After suffering a devastating drop in market value late last year, Nvidia (NASDAQ:NVDA) has been on the recovery track. On a year-to-date basis, Nvidia stock has gained an impressive 57%. However, shares have some ways to go before reaching 2018’s highs. Not only that, NVDA has started to stumble recently, printing some red ink in the technical charts.
So, what’s going on? Primarily, NVDA stock is a mix of positive and negative news. On the optimistic end of the spectrum, Nvidia turned in a solid earnings report for its third quarter.
The semiconductor and tech firm delivered earnings per share of $1.78 and revenue of $3.01 billion. These results handily beat out analysts’ expectations for EPS of $1.57 and top-line sales of $2.91 billion.
Just as importantly, management expects Q4 revenues to hit between $2.89 billion to $3.01 billion, representing a substantial lift from Q4 2018 results. Moreover, if sales come in as forecast, it would stop the company’s consecutive series of quarterly sales declines. On paper, that’s a net positive for Nvidia stock.
However, as our own Tom Taulli points out, NVDA stock has many challenges ahead despite recent fundamental improvements. First, Taulli mentions the competitive risks clouding shares. For instance, Advanced Micro Devices (NASDAQ:AMD) has turned up the heat with its premium processors. Plus, big dogs like Intel (NASDAQ:INTC) are encroaching in the artificial intelligence training space, where computers learn various protocols (such as AI-powered cars avoiding obstalces).
Second, the overhang of the U.S.-China trade war is incredibly distracting for Nvidia stock. Taulli notes that one consequence is Nvidia’s pending acquisition for Mellanox Technologies (NASDAQ:MLNX), which Chinese authorities could block.
Still, patient investors have an ace up their sleeve: “real” AI.
Appreciating the Granularity of Nvidia Stock
Although NVDA stock admittedly faces competitive threats in AI, it’s also well-positioned to dominate the space. That’s because the company has substantial expertise in its chipset technologies which power AI platforms. And as these platforms become more sophisticated, Nvidia’s chipset leadership should distinguish it from the competition.
To understand why, we have to understand the granularity of AI, which is divided into two basic categories: training and inference. Briefly speaking, the former category describes programmers “teaching” computers to respond to pre-defined data sets. But the latter describes true AI. It involves computers taking training material and applying it to variable conditions and “stimuli.”
For instance, you can train an automotive AI system to recognize road markings, traffic signals, and pedestrians. But with inference, an AI-driven vehicle can turn to avoid a suicidal person lunging for the car. Essentially, inference platforms “know” what to do.
Although we’re some time away from human-like droids, inference-based AI platforms have practical applications in the here and now. Obviously, though, these data-intensive initiatives require capable processors. That’s the long-term upside potential for NVDA.
Furthermore, according to a McKinsey & Company study, the AI market offers big pathways for growth. In their words, it’s the best opportunity for the semiconductor industry “in decades.” And the opportunity will be decisively geared more toward inference-processing hardware over AI training hardware. Theoretically, this benefits NVDA stock while providing at least a temporary moat against many competitors.
As data processing for these advanced initiatives become more resource-intensive, we may see more consolidation in the industry. If this occurs, it’s a natural tailwind for Nvidia stock. After all, the underlying company is on track to spend over $2.7 billion in research and development, far more than smaller competitors like AMD.
Opportunities Abound for the Big Dogs
Another note about the competition: I wouldn’t excessively worry about Intel’s encroachment into AI. This space is more than big enough to accommodate several big dogs of tech.
With AI, most folks probably think in terms of accretive or disruptive applications, such as smart grids or self-driving taxis. However, AI is also incredibly pertinent to defense and security.
We learned this the hard way from vicious terrorist attacks that occurred in Europe over the past holiday weekend. One of the themes that have popped up in the aftermath is resource distribution. Simply put, law enforcement agencies are stretched far too thin, allowing would-be terrorists to slip through the cracks.
One of the most profound implications of AI is preventative counterterrorism. With Nvidia’s innovations in facial recognition, combined with future developments in behavioral predictability platforms, societies can eventually recognize a threat before it activates.
Of course, what I’m discussing is years down the line. Still, Nvidia is hard at work developing tomorrow’s technologies today. If you’re willing to ride out some chop, NVDA stock has serious long-term potential.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.