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Can Q3 Earnings Fuel NVIDIA Corporation Stock Higher?

NVIDIA Corporation (NASDAQ:NVDA) stock is at an all-time high ahead of earnings. Is NVDA stock still a good buy now?

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There is little doubt to suggest that Jensen Huang led semiconductor company NVIDIA Corporation (NASDAQ:NVDA) is one of the best investments over the last year or so with over more than 96% gains in the year-to-date and nearly 200% gains over the last one year. We also have been bullish on NVIDIA for a considerable time now. Quite unsurprisingly, NVIDIA stock is at its all-time highs ahead of the company's third-quarter earnings, which the GPU maker is scheduled to report on Thursday after the closing bell. The Santa Clara, California based chipmaker is likely to deliver again in Q3, but should you buy NVDA stock now at its all-time high ahead of earnings? More importantly, should the late-to-the-game investors buy into NVIDIA stock rally or simply let it go? Let's take a closer look.

What The Street Expects From NVIDIA's Q3 Earnings Release.

NVIDIA has a recent history of crushing Wall Street estimates, beating the high end of the Wall Street earnings/revenue estimates in all the last four quarter except one where it missed the high-end revenue estimate by a whisker. The current Wall Street consensus expects the Jensen Huang led GPU maker to report non-GAAP earnings of 94 cents a share, up from an EPS of 83 cents in Q3 2017, just a 13.25% Year-on-Year (YoY) growth print. This a drastic change from the triple-digit YoY growth registered in the previous three quarters as NVIDIA gets caught with tough comparables to beat. On the top line front, Analysts expect the company to report a near 18% YoY growth in revenues for the quarter, with revenue expected to come in at $2.36 billion.

The wall street estimate is close to the midpoint of the management guidance, issued during the last quarterly earnings release. As per the management guidance, NVIDIA revenue in Q2 is expected to come in at $2.35 billion (+/- 2%), implying a revenue range of $2.3- $2.4 billion, translating to YoY growth of 15% at the lower end and 20% at the higher end. Here again, the growth seems to slow down compared to past three quarters where top line growth was near or above 50%.

What These Estimates Tell You About NVIDIA.

The point worth noting here is that tough comparables are catching up with NVIDIA. Though the revenue growth may not be very high as the previous quarters, once again NVIDIA is likely to trump estimates again in Q3. The earnings whisper of $1.02 per share further suggests it will yet again beat the high end of the analyst estimates which is further proof that Wall Street 'models' are yet to catch up with the rapid earnings growth at the firm. However, the recent run-up in NVIDIA shares doesn't guarantee a massive post-earnings rally even on a massive earnings beat as seen in the drop after Q2 earnings. NVIDIA stock needs more than earnings beat. Naturally, expectations are high going into Q3 earnings.

Special focus on AI and Automotive Segment.

The datacenter and automotive segments are largely the growth engines for NVIDIA, given that the datacenter and self-drive markets are expected to continue to grow over a multi-year timeframe, as usual investors would be expecting strong performance from these segments. The AI part which mainly features in the GPU maker's datacenter segment has been growing at a rapid triple digit rate and special focus would be on this. The marginal sequential growth of the datacenter segment is believed to be the reason behind NVDA stock's decline even after stellar Q2 earnings. Hence, even if this may seem overexaggerated but disappointment with respect to expectations here could hurt NVIDIA stock's fortunes again. Top management's commentary on the Tesla's rumored decision to part ways with NVIDIA will also be closely watched.

With all their segments showing healthy double-digit growth, NVIDIA has a lot of reasons to believe that the growth story will continue well past the current year. However, now with AMD (NASDAQ:AMD) and Intel (NASDAQ:INTC) coming together to take on NVIDIA in PC chips for gaming laptops, NVIDIA has its task cut out. Management's plans to counter the threat which aims to challenge NVIDIA's dominance in gaming will be closely watched as gaming revenues form bulk of the company's revenue. Gaming revenue grew by 54% YoY in Q2.

Playing NVIDIA Stock Through Q3 Earnings

NVIDIA is firing all cylinders enjoying strong growth in all segments, in all likelihood, should continue for some more time, but at more than 15 times sales, investors have a very slim margin of safety. We still believe that NVIDIA stock is a solid long term buy, given that the company has a considerable lead over the competition in the nascent AI/autonomous-driving industries, all of which are expected to grow over the next few years. The third quarter again is looking good to serve as another endorsement of NVIDIA’s growth story.

However, a word of caution for investors, considering the recent run-up in NVIDIA stock price, profit booking following the earnings call cannot be ruled out and valuation concerns are likely to catch up if the guidance is not strong enough. Further, the NVIDIA stock technical chart suggests that the stock is overbought as per Relative Strength Index (RSI) indicator with the current RSI reading at 75.76, well above the commonly used overbought threshold of 70. Moreover, the share price is precariously close to the upper Bollinger Band, suggesting an uptick could make the stock overbought as per Bollinger Bands indicator as well. And, generally, the combination of these two indicators is considered as a strong signal. All this suggests that the upside from here could be limited.

Therefore, long-term and late-to-the-game investors looking to enter into NVDA stock should wait till earnings to make a move, and look to add NVIDIA shares in the case of any post-earnings dip. In case of a post-earnings pop in the stock price, investors would do well to take a staggered approach to buy into the stock, given that the elevated valuations and the recent rise in the stock price, do not rule out the possibility of a short-term pullback in NVIDIA stock price.

Looking for fundamentally strong tech stocks like NVIDIA? Check out Amigobulls' top stock picks from the tech sector, which have beaten the NASDAQ by nearly 168%. Interested in automotive stock? Then, we also have our top picks from the auto sector, which have beaten the S&P 500 by over 284%. If you're a trader though, you should check out our daily trading ideas section for daily, free updates on the latest crossovers and other popular technical signals.


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