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?
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For those looking for top large-cap stocks to buy now, here’s a deep dive into NVDA stock ahead of the Q4 earnings report on Feb. 24.
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.
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.
And on Feb. 18, Nvidia announced new chips for mining Ethereum, amid the cryptocurrency surge.
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.
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Nvidia Stock Technical Analysis
Nvidia has a superior IBD Composite Rating of 99. In other words, it ranks in the top 1% of all stocks based on combined technical and fundamental metrics. In fact, NVDA stock belongs to the IBD 50 list of top growth stocks as well as on 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.
On Feb. 11, NVDA stock cleared a 587.76 flat-base buy point after consolidating large gains for 14 weeks, according to MarketSmith chart analysis. It’s currently in buy range to 617.15. Earlier in February, it topped a 560.07 alternative entry from its January highs.
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 and is acting well since the breakout.
While the relative strength line is starting to trend higher again, it’s below consolidation highs. 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 tripled from March 2020 coronavirus lows. The surge came on the back of strong quarterly earnings and a trio of key business moves.
In 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 in 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: 42% of outstanding shares are owned by funds. As of December, 4,095 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 stock owns an RS Rating of 73, meaning it has outperformed 73% of all stocks over the past year. The iShares PHLX Semiconductor ETF (SOXX) holds both Nvidia and AMD stock.
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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. Analysts expect EPS to jump 48% to $2.80 as revenue leaps 55.4% to $4.83 billion. Nvidia, like other fabless chipmakers, is facing supply constraints at chip foundries, namely Taiwan Semiconductor Manufacturing (TSM). Its guidance will provide more insight into its supply situation.
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.
Lately, 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. 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.
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Rival Chip Stocks
Nvidia and AMD are established leaders in the semiconductor industry.
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, Broadcom (AVGO) and Monolithic Power Systems (MPWR). The group itself ranks No. 65 out of 197 industry groups.
Besides Nvidia, Broadcom and Monolithic belong to the prestigious IBD 50 list.
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 stock seized a 587.76 buy point Feb. 10 after consolidating for months. The flat base shows some weaknesses, but Nvidia’s RS line is improving.
Meanwhile, the stock market remains comfortably in rally mode, but a pause or pullback could be due as key indexes test support at their 21-day exponential moving averages.
Bottom line: Nvidia stock is 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.
Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.
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