Reports Q1 2020 results on Thursday, May 21 after closing
Revenue forecast: $ 2.97 billion
EPS expectation: $ 1.66
A strong and impressive rally in NVIDIA (NASDAQ 🙂 stocks during the current global health crisis clearly separates this chip stock from the crowd. While other players saw their stock prices drop due to demand concerns, NVIDIA shares rose by more than 50% this year, a massive outperformance of around 6% since early 2020.
While the chipmaker is unlikely to escape the general slowdown in demand due to COVID-19 closings, analysts are focusing on the company's balance sheet, cash flow, and product categories, which are expected in the current environment will remain strong.
NVIDIA was one of Morgan Stanley & # 39; s top picks in the semiconductor space. "We prefer NVIDIA for greater hood growth with the best chance of going through difficult conditions," analyst Joseph Moore wrote in a recent post.
When the Santa Clara, CA-based company publishes its first quarter earnings tomorrow, investors will be eager to see if demand recovery is on track.
NVIDIA has seen inventory levels increase and buyers have been delaying purchases since Q4 2018. The company has been hit hard by the industry slowdown, particularly in the demand for chips used in gaming and data centers – NVIDIA's two largest income generating units.
Last year, the turbulent trade war between the US and China and a global economic slowdown forced the largest buyers of the company to postpone purchases. This macro headwind halted NVIDIA growth for three consecutive quarters as quarterly revenue shrank from a year earlier. In February, the company delivered a strong sales forecast for the first quarter, with sales of $ 3 billion, plus or minus 2%. The chipmaker later lowered that forecast by only $ 100 million because of the coronavirus-related disruptions.
Yet NVIDIA did not passively accept that news. The largest maker of graphics chips used in PC gaming has adapted its technology to the artificial intelligence market, creating a new multi-billion dollar company.
According to Chief Executive Officer Jensen Huang, the use of such computers is spreading, making growth less dependent on the spending plans of a handful of companies.
Most of the company's revenue still comes from PC gaming, where NVIDIA's graphics chips create the most realistic experiences. Top-of-the-line GeForce parts cost more than many consumers spend on an entire PC.
As there are signs of a strong recovery in demand for NVIDIA chips, the key question for investors is how far chipmaker stocks can go.
Most analysts expect semiconductor activities to improve in 2020, when the industry is expected to receive a significant boost from the introduction of 5G technology and the expansion of cloud infrastructure spending.
But a variety of headwinds persist: valuations are a major concern, especially when taking into account risks such as COVID-19 that are currently plaguing the global economy. Ties between the US and China are also deteriorating again.
The Trump administration last week banned any chip manufacturer using American equipment to supply Huawei technologies to China without the permission of the United States government. The Chinese government has vowed to protect its national champion through retaliation against U.S. companies that depend on China.
NVIDIA has invested heavily in the world's second largest economy, where many of its chips are used for assembly in other products, especially in industries related to artificial intelligence.
Bottom Line
After the sharp rise in stock this year, NVIDIA is now one of the most highly valued chip stocks with a price-earnings ratio of 77.41, yielding more than twice the average multiple of the semiconductor group of 38.35. That leaves the stock amenable to correction for any negative surprise in tomorrow's earnings report, especially if the economic and geopolitical environment remains fragile.
