Nvidia (NVDA) chips power a future of self-driving cars and cloud gaming. NVDA stock rallied on strong earnings and a stronger-than-expected outlook, but supply constraints remain. Is Nvidia stock a good buy now?
On May 26, Nvidia easily beat earnings estimates for its fiscal quarter. The company’s revenue guidance for the current quarter also came in above views. Since then, shares have rallied more than 20%.
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 Amazon and VMware (VMW) on an AI-driven cloud platform for big businesses. Besides Nvidia, AMD, Intel 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, touting 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.
In April, chip foundry Taiwan Semiconductor Manufacturing‘s (TSM) said it would spend $100 billion to expand capacity and ease the global chip shortage. That lifted chip stocks such as Nvidia.
Also in April, Nvidia’s proposed $40 billion Arm takeover came under scrutiny in the U.K., shortly after Nvidia unveiled its first CPU, called Grace. The CPU, or central processing unit, uses chip designs from U.K.-based Arm for high-end computing and AI applications.
An independent competition authority in the U.K. is preparing to rule on the Arm takeover by the end of July. Nvidia announced its $40 billion purchase of U.K. chipmaker Arm last September.
Nvidia’s GPUs act as accelerators for CPUs made by other companies. With its own CPU, Nvidia will offer a more complete system for data centers, and a direct challenge to processor giants Intel (INTC) and Advanced Micro Devices (AMD)
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Nvidia Stock Technical Analysis
Nvidia earns an unbeatable IBD Composite Rating of 99. In other words, it has outperformed 99% of all other stocks in terms of combined technical and fundamental metrics. In fact, NVDA belongs to the IBD Leaderboard, a list of stocks with the most potential for big gains.
Investors generally should focus on stocks with CRs of 90 or even 95.
Nvidia stock cleared a 648.67 buy point from a first-stage cup base May 28 and hit a 20% profit-taking sell signal June 28, according to MarketSmith chart analysis. The chip stock remains far above buy range, which goes to 681.10.
The relative strength line for NVDA stock hit a new high July 6. A rising RS line means that a stock is outperforming the S&P 500 index. It is the blue line in the chart shown.
The Accumulation/Distribution Rating is an A, a sign of heavy buying by institutions over the past 13 weeks. The chip stock boasts strong institutional backing: As of March, 4,397 funds owned NVDA shares. In fact, Nvidia shows eight quarters of rising fund ownership, the IBD Stock Checkup tool shows.
Nvidia stock owns an RS Rating of 91, meaning it has outperformed 91% 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.
In Q1, Nvidia earnings rocketed 103% as sales jumped 84%. The year-over-year improvement on both the top and bottom lines was the highest in four quarters. Gaming chip revenue soared 106%. Data-center chip sales jumped 79%, due in part to the Mellanox purchase last year. In addition, Nvidia guided revenue higher for the current quarter.
Analysts expect EPS to jump 30% in all of fiscal 2022 as revenue increases 49%, according to FactSet. This despite Nvidia, like other fabless chipmakers, facing supply constraints at chip foundries, namely Taiwan Semiconductor.
Out of 29 analysts covering NVDA stock, 28 rate it a buy, one has a hold and none has a sell, according to TipRanks.
As cloud gaming grows around the world, Nvidia’s new cloud gaming service will be watched. Now in its second year, the service, called GeForce Now, has over 10 million members globally, though it’s unclear how many users are paid subscribers. Rival services include Google Stadia, Microsoft Xbox Network and Amazon Luna.
Nvidia shows two quarters of accelerating earnings growth, capped with a 103% gain in Q1. Sales growth has accelerated four straight quarters, capped with an 84% gain in Q1. Over the past five years, Nvidia grew EPS 45% annually and sales 27% annually, according to FactSet.
Nvidia’s strong fundamentals also show up in a 33% profit margin and 37% return on equity.
The pandemic fueled demand for Nvidia chips in home computing, video games and data centers. Now chips are in such hot demand that it’s led to a global shortage. On May 26, CFO Colette Kress said that Nvidia expects “to remain supply constrained into the second half of the year.”
The chip shortage hit automakers especially hit hard. Nvidia and its peers makes chips for car infotainment systems and power steering wheels, besides autonomous driving systems.
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Rival Chip Stocks
Nvidia and AMD are established leaders in the semiconductor industry.
Among top chip stocks, Nvidia helps to lead IBD’s Electronics-Semiconductor Fabless industry group. Fabless 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 ranks a middling No. 49 out of 197 industry groups. But Nvidia stock is a top-rated stock in its group.
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 and cloud gaming. 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. But amid the global chip shortage, it could take months for the supply of Nvidia GPUs to catch up with demand. And Nvidia’s industry group is lagging.
Leaderboard stock NVDA is far extended from a 648.67 buy point. In fact, Nvidia hit profit-taking sell territory in late June after reaching a 20% profit goal from its latest breakout. The RS line is spiking again, a positive sign.
Bottom line: Nvidia stock is not a buy right now because it’s out of reach. As a leading chip stock with exposure to top end markets in data centers and gaming, Nvidia is always one to watch.
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