Nvidia (NASDAQ:NVDA), the premiere graphics-chip maker, is expected to report its second-quarter earnings on Aug. 15 after the market closes. Semiconductor stocks, including Nvidia stock, are among the equities that have been the hardest hit by the recent selloff.
Despite the recent slide of Nvidia stock price, it might still be too early to get back into NVDA, given its short-term risks that make it a highly volatile investment. In other words, I recommend investors wait for several weeks before buying Nvidia stock.
What Wall Street Will Look For in Nvidia’s Earnings
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.
When NVDA reports its Q2 results, Wall Street will pay attention to its five segments that drive its revenues: gaming, data center, professional visualization, automotive, and edge computing.
Gaming accounts for over 40% of Nvidia’s total revenue. In Q1, the unit’s revenue tumbled 39% year-over-year. Investors are quite worried about the company’s growth outlook, which is mostly based on its GPUs for gaming and artificial-intelligence servers. Nvidia’s EPS and Nvidia stock price are very closely linked to the sales trends of its GPUs.
Investors will also want to hear management’s take on the impact of cryptocurrency mining on NVDA going forward. In recent years, Nvidia stock price has been largely driven by the popularity of cryptocurrencies like Bitcoin.
However, analysts have noted that the crypto craze, which for the most part waned in 2018, can no longer be relied upon to further boost Nvidia’s GPU business. Indeed, NVDA’s fall from grace started with the collapse of the cryptocurrency craze. The collapse has dealt a blow to the top and bottom lines of NVDA.
Wall Street is also concerned that NVDA’s automotive business, based on the advent of artificial intelligence (AI)-powered autonomous vehicles, may suffer in coming months. Currently, automotive is the smallest of all of NVDA segments, accounting for just over 5% of its revenue.
NVDA Faces 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 Advanced Micro Devices (NASDAQ: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 price fell meaningfully, indicating that the owners of Nvidia stock are increasingly paying attention to AMD’s earnings.
For years, NVDA’s chips had been dominant in PCs. However, a higher percentage of video games are being played on consoles now, and NVDA’s GPUs aren’t usually incorporated into consoles. Sony (NYSE:SNE) is, for example, using AMD’s products in its consoles.
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. As AMD launches its Navi cards, it’s confident that its GPUs will take market share from NVDA in the video-game chip sector.
Responding to AMD’s new products, Nvidia’s management has taken several steps. Specifically, NVDA has launched new “Super” versions of its RTX GPR offerings. These new versions are considerably faster than their predecessors. But NVDA is selling its new chips at the same prices as its old ones, effectively cutting its prices.
AMD has responded by reducing its own prices, making investors wonder if either chip maker will end up in good shape.
NVDA Stock Technical Charts Are Signalling More Volatility
Over the past year, Nvidia stock price is down about 40%, and the shares have been quite volatile. As a result, the technical outlook of NVDA stock has been damaged. Its short-term chart still looks weak, and Nvidia stock price looks poised to drop even more in the near-term.
Although NVDA’s momentum indicators, which describe the speed at which stock prices move over a given time period, are currently in oversold territory, they can stay oversold for quite a long time. That’s particularly true when, as is the case with NVDA, a stock’s overall trend is down. Therefore, more buy signals based on momentum indicators need to be conﬁrmed before Nvidia stock can become a buy from a technical standpoint.
I would suggest that long-term investors wait until Nvidia stock builds a base between $150 and its Dec. 2018 low of $125.
On the other hand, if the current trade tensions are swiftly resolved or NVDA reports strong earnings, Nvidia stock price could rebound quickly.
The Bottom Line on Nvidia Stock
Given the volatility of Nvidia stock price over the past year due to the ongoing questions about the fundamentals of NVDA and its sector, I would urge investors to be cautious about NVDA stock.
The U.S.-China trade war has not helped NVDA, either, as China accounts for nearly a quarter of Nvidia’s sales. The headwinds of the sector make many analysts wonder whether NVDA can, in the near future, regain the kind of rapid and sustained growth that investors had grown used to in recent years.
Although Nvidia stock will likely reward long-term investors, tech stocks may remain volatile over the next few weeks. A couple of negative macro or global news headlines as well as questionable earnings results from NVDA on Aug. 15, may drive Nvidia stock price down. If that occurs, long-term investors will be given a better entry point in Nvidia stock.
As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.