As Nvidia Stock Validates the ‘Buy the Dip’ Thesis, Things Get Interesting

I don’t take a lot of victory laps,but it might be time for one in the case of NVIDIA (NASDAQ:NVDA) stock. In late June, I mentioned that the semiconductor name was a credible buy on the dip candidate and that any weakness in the shares should be seen as a buying opportunity. Since then Nvidia stock is up almost 31%.

As Nvidia Stock Validates the 'Buy the Dip' Thesis, Things Get Interesting
Source: Hairem /

Was I prescient … or just lucky with that call? Hold that thought.

To be sure, that’s a big move in a short time frame for any stock and it has Nvidia up more than 47% year-to-date. Said another way, Nvidia stock is beating rival Intel (NASDAQ:INTC) by a margin of more than 4-to-1 this year while topping the widely followed PHLX Semiconductor index by almost 800 basis points.

So following Nvdia stock’s stellar run over the last 90 days, pondering the shares’ near-term fate and how much value is left are reasonable things to do. To be sure, Nvidia is a riskier bet today than it was in late June. That’s the result of a 31% surge over that time, but that doesn’t mean near-term gains are capped.

The company is slated to report earnings on Nov. 14 after the close of U.S. markets. Analysts are expecting earnings per share of $1.24, down from $1.67 a year earlier, so anything in between those two numbers could be a boost to Nvidia stock, as would bullish guidance for the fourth quarter and 2020. Point is, there are catalysts on the horizon that could lift shares of Nvidia even further.

Fundamental Factors

In previous coverage of Nvidia stock and rival chip names, I’ve highlighted two important, but longer-ranging catalysts: gaming and artificial intelligence. It appears some sell-side analysts are getting hip to those factors as well.

Artificial intelligence is growing rapidly and with the growing need for related data centers comes an increased need for chips manufactured by Nvidia.

“NVDA’s data center growth is on the cusp of benefiting from the next-big AI landmark — the ability to accurately listen, understand, speak and contextualize human speech, referred to as natural language processing (NLP)/conversational AI,” wrote Bank of America Merrill Lynch analyst Vivek Arya in a recent note to clients.

Stanford researchers confirm the long-term, wide-ranging implications and impacts of artificial intelligence.

“Artificial intelligence is one of the most profound undertakings in science, and one that will affect every aspect of human life,” according to the university’s research. “AI technology is progressing along so many directions and progress is being driven by so many different organizations that it is bound to continue.”

Transitioning to video games, a more tangible element of the Nvidia stock thesis for many investors, a confluence of factors could boost NVDA going forward. Those include expansion of cloud gaming and the ongoing e-sports, which should facilitate increased demand for the graphics processing units Nvidia makes.

Video games are expected to be a $152 billion industry this year and with e-sports in the early innings of a multi-year growth trend, Nvidia provides exposure to these themes without forcing investors to embrace dedicated video game investments.

Bottom Line: Momentum’s Back, But Not Too Expensive

Nvidia stock has long been viewed as a momentum play and while upside momentum has returned, the shares remain reasonably valued, perhaps surprisingly so. At 27.32x forward earnings, that’s a steep multiple compared to the S&P 500 index, but also a discount to rival Advanced Micro Devices (NASDAQ:AMD).

Near-term caution and opportunity stem from the same source. Due to the that run-up in Nvidia stock mentioned earlier, the upcoming earnings report has to be well-received by investors. If it’s not, there will be a sell the news event and it will be justified given the recent strength in the name.

However, if such a scenario materializes, it could again be a dip to be used to get involved with NVDA stock heading into 2020.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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