On Feb. 20, Nvidia (NASDAQ:NVDA) stock hit an all-time high of $316.32. Since then, NVDA stock has fallen about 25%. As we start a new quarter, investors are wondering if April might be an opportune time to buy shares.
Given the uncertainty we’re facing in broader markets, it might still be too early to get back into the stock. The company is expected to report Q1 earnings in mid-May. Therefore, I’d recommend that investors wait for several weeks before buying NVDA stock and analyze the quarterly metrics prior to committing any fresh capital.
Here’s why.
China Means Both Demand and Supply for Chip Stocks
Nvidia sells two main products: graphics processing units (GPU) and Tegra processors. The GPUs are used in PCs and data centers. Tegra is a system-on-a-chip (SoC) suite developed by Nvidia for mobile devices.
But its Tegra Processors segment only accounts for about 10% of its total revenues. Therefore, many investors regard Nvidia as the premiere graphics-chip stock.
Its GPUs have earned a superior reputation compared to competing products, especially within the gaming industry. GPUs accelerate central processing units (CPUs), boosting the performance of video and graphics and improving a computer’s overall performance.
China consumes more than 50% of all semiconductors made worldwide. And China and the U.S. are the two largest gaming markets worldwide. Over 40% of Nvidia’s sales come from China and Hong Kong.
Furthermore, many technology companies either have manufacturing plants in China or use Chinese companies in their supply chains. Earlier in February, Jensen Huang, CEO of Nvidia, during the Q4 earnings call, highlighted that the novel coronavirus outbreak in China could adversely affect both sales and production for the group. He added that Q1 revenue could be adversely affected due to disruptions in the company’s supply chain.
Indeed, Nvidia’s Chief Financial Officer Colette Kress said “while it is still early and the ultimate effect is difficult to estimate, we have reduced our Q1 revenue outlook by $100 million to account for the potential impact.”
Since late February, the novel coronavirus outbreak has become a global pandemic and reached our shores. Broader markets as well as semiconductor stocks ebb and flow as headlines change, literally by the day. Thus it might still be too soon to say what the short- and long-term economic impact of this unprecedented situation will be on chip stocks like NVDA.
What to Expect from Nvidia’s Q1 Earnings
The company will likely release Q1 metrics in mid-May.
On Feb. 13, it reported revenue for the fourth quarter ended Jan. 26, 2020, of $3.11 billion, an increase of 41% from $2.21 billion a year earlier, and up 3% from $3.01 billion in the previous quarter.
GAAP earnings per diluted share for the quarter were $1.53, up 66% from 92 cents a year ago, and up 6% from $1.45 in the previous quarter.
Nvidia stock breaks out its revenue into four main segments: gaming, data center and edge computing, professional visualization and automotive. Gaming, the most important segments, accounts for over 60% of Nvidia’s total revenue.
According to recent research by Yuhang Jiang of Nankai University in China “GeForce, a gaming platform owned by NVIDIA, is one of the largest gaming platforms … [the majority] of the loyal players are attracted by the superior GPUs products invented by NVIDIA.”
The company has recently launched the play-anywhere cloud version, i.e., GeForce Now. And it has already attracted many gamers. On March 26, Nvidia said that it would release new games on a regular basis.
Therefore, when the group releases Q1 metrics, the Street will pay special attention to gaming revues. Investors will also want to appreciate how each segment may be affected by the potential disruption caused by the COVID-19 pandemic worldwide.
Chip stocks are facing uncertainty. Until Nvidia’s next earnings announcement, NVDA stock is likely to be a battleground between long-term investors and short-term traders.
Investor Takeaway on NVDA Stock
As another earnings season begins, many stocks are likely to remain volatile and swing lower in the coming weeks. A couple of negative macroeconomic or global news headlines may drive many stocks, including Nvidia stock, down. Thus, NVDA stock might fall further, providing long-term investors with a better entry point.
I’d suggest that long-term investors wait until Nvidia stock builds a base between $200 and $250. Any move toward $200 would likely make the stock quite attractive for many investors.
Later in 2020, I expect the stock market to stabilize. And we’ll have a better idea about the state of the global economy. Then Wall Street is likely to again become bullish on Nvidia’s growth outlook. The company is more than just gaming. And as the move to digital continues, its GPUs are likely to help the business gain more customers in a wide range of industries.
Finally, if you’d still like to have exposure to NVDA stock, but don’t want to have the full volatility that may come with it, you may instead consider investing in an exchange-traded fund (ETF). Examples of such ETFs are the Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ), the iShares PHLX Semiconductor ETF (NASDAQ:SOXX) or the VanEck Vectors Video Gaming and eSports ETF (NYSEARCA:ESPO).
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.
