If it weren’t for the trade-war issues between the U.S. and China, things would probably be going better for Nvidia (NASDAQ:NVDA). However, despite the turmoil that chip stocks can face as these tensions escalate, Nvidia stock has been trading pretty well lately.
After about a year of intense bearish pressure, investors are looking for some of that negativity to alleviate. In the past three months, NVDA stock’s 12.9% gain has outpaced a 4.5% rise in the iShares PHLX Semiconductor ETF (NASDAQ:SOXX), which counts Nvidia shares as its largest holding of 31 chip stocks.
Many bears hated Nvidia for its exposure to crypto and its climbing valuation. Others despised it simply because it had gone up so much over the past few years, rallying about 1,000% in less than three years.
At the end of the day though, Nvidia makes the products that are fueling tomorrow’s technology — and that’s always going to be worth a premium. With the valuation more reasonable and with shares trying to turn higher, NVDA stock is worth a closer look.
China Syndrome
When trade tensions flare up between Beijing and Washington, that’s generally bad news for chip, semiconductor and memory companies. Nvidia has plenty of revenue exposure to China, but others get hurt, too. Names like Micron (NASDAQ:MU), Advanced Micro Devices (NASDAQ:AMD) and Broadcom (NASDAQ:AVGO) come to mind.
For Nvidia, it’s more than just revenue and tariff worries though. The company is trying to close its Mellanox Technologies (NASDAQ:MLNX) acquisition, but will need China’s blessing to get it done. The $6.9 billion deal was announced in March, and Nvidia expects the deal to be immediately accretive to gross margins, earnings and free-cash flow.
That last one is a biggie and helps strengthen the company’s financials. Most view the deal as a favorable one. So if it gets hung up — or receives the silent treatment from China like Qualcomm’s (NASDAQ:QCOM) attempted acquisition of NXP Semiconductors (NASDAQ:NXPI) — then it will likely have a negative impact on Nvidia stock.
Valuing NVDA Stock
When chip demand from crypto-miners fell off a cliff last year, so too did Nvidia’s growth. Revenue, earnings and margins all took a hit as the company had to work through severely bloated inventory. The overhang has hindered the stock for a year, as investors watch NVDA stock try to recover from its 50% haircut in the fourth quarter of 2018.
It’s been a difficult run for long-term shareholders, as growth estimates have been hammered. On the plus side though, Nvidia stock has a much more attractive valuation — at least, if investors still believe its long-term catalysts are still in play.
That is, do they still believe there is growth potential in autonomous driving, artificial intelligence, cloud computing and data center storage? I, for one, do believe in these secular growth themes and therefore believe that Nvidia’s best days are still ahead of it, not behind it.
While analysts are calling for an 8% decline in revenue and an 18.7% decline in earnings this year, they expect 20% growth in sales and 32% growth in earnings next year.
That does seem a bit ambitious, but given Nvidia’s prior growth rates, it’s not out of the realm of possibilities. If it comes to fruition, it leaves NVDA stock trading at about 25 times forward earnings. While not necessarily cheap, it’s far from egregious — particularly if it can close on the Mellanox acquisition.
Trading Nvidia Stock Price
So where does our $217 headline come from? RBC Capital Markets increased their price target on Nvidia stock to this mark, up from $190 previously. The analyst is bullish on improving demand from gaming and expects an improvement in the data center business.
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As shown in the chart above, it’s been a volatile ride for NVDA stock. Before trade tensions escalated in May, shares were bubbling in the low-$190s, waiting for a move higher. Instead, they broke down significantly, falling over 35% in a month.
More recently, Nvidia stock has put in a series of higher lows (shown via purple arrows on the chart) and even more recently, has been finding support between $170 and $172.50.
In terms of resistance, we saw NVDA stock rejected from the 61.8% retracement at $188 last month. Investors again saw it happen this week. Over the 61.8% retracement and the 2019 highs from May near $193 are on the table. Above that and $200+ is possible.
That’s what bulls need to see happen for RBC’s $217 price target to become reality. If it happens, that will represent a 20% rally in Nvidia stock.
On the downside, bulls want to see the 50-day moving average hold as support. Below it puts the 200-day moving average and 78.6% retracement on the table.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long NVDA.
