Nvidia (NVDA) chips power a future of self-driving cars and cloud gaming. New products set the path for future growth while the global semiconductor market is in a supply crunch. Is Nvidia stock a good buy now?
Chip stocks like Nvidia, along the tech sector and growth stock more broadly, have sold off hard since late February. Shares rebounded March 9 as bond yields eased. 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, drug development and driverless cars.
For example, it will supply the chip that acts as the “brain” for the newest Nio (NIO) electric vehicle. The ET7 is Nio’s first electric sedan, promising a range of 621 miles and highly autonomous driving. It’s due to arrive early next year.
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. Besides Nvidia, Advanced Micro Devices (AMD), Intel (INTC) and Qualcomm (QCOM) tap growth markets such as cloud data centers.
In February, Nvidia announced new chips for mining Ethereum, a cryptocurrency. Last September, Nvidia unveiled new GeForce gaming GPUs, touted as a generational leap in performance. Then NVDA agreed to buy Arm Holdings after completing its Mellanox acquisition, boosting its data center business. And last October, Nvidia signaled strength in AI or artificial intelligence chips, including use in the discovery of drugs and vaccines.
But semiconductor stocks can be volatile and sensitive to geopolitical tensions. 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 recent U.S.-China trade war.
Nvidia Stock Technical Analysis
Nvidia has an IBD Composite Rating of 85. In other words, it ranks in the top 85% of all stocks based on combined technical and fundamental metrics. In fact, NVDA belongs to the IBD Leaderboard, a curated list of stocks with the most potential for big gains.
Investors generally should focus on stocks with CRs of 90 or even 95.
Shares are retesting the 200-day/40-week line while still hitting resistance at the 50-day/10-week moving average.
The relative strength line for NVDA stock has been trending lower since mid-February. A rising RS line means a stock is outperforming vs. the S&P 500 index. It is the blue line in the chart shown.
Its Accumulation/Distribution Rating is a D, a sign of moderate selling by institutions over the past 13 weeks. The chip stock boasts strong institutional backing: As of December, 4,127 funds owned NVDA shares. In fact, Nvidia shows eight quarters of rising fund ownership, the IBD Stock Checkup tool shows.
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 Feb. 24, Nvidia easily beat views for the fourth quarter. Year over year, Nvidia earnings rose 64% while sales climbed 61%. In Q4, gaming chip revenue rose 67%, despite supply shortages. Data-center chip sales soared 97%, due in part to the Mellanox purchase last year.
The quarter capped “a breakout year for Nvidia’s computing platforms,” said CEO Jensen Huang. In addition, Nvidia guided revenue higher for the current quarter.
Despite that impressive showing, Nvidia shares fell. Analysts flagged flat sequential growth in its data-center business and debated the crypto impact on its gaming business.
Analysts expect EPS to rise 34% in fiscal 2022 as revenue jumps 33%. This despite Nvidia, like other fabless chipmakers, facing supply constraints at chip foundries, namely Taiwan Semiconductor Manufacturing (TSM).
Nvidia shows one quarter of accelerating earnings growth, capped with a 64% gain in the latest quarter. Over the last three quarters, Nvidia earnings per share growth averaged 67%, far above the three-year average of 13%. Sales also accelerated to 61% in the latest quarter, well above an average 11% over the past three years.
Nvidia’s strong fundamentals also show up in a 40% annual pretax margin and 43% 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. Nvidia taps those markets, including AI, self-driving cars, data centers, gaming and cryptocurrencies.
In fiscal 2021, Nvidia earnings staged a strong comeback after falling the prior year. Pandemic lockdowns stoked demand for Nvidia chips in home computing, videogames and data centers.
Now chips are in such hot demand that it’s led to a global shortage. Management expects tight supplies of Nvidia’s latest gaming GPUs to last throughout its fiscal first quarter, meaning it will be at least May before the situation improves.
The auto sector has been especially hit hard, with General Motors (GM) and Ford (F) warning that the global chip shortage could hit production and earnings. Nvidia and its peers makes chips for car systems such as infotainment systems and power steering wheels, besides autonomous driving. Ford and GM are now partially building SUVs and trucks due to the supply constraints, new reports say.
Rival Chip Stocks
Nvidia and AMD are established leaders in the semiconductor industry.
Among top chip stocks, Nvidia and AMD belong to 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.
Fabless chip stocks include Qualcomm, Broadcom (AVGO) and Monolithic Power Systems (MPWR). The group itself ranks a poor No. 125 out of 197 industry groups. MPWR stock belongs to the IBD 50 list of top growth stocks.
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 chipmaker shows healthy profit margins and return on equity.
Recent acquisitions expand its opportunity in emerging growth areas, such as data centers. New gaming chips underscore its continued dominance in core markets. The adoption of cryptocurrencies could further stoke 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.
Amid the global chip shortage, it could take months for the supply of Nvidia GPUs to catch up with demand.
On a technical basis, NVDA triggered a sell signal from its latest breakout. Its 50-day line is acting as an area of resistance, while the RS line is lagging.
Bottom line: Nvidia stock is not a buy right now. As a leading chip stock with exposure to top end markets in data centers and gaming, Nvidia’s always one to watch.
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