The stock price of Nvidia (NASDAQ:NVDA), the premiere graphics-chip maker, has been choppy in recent weeks. Since mid-September, semiconductor stocks, including Nvidia stock, have been among the hardest hit by the uncertainties facing the market.
Given Nvidia’s innovations in multiple areas, including AI and machine learning, there’s a strong bull argument for Nvidia stock. However, nearer-term pressures like the U.S.-China trade war and a potential global economic slowdown will weigh meaningfully on the outlook of Nvidia stock, especially until NVDA reports its earnings in late November. Let us now take a look at how Nvidia stock may fare in the early part of the fourth quarter.
Investors Were Upbeat About Nvidia’s Q2 Earnings
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), improving video and graphics and enhancing computers’ overall output.
On Aug. 15, Nvidia reported its Q2 earnings. Investors overall seemed pleased with the results. Nvidia stock gained about 20% in the few weeks after the results were released.
During the quarter, Nvidia’s top and bottom lines were up versus the previous quarter, Q1. NVDA’s revenue increased 16.2% versus Q1 but fell 17.4% year-over-year to $2.58 billion. Similarly, the company’s adjusted earnings per share jumped 40.9% sequentially but fell 36.1% YoY to $1.24.
For Q2, analysts, on average, expected Nvidia to report revenue of $2.55 billion and adjusted EPS of $1.15.
For Q3, NVIDIA expects to book revenue of $2.9 billion, plus or minus 2%. Analysts, on average, expect a $2.98 billion top line.
NVDA Has Many Different Revenue Segments
When Nvidia reports earnings, analysts pay attention to five segments that drive its revenues: gaming, data center, professional visualization, automotive, and edge computing.
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. As AMD launches its Navi cards, AMD’s GPUs will likely take market share from Nvidia in the video-game-chip sector.
Similarly, Intel (NASDAQ:INTC) has become more competitive with NVDA in the datacenter space. Nvidia recently spent $6.9 billion to buy the datacenter networking company Mellanox.
In Q2, NVDA’s revenue from datacenters rose 3.3% versus Q1, but fell 13.8% YoY to $655 million. Nvidia’s datacenter business revenue missed analysts’ consensus estimate of $668.5 million.
Gaming accounts for about 40% of Nvidia’s total revenue. The Q2 sales of its gaming segment went up by 24.5% sequentially but fell 27.3% YoY to $1.31 billion. Nonetheless, the segment’s revenue beat analysts’ consensus estimate of $1.3 billion.
In recent months, the owners of Nvidia stock have been 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 are very closely linked to the unit sales of its GPUs.
The Bull Vs. the Bear Debate for NVDA stock
Analysts are concerned about the recent slowdown of the overall chip sector and the U.S.-China trade wars. Over 40% of Nvidia’s sales come from China and Hong Kong. Therefore, within the company’s Q3 results, investors will scrutinize the performance of its China business.
Given the various headwinds facing Nvidia stock, investors have been concerned with NVDA’s current valuation levels. For example, NVDA stock is trading at a forward price-earnings ratio of almost 24. In comparison, Intel stock’s forward P/E ratio stands at about 10.6. Therefore, going forward, NVDA’s results will have to improve to justify the rich valuation of NVDA stock.
Where Nvidia Stock Is Now
As tech companies start to release their earnings in the coming days, I expect NVDA stock to be quite volatile, continuing its recent pattern. For example, the day after AMD reported its Q2 earnings on July 24, Nvidia stock fell meaningfully, as the owners of NVDA stock were spooked by the results. Therefore, when AMD releases its earnings in late October, NVDA stock will probably be volatile again.
If the stock market is weak, NVDA stock may easily move toward $160 or even $150, where it has significant support.
It’s important to remember that Nvidia is a momentum stock. Therefore, investors who are are worried about entry points should wait until NVDA builds a firm base between $155 and $165 before buying any shares.
Those who already own Nvidia stock may consider hedging their positions with monthly at-the-money covered calls,. By adapting such a strategy, investors can benefit from a rally by Nvidia stock in the wake of the results and have some protection from subsequent profit-taking.
On the other hand, if the dragged-out trade tensions are swiftly resolved and the markets rally, then Nvidia stock could easily move above $190.In that case, the shares would probably subsequently embark on a long-term rally. As a result, NVDA’s technical charts would need to be reevaluated.
The Bottom Line on Nvidia Stock
Despite the semiconductor industry’s headwinds and cut-throat competition from AMD, there is strong demand for Nvidia’s graphics processors.
NVDA is benefiting from high sales not only in video games but also in datacenters 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, greatly lifting NVDA stock.
Nvidia has over two decades of experience in its niche markets and knows how to serve its customers well. From high-performance computing to deep learning, Nvidia’s chips are likely to continue to be an integral part of our future. They could even be used in segments that Wall Street may not have considered.
However, Nvidia stock still faces challenges. Nvidia’s Q2 earnings were largely in-line with analysts’ average outlook.
Yet, given how NVDA stock seesawed in recent months, I think investors should be cautious about the shares in the short-term.
Many investors seem to be uncertain about the stock market, and their expectations are somewhat subdued. Therefore, it would not be surprising if many investors hit the “sell” button on tech names, including NVDA stock, in the nearer term.
As of this writing, Tezcan Gecgil held INTC covered calls with Oct. 4 and Oct. 11 expiry dates.
