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?
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 on a single charge and lidar sensors that enable its autonomous driving system. It’s due to arrive early next year.
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. Chip stocks rallied early in 2020 on signs of an industry recovery, then sold off on coronavirus fears.
Chip stocks are also sensitive to tensions between the 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 recent U.S.-China trade war.
Nvidia Stock Technical Analysis
Nvidia has a superior IBD Composite Rating of 97. In other words, it ranks in the top 3% of all stocks based on combined technical and fundamental metrics. In fact, NVDA stock belongs to the IBD 50 list of top growth stocks.
Investors generally should focus on stocks with CRs of 90 or even 95.
On Feb. 8, NVDA cleared a 560.07 alternative entry from its January highs. The buy range tops out at 588.07.
The base is third stage, which entails higher risk. Also, it 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.
The relative strength line has been trending lower for 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 has more than quadrupled from March 2020 coronavirus lows. The surge came on the back of strong quarterly earnings and a trio of key business moves.
Last September, Nvidia unveiled new GeForce gaming GPUs, touted as a generational leap in performance. Then NVDA agreed to buy Arm Holdings for $40 billion, boosting its data center business. Finally, last October, Nvidia signaled strength in AI or artificial intelligence chips, including use in the discovery of drugs and vaccines.
The chip stock boasts strong institutional backing. As of December, 4,027 funds owned NVDA shares, up 2% from September. 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 Nov. 18, Nvidia earnings for the third quarter beat views. The company guided higher on revenue. In Q3, gaming chip revenue rose 37%. Data-center chip sales soared 162%.
On Feb. 24, the company reports for Q4 and full-year 2021. Analysts expect Nvidia earnings per share to jump 68% for the full year and to increase a further 20% in 2022, according to Zacks Investment Research. Revenue should grow 51% in 2021 and 20% in 2022.
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 fundamentals also show 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. Nvidia taps those markets, including AI, self-driving cars, data centers, gaming and cryptocurrencies.
In recent quarters, Nvidia earnings staged a strong comeback after a string of down quarters. Under pandemic lockdowns, Nvidia saw higher demand for its chips in home computing, videogames and big data centers.
Now chips are in such hot demand that it’s led to a global shortage. Nvidia expects tight supplies of its latest gaming GPUs to last throughout the first quarter, meaning it will be at least May before the situation improves.
But the auto sector has been especially hit hard, and Ford (F) recently warned that the global chip shortage could result in a 10%-20% loss of planned Q1 production.
Rival Chip Stocks
Nvidia and AMD are established leaders in the semiconductor industry. They are both on IBD Leaderboard, a curated list of stocks with the most potential for big gains.
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.
Fabless chip stocks include Qualcomm and Broadcom (AVGO). The group itself ranks a poor No. 102 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 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 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.
Meanwhile, it could take months for the supply of Nvidia GPUs to catch up with demand.
On a technical basis, NVDA stock seized an early entry but remains below a traditional 587.76 buy point. The flat base shows some weaknesses, while Nvidia’s RS line is lagging.
Bottom line: Nvidia stock is a buy right now, for aggressive investors. Others could wait for it to clear the regular buy point. 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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