This has been a great year for investors in Nvidia (NASDAQ:NVDA) stock. Year to date, NVDA stock is up over 60%.
As we start the second half of the year, many participants are wondering whether it is too late to buy the chip group.
The company has more than two decades of experience in its niche markets and knows how to serve its customers well. From high-performance computing to deep learning, Nvidia’s chips are likely to continue to be an integral part of our future. They could even be used in segments that Wall Street may not have yet considered.
So in the long run, I expect NVDA stock to increase much more.
However, as the number of novel coronavirus cases both stateside and globally goes up and the earnings season kicks in, there will likely be pressure on many stocks that have recently seen stellar run-ups. A couple of negative macroeconomic or global news headlines may drive many stocks, including Nvidia, down.
Long-term investors may regard any potential pullback in NVDA stock as opportunity to buy the shares.
What to Expect from Q2 Earnings
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 segment only accounts for about 10% of its total revenues. Therefore, many investors regard Nvidia as the premiere graphics-chip stock.
In May, Nvidia released robust first-quarter earnings. Revenue came at $3.08 billion for the quarter ended April 2020. A year ago, it was $2.22 billion. Earnings per share was $1.80, compared to 88 cents per share a year ago.
Nvidia stock breaks 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.
When the group releases Q2 metrics in August, analysts 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.
NVDA is benefiting from high sales not only in video games but also in data centers and workstations. Industry experts also regard NVDA as a top player in the AI chip space. Plus, its graphics chips are highly sought after for use in deep-learning applications.
Nvidia is also exploring smart-city solutions, which exploit its proficiency in AI and data analytics. In other words, the company is somewhat shifting its focus from processors to providing the full technical backbone for AI ecosystems.
As the use of AI and machine learning continues to rapidly grow, its AI business could expand exponentially, greatly lifting NVDA stock. For example, in recent days, it announced a partnership with Mercedes-Benz to build software-defined computing architecture for automated driving.
What Could Derail NVDA Stock For Now
As tech companies start to release their earnings in the coming days, I expect NVDA stock to be quite volatile. It’s important to remember that Nvidia is a momentum stock. Long-term investors would like to see the stock go and stay over $400. Yet short-term traders will likely keep it between $325 and $375.
Any weakness in broader markets or other chip and technology stocks in this earnings season will likely weigh on NVDA stock, too.
Those who already own Nvidia stock may consider hedging their positions with monthly at-the-money (ATM) covered calls. By adapting such a strategy, investors can benefit from a rally by Nvidia stock in the wake of the results and at the same have some protection from subsequent profit-taking.
In case of a drop in price, I’d suggest that long-term investors wait until Nvidia stock builds a base between $300 and $350. Any move toward $300 would likely make the stock extremely attractive for many investors.
On the other hand, if the recent rally in the markets continue in the early days of July, too, then Nvidia stock could easily move toward $400. Then NVDA’s technical charts would need to be reevaluated.
Investors may also be concerned with NVDA’s current valuation levels. For example, NVDA stock is trading at a forward price-earnings ratio of over 46. And its price-sales ratio stands at 19.3. In comparison, Intel (NASDAQ:INTC) stock’s forward P/E and P/S ratios stand at about 12.4 and 3.3 respectively. Therefore, some short-term price-taking in NVDA stock looks likely.
The Bottom Line on NVDA Stock
Given Nvidia’s innovations in multiple areas, including AI and machine learning, there’s a well-deserved bull argument for the stock of the premiere graphics-chip maker. There is strong demand for Nvidia’s graphics processors.
However, in July, broader markets as well as semiconductor stocks will likely ebb and flow as Covid-19 and earnings headlines change, literally by the day. Therefore, nearer-term pressures will likely weigh on the outlook of NVDA stock, especially until the group reports its earnings.
Any pullback in the share price should provide a better entry point for long-term investors.
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. 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, including a Ph.D. degree, 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.