It took a while, but investors have come to realize that Nvidia (NASDAQ:NVDA) is likely to be an even bigger winner in the “new normal.” NVDA stock plunged as markets sold off in February and March. But it has skyrocketed off the bottom, gaining 79% in just over two months.
That rally makes some sense. Ahead of fiscal-first-quarter earnings on Thursday afternoon, the question might be whether the easy money has been made. After all, in a market still off its highs, NVDA stock is at an all-time peak.
But I don’t believe the gains are over. Rather, I believe the Q1 report will be the first step in showing just how much further Nvidia has to go.
A Second Wave
When markets began to turn south in February, investors panicked and sold pretty much everything. There were only a few exceptions.
By and large, those exceptions were companies that had obvious short-term benefits from the coronavirus crisis. Shares of personal protective equipment manufacturers like Lakeland Industries (NASDAQ:LAKE) soared. Online pet retailer Chewy (NYSE:CHWY) gained. Zoom Video Communications (NASDAQ:ZM) rallied.
As some semblance of sanity returned in March, investors started looking for companies that would get mid-term benefits, even if there was a potential short-term hit. And Nvidia is one of those companies.
The Mid-Term Boost to NVDA Stock
After all, just consider the company’s core product lines. Gaming demand is spiking: that’s why the likes of Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA) have rallied.
But that demand doesn’t go away instantly now that “stay at home” orders have been lifted. New users have been brought on, and lapsed gamers have been recaptured. And as those new customers look to upgrade over time, they’ll likely do so via Nvidia chips, given its dominance in the category.
Work from home policies have driven enormous demand for cloud services. That’s a key reason, and perhaps the main reason, why Amazon (NASDAQ:AMZN) has gained so sharply. Certainly, its e-commerce business has benefited, but Amazon Web Services should be seeing significantly accelerated adoption. AWS infrastructure is powered by Nvidia.
And as I’ve detailed before, Nvidia’s long-awaited acquisition of Mellanox Technologies only strengthened its data center business..
Gaming and data center combined drove 78% of Nvidia’s revenue in fiscal 2020 (ending January). Mid-term strength in those categories means Nvidia is set to deliver impressive results in the coming years, not just this quarter.
What to Watch for in Q1
To be sure, that doesn’t necessarily mean Nvidia is going to crush analyst estimates for the first quarter. But we should start to see signs of increased demand.
After all, Nvidia’s Q1 ended just a few weeks ago. And management will comment on order patterns in the first few weeks of the second quarter.
In both cloud and data center, I expect the news will be quite positive. Some gamers no doubt have spent recent weeks upgrading their rigs, or getting new ones.
In data center, we’ve already seen good news from rivals whose quarters ended a month earlier. Advanced Micro Devices (NASDAQ:AMD) chief executive officer Lisa Su said on her company’s first-quarter conference call that the current crisis is “positive for the data center market.” Intel (NASDAQ:INTC) posted impressive Data Center Group revenue in its Q1, which its management said was above expectations.
Again, NVDA stock has incorporated this good news to at least some extent. But I expect Thursday’s report to highlight just how much growth Nvidia has left, particularly in its two largest categories.
Short-Term Trading in NVDA Stock
Even a strong quarter doesn’t necessarily mean that NVDA stock is going to soar in regular trading on Friday. After all, we just saw a blowout quarter from Walmart (NYSE:WMT). WMT stock promptly fell 2% on the news.
We may see some profit-taking on Friday. Chip stocks could see further volatility in the coming weeks.
But as I’ve repeatedly advised investors over the last few months, the long view is what matters. That’s particularly true for a company like Nvidia. Its chips are going to power some of the megatrends that will back what I’ve called the “Roaring 2020s.”
Thursday’s earnings will show what those megatrends can do in the short term. But more importantly, they’ll highlight what they mean in the long term.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.
