Has Nvidia (NASDAQ:NVDA) stock really taken over in the semiconductor market, or has it simply temporarily jumped to the top? Investors who read headlines may be tempted to believe that NVDA shares are only headed up. However, the signs are not so clear. Further, markets have already rewarded Nvidia shareholders handsomely as the stock has risen 206% year-over-year, from roughly $165 to $505.
Additionally, there are signs that share prices could soon be cooling. NVDA shares will face upward resistance. And a certain percentage of investors will look to book profits which will exert downward pressure on share prices. So, whether Nvidia stock ultimately rises much higher, levels off, or declines these questions should remain present in investors’ minds.
Bigger Than Intel?
Nvidia competes in a fierce semiconductor industry against well-heeled adversaries. Potential investors and current owners alike should be considering competitor firms’ situations as well. Nvidia will be affected by them.
Nvidia recently captured headlines because it eclipsed Intel (NASDAQ:INTC) to become the leading semiconductor company in terms of market capitalization. Shrewd investors need to ask themselves what that really means. Casual observers might interpret this to mean that Nvidia is selling the most in the industry, or has the most money. But that isn’t the case.
As a reminder to readers, market cap is a simple calculation of shares outstanding multiplied by current share price. Nvidia’s current market cap is $303 billion, Intel’s is $209 billion, and AMD (NASDAQ:AMD) sits at a more modest $98 billion.
Clearly Nvidia has the highest market cap among them. But, so what?
Nvidia reported revenues of $3.866 billion(1) Q2 2020, while Intel reported $19.7 billion, and AMD reported $1.93 billion. The point here is that when headlines mention that Nvidia has overtaken Intel, investors should look at the picture holistically. Based on Q2 ‘20 earnings, Intel is roughly 5 times the size of Nvidia. AMD is more comparable to Nvidia along parameters of revenues.
Further, when I wrote about AMD a few weeks ago, I mentioned that it has done well. Yet, the firm must constantly look over its shoulder for any moves by Intel. The fact remains that Intel is the 800 lb. gorilla in the room. Intel has, can, and will shape the market to its liking. Investors should understand that Intel is only temporarily down, and certainly not out.
Really a Gaming Leader?
Nvidia’s console gaming Tegra chip powers the Nintendo (OTC:NTDOY) Switch. The Switch itself is only a few years old, and has sold 62 million units in its short lifetime. Only the Wii has sold more console units for Nintendo at 101 million lifetime sales. Estimates are that Nvidia will receive $100 million in revenue from Switch sales in the second half of 2020. $100 million is a big number, or is it?
Microsoft’s (NASDAQ:MSFT) Xbox Series X will be powered by AMD’s RDNA2 GPU as will Sony’s (NYSE:SNE) Playstation 5. AMD projects Q3 revenues will reach $2.55 billion driven primarily by the previously mentioned consoles. That’s a jump of $600 million from Q2’s $1.932 billion. AMD is expecting several hundreds of millions of dollars from those console chips sales in Q3.
Nvidia is only anticipating $100 million in the entire second half of 2020 from console gaming chips.
Earnings Beat Unrewarded
Seeing that Nvidia stock didn’t rise much following the firm’s Q2 earnings ought to raise a few eyebrows. It’s a clear indication that the markets believe Nvidia is already overvalued. It also sends a signal to the market that a cooling period may well be coming.
Of the 39 analysts who cover Nvidia for the Wall Street Journal, 27 rate it a buy. Six of those analysts rate it a hold. I fall more in line with their thinking. Prices are already above $500 per share. There isn’t a lot of logic behind them rising much higher. I also feel that it’s naive to give much weight to market cap.
While the measure is meaningful, it’s also very changeable and may decline or rise quickly. Intel dropped on news that it was going to miss a production target. Market cap declined. But sales are still the primary driver in my opinion. Indications such as sales and P/E ratios give clearer indications of a firm’s real value.
Nvidia has done very well and is trending upward long-term, I just wouldn’t buy now as I think Intel will bounce back and regain the ground it lost to Nvidia. And AMD is on track to hit production goals. PS5 and Xbox Series X will certainly outsell the Nintendo Switch this holiday season, and over a lifetime as well. But the future is still bright for both Nvidia stock and the company.
Alex Sirois did not hold any shares of stocks mentioned in this article as of writing