Nvidia (NVDA), a leader in artificial intelligence, powers a future of self-driving cars and cloud gaming. A recent takeover has fueled earnings, while new chips set the path for future growth. Nvidia stock was a big winner for most of 2020, but is it a good buy now?
For those looking for top large-cap stocks to buy now, here’s a deep dive into NVDA stock.
NVDA Stock Basics
The fabless chipmaker pioneered graphics processing units, or GPUs, to make video games more realistic. It’s expanding in AI chips, used in supercomputers, data centers and driverless cars.
For example, it supplies the chip that acts as the “brain” for the newest Nio (NIO) electric vehicle. The ET7 is Nio’s first electric sedan, which promised a range for 621 miles on a single charge and lidar sensors that enable its autonomous driving system.
Besides Nvidia, Advanced Micro Devices (AMD), Intel (INTC) and Qualcomm (QCOM) tap some of those markets. Nvidia counts Amazon (AMZN) Web Services as a customer for data-center chips. It is partnering with VMware (VMW) and Amazon on an AI-driven cloud platform for big businesses.
Semiconductor stocks are volatile.
Global chip sales turned south in late 2018 and fell 12% in 2019. They rallied early this year on signs of an industry recovery and on a U.S.-China trade deal, then sold off on coronavirus fears.
The deadly virus outbreak first halted production in China and then put global economies under strain. Despite the pandemic, the semiconductor industry will return to growth in 2020, according to World Semiconductor Trade Statistics. The group projects that chip sales will rise 5% to $433 billion this year. It sees growth accelerating to 8% in 2021, as 5G wireless networks spread.
Chip stocks are also sensitive to tensions between U.S. and China. The previous U.S. administration cracked down on Chinese tech giants like Huawei, and anti-China sentiment continues among lawmakers from both parties.
Nvidia and AMD derive 1% to 2% of revenue from Huawei. Other companies are more exposed. Semiconductor companies took a broad hit from the trade war between the two nations.
Nvidia Stock Technical Analysis
Nvidia has a near-perfect IBD Composite Rating of 98. In other words, it ranks in the top 2% of all stocks based on combined technical and fundamental metrics. In fact, NVDA stock belongs to the IBD 50 list of top growth stocks.
The flat base formed mostly below the 50-day/10-week moving average, which is a negative. However, NVDA stock is back above that key level of support. If Nvidia rebounds further, a move the recent high of 560.07 could offer an early entry for aggressive investors.
The relative strength line has fallen from the Nov. 6 peak to the lowest level in about five months. That’s after a strong rise since May 2019. A rising RS line shows a stock is outperforming vs. the S&P 500 index. It is the blue line in the chart shown.
NVDA stock is 8% below its latest entry but has nearly tripled from March coronavirus lows.
The surge came on the back of strong earnings in the latest three quarters and a trio of key business moves.
In September, Nvidia unveiled new GeForce gaming GPUs seen to mark a generational leap in performance. Then NVDA agreed to buy Arm Holdings for $40 billion, boosting its data center business. In October, Nvidia CEO Jensen Huang signaled strength in AI or artificial intelligence chips, outlining new work in data centers and health care.
Chip stock Nvidia boasts strong institutional backing and eight quarters of rising fund ownership. The number of funds owning shares climbed to 4,005 in December from 3,866 in September.
Nvidia Earnings And Fundamental Analysis
Nvidia’s EPS Rating is a superior 97 and its SMR Rating is an A, on a scale of A+ to a worst E. The EPS rating compares a company’s earnings growth to other stocks, and its SMR Rating gauges sales growth, profit margins and return on equity.
On Nov. 18, Nvidia earnings for the third quarter beat views and the company guided higher on revenue. In Q3, gaming chip revenue rose 37% year over year. Data-center chip sales soared 162%.
“Nvidia is firing on all cylinders, achieving record revenues in gaming, data center and overall,” Huang said in a statement. Demand for the new Nvidia GeForce RTX GPU (graphics processing unit), he added, is “overwhelming.”
The third quarter continued a strong comeback after a string of down quarters not too long ago. Chipmakers took a hit in 2019 from a cyclical downturn in semiconductor sales. But under pandemic lockdowns, Nvidia has seen higher demand for its chips in home computing, videogames and big data centers. With its Mellanox acquisition, Nvidia doubled down on AI, deep learning and data centers.
When Nvidia next reports, analysts expect Q4 EPS to rise 48% as revenue grows 55%. They see Nvidia earnings per share increasing 68% in all of 2021 and a further 20% in 2022, according to Zacks Investment Research.
Over the last three quarters, Nvidia earnings per share growth averaged 81%, far above the three-year average of 12%. Nvidia grew sales 57% in the last quarter, also well above the three-year average of 9%.
Nvidia’s strong fundamental position also shows up in a 35% annual pretax margin and 33% return on equity, the IBD Stock Checkup tool shows.
In case of broad semiconductor weakness, some experts advise investing in the highest-growth end markets of AI, self-driving cars, data centers, gaming and cryptocurrencies. Nvidia taps those markets.
Rival Chip Stocks
Nvidia and AMD are established leaders in the semiconductor industry. They also both on the IBD 50 list of top growth stocks and on IBD Leaderboard, a curated list of stocks with the most potential for big gains. Nvidia got trimmed to a quarter position on Leaderboard Jan. 27, after showing bigger losses than stocks at large.
Among top chip stocks, Nvidia and AMD help to lead IBD’s Electronics-Semiconductor Fabless industry group. Fabless chip companies contract with foundries to make the chips they design. Other chip companies own their fabrication plants.
Other big names in the fabless group include Qualcomm and Broadcom (AVGO). The fabless group itself ranks a mediocre No. 59 out of 197 industry groups.
For the best returns, growth stock investors should focus on companies that are leading the market and their own industry group.
Is Nvidia Stock A Buy Now?
On a fundamental level, Nvidia earnings and sales are rising again after sharp declines. The chip giant shows well on other key measures such as profit margins and return on equity.
The Mellanox and Arm Holdings acquisitions expand its opportunity in emerging areas such as data centers. New gaming chips underscore its continued dominance in core markets. Continued demand for cryptocurrencies further stokes demand for Nvidia chips.
Nvidia is a leader in the fabless chip group, which has seen industry headwinds ease. But the ongoing coronavirus risk could affect global end markets in electronics into 2021.
On a technical basis, NVDA stock is still below its latest buy point. The stock has been straddling its 10-week line and the relative strength line is still trending lower.
Bottom line: Nvidia stock is not a buy right now. But it could offer an early entry at any time and is within a flat base. As a leading chip stock with exposure to top end markets in data centers and gaming, Nvidia’s certainly one to watch.
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