The coronavirus from China slammed virtually every stock trading during the second half of February, and Nvidia (NASDAQ:NVDA) was no exception.
NVDA closed at an all-time record high of $314.70 on February 19, then plunged during the panic of the coronavirus sell-off. NVDA stock dropped to $252.60 within a week, losing 20% of its value.
However, Nvidia is in a better position than many companies — it set that record high for a reason. As the markets showed tentative signs of recovery on Friday, NVDA did better than most, gaining back nearly 7%.
Assuming coronavirus doesn’t end up tanking the global economy in 2020, Nvidia is well-positioned for continued growth.
A Big Q4 for Nvidia
NVDA stock hit that February 19 record close on the strength of an impressive Q4 earnings report. Nvidia blew past EPS and revenue estimates. Revenue was $3.11 billion, up 41% year-over-year. Adjusted earnings per share (EPS) of $1.89 were up a whopping 136% YoY.
The one whiff of worry for investors was a lowering of the company’s fiscal Q1 2021 outlook. Because of anticipated impact from the coronavirus, Nvidia dropped its Q1 revenue estimate by $100 million to $2 billion, plus or minus 2%.
Despite the lowered outlook, Nvidia stock surged. That was before the market imploded as coronavirus panic set in.
Coronavirus Risk
Like all companies, Nvidia is at risk of taking a hit from the coronavirus. The company has a high exposure to the Chinese market, with an estimated 53% of its 2018 revenue tied directly to China. That was a concern when the trade war between the U.S. and China was threatening to escalate into an economic conflagration.
With China being the epicenter of the coronavirus outbreak, that also meant Nvidia was exposed more than many companies. Production of Nvidia products as well as partner products (such as laptops) that use Nvidia GPUs was at risk. An economic shock in China would also have a ripple effect that would cut consumer spending on non-essentials in that country. Gaming PCs would definitely be in that “non-essential” category.
While the coronavirus outbreak in China seems to be under control, news of its spread globally resulted in stock markets facing their biggest losses since 2008. Within a week, Nvidia had dropped 20%. Its competitors were also hit. Intel (NASDAQ:INTC) was down 17%, while Advanced Micro Devices (NASDAQ:AMD) took a 25% hit.
The big difference with Nvidia has been the extent of its recovery from that initial shock. On Friday, INTC closed down another 0.5%. AMD was up 3.3%. NVDA stock gained 6.9%.
Artificial Intelligence (and Data Center) Set to Grow in 2020
One of the reasons investors are optimistic about Nvidia is the company’s increasing presence in the field of AI and cloud computing.
Nvidia was the first of the big chipmakers to leverage its parallel processing GPUs for artificial intelligence. In 2018, University of Washington computer science professor Pedro Domingos told CNN:
“What’s happened to Nvidia is amazing. Once Nvidia realized its chips were popular with artificial intelligence researchers, it seized the market.”
In the company’s Q4 earnings report, Nvidia CEO Jensen Huang was optimistic about AI:
“NVIDIA AI is enabling breakthroughs in language understanding, conversational AI and recommendation engines ― the core algorithms that power the internet today. And new NVIDIA computing applications in 5G, genomics, robotics and autonomous vehicles enable us to continue important work that has great impact.”
Data Center revenue (which includes the AI component) set a company record for the quarter, hitting $968 million, up 43% YoY. That makes it second among Nvidia’s divisions (behind gaming GPUs), with 31% of total revenue. In Q3, Data Center revenue of $726 million made up 24% of the company’s total revenue. The increase reflects a shift in data center spending. After being in decline for much of 2019, spending is beginning to increase and is projected to hit $208 billion globally in 2020.
The bottom line for Nvidia is that the company is well positioned for 2020. Its gaming division and graphics cards continue to rack up impressive sales growth. Add in the projected return to positive growth for data center spending in 2020, and the company’s investment in AI and cloud computing will pay off as well. Expect NVDA stock to recover and push past that record high it set in February.
The wild card, of course, is the coronavirus. But that’s a risk investors have to take into account for all stocks at this point.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
