The past 12 months have been a lost year for Nvidia (NASDAQ: NVDA) stock investors. While the S&P 500 has surged 13% to new all-time highs, NVDA stock price is up 10%. Investors are hoping the semiconductor giant’s third-quarter earnings report on Thursday afternoon will get the company back on the right track.
However, win, lose, or draw on Thursday, long-term investors should remember why they own the stock in the first place. If they have stayed patient up to this point, it’s unlikely anything the company reports on Thursday will change the long-term Nvidia stock bull thesis.
NVDA’s Numbers
As always, the first thing the market will be watching for on Thursday is the top and bottom lines. Analysts are calling for adjusted earnings per share of $1.58, down 14.1% from a year ago. Wall Street is also anticipating Nvidia will report third-quarter revenue of $2.92 billion, down 8.2% from 2018.
On the surface, those numbers seem pretty terrible. But at this point in the semiconductor cycle, it’s all about improvement. Last quarter, Nvidia’s revenue was down 17% and its EPS was down 36%. If the declines in the third quarter are in-line or smaller than consensus estimates, it would be a sign that the worst of the cyclical downturn may be over for NVDA.
On a segment-by-segment basis, investors will be watching gaming and automotive businesses most closely. The gaming segment is Nvidia’s largest, accounting for $1.31 billion in revenue in the second quarter. Last quarter, gaming revenue was down 27% year-over-year, but up 24% quarter-over-quarter.
Nvidia’s automotive business is much smaller, but it’s the company’s highest-growth segment these days. In the second quarter, NVDA reported $209 million in automotive revenue, up 30% from a year ago and 26% compared to the first quarter.
Analyst Take on Nvidia Stock
Bank of America analyst Vivek Arya recently previewed Nvidia’s third-quarter earnings report. Arya says he expects a mostly in-line quarter from the company, but near-term risk for NVDA stock is likely to the downside.
Since Aug. 15, the NVDA stock price is up more than 40%, roughly doubling the overall return of the semiconductor group. It also suggests market expectations have crept much higher for the third quarter, Arya says.
“With that said, we view any volatility in the stock as a particularly enhanced opportunity given NVDA’s unrivaled leadership in some of the most investable and fastest-growing markets in technology – artificial intelligence, gaming, and autos.”
Arya says data center segment expectations may be particularly high. Wall Street consensus is calling for $737 million in data center revenue in the third quarter. Arya is predicting just $688 million.
Looking ahead to next year, Arya thinks NVDA stock has a number of bullish catalysts ahead, especially if the semiconductor market improves.
“Heading into CY20, we see the company benefiting from new 7nm technology, broader adoption of ray tracing, cloud capex acceleration, and the potential close of the accretive Mellanox deal announced in March,” Arya says.
Bank of America has a “buy” rating and $250 price target for NVDA stock.
How to Play NVDA Stock
My take on Nvidia hasn’t changed over the past year. It likely won’t change no matter what the company reports on Thursday.
Nvidia is a classic growth stock. In that sense, most bears aren’t arguing with Nvidia’s business model or its growth outlook. Anyone who argues that AI and autonomous vehicle technology are poor markets for investment is crazy. Instead, value investors are simply critical of Nvidia’s share price. The stock’s sluggish performance in the past year gave its fundamentals a chance to catch up. Unfortunately, the semiconductor market downturn and the trade war with China put NVDA’s growth on hold for several quarters.
Incredibly, even after virtually no overall stock gain in the past year, Nvidia’s forward earnings multiple is actually slightly higher today than it was 12 months ago, according to Ycharts. It’s currently sitting at 29.5, which isn’t extremely high. But it’s not cheap either considering its peer group’s forward earnings multiples are generally in the high teens.
If you are a Nvidia bull, go ahead and buy some shares if the stock takes a dive following earnings. But I wouldn’t recommend anyone go all-in on NVDA stock at this point. The valuation is full, and the near-term risk is to the downside.
As of this writing, Wayne Duggan did not hold a position in any of the aforementioned securities.
