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 first quarter. Its revenue guidance for the current Q2 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 Nio (NIO) ET7, which will be Nio’s first autonomous driving model when it arrives in Q1 2022. And Nvidia already Amazon (AMZN) Web Services with chips for data centers.
Last September, Nvidia unveiled new GeForce gaming GPUs, touting a generational leap in performance. In April, Nvidia unveiled its first CPU, called Grace, which uses chip designs from U.K.-based Arm for high-end computing and AI applications.
Nvidia’s proposed $40 billion Arm takeover is under scrutiny in the U.K., with a ruling expected by month end.
Nvidia’s GPUs act as accelerators for central processing unit, or CPUs, made by other companies. With its own CPU, Nvidia will offer a more complete system for data centers, directly challenging processor giants Intel (INTC) and Advanced Micro Devices (AMD).
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 the 20% profit-taking sell zone June 28, according to MarketSmith chart analysis. The chip stock remains far above buy range, which goes to 681.10. On July 14, Nvidia fell below the 10-day moving average but it remains well above the 50-day line.
The relative strength line for NVDA stock is rising after a recent decline. It rallied for most of 2019 and 2020. 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 a B+, a sign of moderate buying by institutions over the past 13 weeks. The chip stock boasts strong institutional backing: As of June, 4,390 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.
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 59% 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 Manufacturing (TSM).
Out of 27 analysts covering NVDA stock, 26 rate it a buy, one has a hold and none has a sell, according to TipRanks.
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.
Nvidia remains constrained on chip supplies, though the situation is said to be improving.
The chip shortage hit automakers especially hard. Nvidia makes chips for car infotainment and autonomous driving systems.
As cloud gaming grows around the world, Nvidia’s new cloud gaming service could become a growth driver. Rival services include Google Stadia, Microsoft Xbox Network and Amazon Luna.
This year, Nvidia began making dedicated chips for mining cryptocurrencies. Its cryptocurrency mining processors, or CMPs, launched in February and generated $155 million in sales by April.
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.
Besides NVDA, fabless chip stocks include Qualcomm, Broadcom (AVGO) and Monolithic Power Systems (MPWR). The fabless group ranks a solid No. 33 out of 197 industry groups, and Nvidia is a highly rated chip stock within it.
For the best returns, 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. Recent acquisitions expand its opportunity in emerging growth areas, such as data centers, automated cars and cloud gaming. The adoption of cryptocurrencies could further stoke demand for Nvidia chips.
Meanwhile, new gaming chips underscore Nvidia’s continued dominance in core markets.
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. Nvidia belongs to a leading industry group.
Leaderboard stock NVDA remains far extended from a 648.67 buy point, backed by a strong RS line.
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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