For no fundamentally changing reasons, Nvidia (NASDAQ:NVDA) has continued drifting up. Nvidia stock bounced from around $135 this past June to close to $200 in recent sessions.
Markets bet on a halt to higher tariffs levied between the U.S. and China as the main reason to buy semiconductor stocks. And with chip stocks a forward indicator, an improving relationship between the two countries should lead to a resumption in demand.
In the last year, semiconductor companies reported lower revenue and forecast a weaker outlook due to the trade war. In the near-term, investors may at least expect chip orders picking up as customers cautiously bet the trade war ceasefire holds. With Nvidia, investors may look forward to the Mellanox merger review.
Mellanox Deal Under Review
Nvidia is waiting for Chinese regulators to approve the Mellanox buyout. A trade war ceasefire suggests an approval is imminent. NVDA stock is already up ahead of an expected close by the end of the year. But given the Chinese regulators, who started the review on Sep. 4, have a 180-day review period, the earliest approval is in March.
In the interim, NVDA’s strong rebound should hold. In its second-quarter earnings report, released in August, the company posted gaming revenue of $1.31 billion, up 24% sequentially and beating the $1.29 billion consensuses.
This strength was enough to offset the weakness in Datacenter, whose revenue fell 14% Y/Y to $655 million. Nvidia’s GPU business will likely resume its upward growth. The GPU chips are dominating the AI revolution, as this segment complements the IoT market.
For the first time, having software capabilities to make use of all the sensors IoT is built around will accelerate growth. This will lead to the next phase of growth in IoT and AI.
Nvidia said the automation market is a $100 trillion opportunity. So, as it continues to be a central player in providing acceleration and accelerated computing solutions, Nvidia’s growth potential will only get bigger.
Graphics Cards and Nvidia Stock
Nvidia’s next quarterly report (Q3) will include a full quarter of sales of its SUPER lineup. This will include its RTX and notebooks becoming a bigger mix. And as sales grow, the company’s gross margin will go up. This is due to component costs falling as well as manufacturing costs declining overall.
The RTX 2080 Super faces competition from Advanced Micro Devices’ (NASDAQ:AMD) Radeon RX 5700 XT but Nvidia still has the faster card. Its relative performance is better than AMD’s RX 5700 XT by 24% but its relative performance-per-dollar is 29% lower.
Avid gamers will not mind paying relatively more to get an Nvidia gaming card. And as more games support ray tracing, it will spur customers to upgrade to the Super GPU cards. Next year, even more games will support ray tracing content. It is evident that the high rate of adoption for these Turing cards will drive GPU sales higher for the next few quarters.
Valuation and Your Takeaway on Nvidia Stock
Nvidia stock is trading close to the analyst price target of $191.59 (per Tipranks). the EPS forecast for the quarter ended Sep. 30 is $1.24. This would be a respectable increase.
As more laptop and PC manufacturers offer ray tracing, Nvidia’s GPU revenue will continue its positive rebound. But since NVDA stock already rallied ahead of the earnings report set for November 14, investors may want to wait until after that day before adding to their position.
Disclosure: None.
