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.
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.
Nvidia stock topped a 574.04 cup-with-handle buy point in early November. But it triggered a sell signal soon after and remains below the 50-day/10-week line. The relative strength line has fallen after a sharp rise for most of this year. The RS line tracks NVDA stock’s performance vs. the S&P 500 index. It is the blue line in the charts shown.
For now, Nvidia shows no new buying pattern, according to MarketSmith chart analysis.
Shares of Nvidia have nearly tripled from the March coronavirus lows. The surge comes 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 has strong institutional backing: 3,928 funds owned it as of September. That was up from 3,734 funds in June.
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 company completed its Mellanox acquisition in April, helping it to double down on AI, deep learning and data centers.
Nvidia’s industry-leading growth in 2020 sets it up for continued outperformance over the next year, Bank of America analysts said Nov. 20. Demand for Nvidia’s chips “remains strong across some of the most desirable end markets, including gaming, AI and cloud computing,” they added.
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 stay-at-home and remote-work measures, Nvidia has seen the pandemic fuel demand for its chips in home computing, videogames and big data centers.
When Nvidia next reports, analysts expect Q4 EPS to rise 48% to $2.80 as revenue grows 55% to $4.82 billion. They see Nvidia earnings per share increasing 67% in all of 2021 and a further 19% in 2022, according to Zacks Investment Research.
Over the last three quarters, EPS growth averaged 81%, well above the three-year average of 12%. Nvidia grew sales by 49% over the past three quarters and by 9% over the past three years.
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 and gaming. Nvidia taps those markets.
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.
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 5.1% to $433 billion this year. It sees growth accelerating to 8.4% in 2021. The spread of 5G wireless networks is a key growth driver.
Yet after the U.S.-China trade war under President Trump, tensions could linger with the incoming Biden administration. Analysts told Reuters that Biden could stick with harsh policies against Chinese tech giants like Huawei, bowing to anti-China sentiment among U.S. 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.
Rival Chip Stocks
Nvidia and AMD are established leaders in the semiconductor industry.
Among top chip stocks, Nvidia, AMD and data-center stock Inphi (IPHI) 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.
Nvidia ranks No. 4 out of roughly 30 fabless semiconductor stocks tracked by IBD. The fabless chip stocks group itself ranks a decent No. 43 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 is also strong 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.
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 beyond 2020.
On a technical basis, NVDA stock undercut a key support level after its latest breakout failed. The RS line, too appears to be a taking a breather after a big rally.
Bottom line: Nvidia stock is not a buy right now. But as a leading chip stock with exposure to top end markets in data centers and gaming, Nvidia’s certainly one to watch.
Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.
YOU MAY ALSO LIKE: