Wall Street darling Nvidia (NASDAQ:NVDA) will report Q2 FY21 earnings on Aug. 19. Year-to-date, NVDA stock is up around 90%.
Santa Clara, California-based Nvidia controls the majority of the world graphics processing unit (GPU) market. In the long run, I expect NVDA stock to increase much more. However, market participants may be ready to hit the “sell” button around the quarterly release, as any good news may already be factored in.
Furthermore, any weakness in broader markets or other chip and technology stocks in the coming weeks will likely weigh on NVDA stock, too. Long-term investors may regard any drop in price as an opportunity to buy the shares of the chip heavyweight.
Q2 Earnings and NVDA Stock
Because Nvidia typically beats the Street’s quarterly revenue estimates, the investing community is expecting a repeat performance. It sells two main products: GPU and Tegra processors. GPU computing is the use of a GPU as a co-processor to accelerate central processing units (CPUs).
In 1999, Nvidia invented the GPU, the driver behind the growth of the PC gaming market. The company currently holds more than 1,100 U.S. patents. Tegra is a system-on-a-chip (SoC) suite developed by Nvidia for mobile devices, but Tegra only accounts for about 10% of its total revenues. Therefore, many investors regard Nvidia as the premiere graphics-chip stock.
Management breaks its revenue into four main segments: gaming, data center, professional visualization, and automotive. Gaming, the most crucial segment, accounts for over 40% of Nvidia’s total revenue. Computer gaming is the world’s largest entertainment industry.
The company owns GeForce, a gaming platform. It is one of the largest gaming platforms, with millions of players who can mean massive traffic and new customers for Nvidia products. The chipmaker frequently uses its Twitter (NYSE:TWTR) platform to make announcements on product developments.
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 were $1.80, compared to 88 cents per share a year ago. Since then, NVDA stock has increased from about $350 to the current price level of over $445.
When the group releases Q2 metrics in August, analysts will pay special attention to total revenue as well as revenue figures from its end-markets. Investors will also want to see how each segment may be affected by a potential disruption in case of increasing COVID-19 case numbers worldwide.
Management’s outlook for the rest of the year and the timeline for next-gen product launches would also complement the fiscal results. Supply and demand trends would likely affect how NVDA stock behaves after the quarterly results.
Of specific importance could be an update regarding a potential rumored acquisition. In July, Bloomberg reported that Nvidia would likely buy UK-based Arm, which the debt-ridden chip designer Softbank (OTCMKTS:SFTBY) took private in 2016. Although it’d probably be a costly acquisition, it would enable Nvidia to own the largest mobile chip designer.
Long-Term Tailwinds for NVDA Stock
According to recent research by Yuhang Jiang of Nankai University, China, Nvidia’s GPUs have “greatly promoted the development of the PC game market and redefined the modern computer graphics technology… Their GPU product brands are aimed at specialized markets, including GeForce for gamers; Quadro for designers; Tesla and DGX for AI data scientists and big data researchers; and GRID for cloud-based visual computing users.”
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.
“Graphics processing units (GPUs) manufactured by NVIDIA continue to dominate many fields of research, including real-time GPU-management… NVIDIA’s status as a key enabling technology for deep learning and image processing makes this unsurprising, especially when combined with the company’s push into embedded, safety-critical domains like autonomous driving.”
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 grows, its AI business could expand exponentially, considerably 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 Nvidia Stock Soon?
In the coming days, I expect NVDA stock to be quite volatile. It’s important to remember that Nvidia is a momentum stock, especially around earnings release dates. Long-term investors would like to see the stock go and stay over $450. Yet short-term traders will likely keep it between $400 and $450.
Those who already own Nvidia stock may consider hedging their positions with monthly at-the-money (ATM) covered calls. By adopting such a strategy, investors can benefit from a rally by Nvidia stock in the wake of the results and 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 around $400. Any move toward $400 or even below would likely make the stock extremely attractive for many investors.
On the other hand, if the recent rally in the markets continues in the second half of August, Nvidia stock could quickly move toward $500. Then NVDA’s technical charts would need to be reevaluated.
Market participants may also want to pay attention to Nvidia’s current valuation levels. For example, NVDA stock is trading at a forward price-earnings ratio of over 56. And its price-sales ratio stands at 23.5. In comparison, Intel (NASDAQ:INTC) stock’s forward P/E and P/S ratios stand at about 10.9 and 2.7, respectively.
On the other hand, AMD stock, which is up over 75% YTD, has forward P/E and P/s ratios of 75.2 and 12.7. These metrics mean that some short-term price-taking in NVDA stock looks likely.
The Bottom Line
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 a strong demand for Nvidia’s graphics processors. And those fundamental developments have recently pushed NVDA stock from $180 in mid-March to the current price of over $440. Put another way, market participants believe that Nvidia will continue to grow at fast levels. The next earnings report would, therefore, be a good gauge.
In the coming weeks, broader markets, as well as chip stocks, will likely ebb and flow as Covid-19 and earnings headlines change, literally by the day. Therefore, nearer-term pressures will probably weigh on NVDA stock’s outlook, especially until the group reports its earnings.
Yet, 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 three 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.