholders will want even stronger results so that the stock price warrants the rich valuation metric.
NVDA Stock Faces Increasing Competition from AMD
For years, NVDA has been a leader in the competitive graphics-card market. However, in recent months, the battle for market share between Nvidia and AMD in that segment has intensified.
Long regarded as the perennial runner-up to NVDA, AMD reported its Q2 earnings on July 24. The next day, Nvidia stock fell meaningfully, spooked by the results.
For years, NVDA’s chips had dominated PCs. However, a higher percentage of video games are being played on consoles now, and NVDA’s GPUs aren’t usually incorporated there. For example, Sony (NYSE:SNE) uses AMD’s products in its consoles. For chip companies, gaming is mostly a seasonal business, so investors tend to look at year-over-year developments.
In this quarter, AMD is expected to start selling its Navi graphics cards that utilize its 7-nanometer (nm) chips. They are touted as highly power efficient. AMD is also confident that its GPUs will take market share from NVDA in the video-game chip sector.
Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG) and Twitter (NASDAQ: TWTR) have also recently announced that they will be using AMD’s second-generation EPYC server processors in their data centers. Their trust in AMD products has given AMD stock a big boost in recent weeks.
Responding to AMD’s new products, Nvidia’s management has taken several steps. Specifically, it launched new “super” versions of its RTX GPR offerings. These new iterations are considerably faster than their predecessors. But NVDA is selling these new chips at the same prices as their predecessors, effectively undercutting their profitability.
AMD has responded by reducing its own prices. That makes observers wonder if either chip maker will end up in good shape.
This potentially sets up an all-or-nothing showdown between Nvidia and AMD.
Where Nvidia Shares Are Now
Prior to Q2 earnings, Nvidia stock closed at $148.77. It eventually jumped past $170, although shares slipped due to strong resistance there. At present, NVDA stock hovers around $160.
Over the past year, shares have dropped around 42%. Moreover, they’re quite volatile. The 52-week range for Nvidia stock has been $124.46 to $292.76.
NVDA stock has likely incurred technical damage. In the coming weeks, I expect shares to move down toward $150 where it has significant support.
It’s important to remember that Nvidia is a momentum stock. Therefore, if you are worried about entry points, I’d suggest that you wait until NVDA builds a firm base between $145 and $165.
If you already own Nvidia stock, you may consider hedging your position with monthly ATM covered calls. Such a strategy would enable you to benefit from an upside move and give some protection in case of profit-taking after the initial move up following the results.
If the current trade tensions are swiftly resolved and the broader markets rally, Nvidia stock could easily continue its rebound. In that case, the technical charts would need to be reevaluated.
The Bottom Line on Nvidia
Despite the semiconductor industry’s headwinds and cut-throat competition from AMD, there is strong demand for Nvidia’s graphics processors. This is true not only in video games but also in data centers and workstations. Industry experts also regard NVDA as a top player in the AI chip space. Plus, its graphics chips are highly sought after for use in deep-learning applications.
Nvidia is also exploring smart-city solutions, which exploit its proficiency in AI and data analytics. In other words, the company is somewhat shifting its focus from processors to providing the full technical backbone for AI ecosystems. As the use of AI and machine learning continues to rapidly grow, NVDA’s AI business could expand exponentially.
However, given how Nvidia shares have seesawed over the past year, I urge caution in the coming weeks. Many investors seem to be going into the last quarter of the year surrounded by much uncertainty about the broader markets and with somewhat subdued expectations. Therefore, it would not be surprising if many people hit the “sell” button in tech stocks in the nearer term.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.