Part 5

NVIDIA Corporation (NVDA)

Company Background

Nvidia Corporation is an American multinational technology company incorporated in Delaware and based in Santa Clara, California. It designs graphics processing units (GPUs) for the gaming and professional markets, as well as system on a chip units (SoCs) for the mobile computing and automotive market. NVIDIA was the pioneer in the graphic processing space as it is the inventor of the graphic processing unit, or GPU. Its primary GPU product line, labeled “GeForce”, is in direct competition with Advanced Micro Devices’ (AMD) “Radeon” products. The company’s GPU platforms are playing a major role in developing multi-billion-dollar end-markets like robotics and self-driving vehicles.

Over the years, the company’s focus has evolved from PC graphics to artificial intelligence (AI) based solutions that now support high performance computing (HPC), gaming and virtual reality (VR) platforms. Nvidia expanded its presence in the gaming industry with its handheld Shield Portable, Shield Tablet, and Shield Android TV and its cloud gaming service GeForce Now.

NVIDIA is a dominant name in the Data Center, professional visualization and gaming markets where Intel and Advanced Micro Devices are playing a catch-up role. The company’s partnership with almost all major cloud service providers (CSPs) and server vendors is a key catalyst.

In addition to GPU manufacturing, Nvidia provides parallel processing capabilities to researchers and scientists that allow them to efficiently run high-performance applications. They are deployed in supercomputing sites around the world. More recently, it has moved into the mobile computing market, where it produces Tegra mobile processors for smartphones and tablets as well as vehicle navigation and entertainment systems. In addition to AMD, its competitors include Intel and Qualcomm.

Current Position – Financial Performance & Future Growth Prospects

One of the new growth areas for NVIDIA has been gaming, as the company has continued to gain a decent market share among the gaming service providers. The strong product line-up of advanced graphics cards has made it a favorite graphics card provider among the PC makers. The strong YoY growth in PC gamers, esports players and higher spending on the gaming GPUs have also been among the key catalysts. Further, NVIDIA’s Turing GPU and its real-time ray tracing technology are witnessing a massive adoption.

As mentioned above, the company generates most of its revenue from gaming graphics processing units (GPUs), but the chipmaker also sells high-end GPUs to data centers, where they process AI and machine learning tasks alongside central processing units (CPUs) and other chips. It also recently expanded that business by acquiring Mellanox, which provides networking equipment to data centers.

The expansion of that business boosted NVIDIA’s data center revenue 167% year over year to a record high of $1.75 billion last quarter. That momentum should continue as the company rolls out its new Ampere GPUs for data centers, bundles in more of Mellanox’s products, and receives more orders from cloud, supercomputing, enterprise, telecom, and industrial edge customers.

Datacenter presents a solid growth opportunity for the company. As more and more businesses are shifting towards the cloud in the current environment, the demand for datacenters is expected to continue to rise in the months and years to come. To cater to this huge demand, datacenter operators like Amazon, Microsoft and Alphabet are expanding their operations across the world, which is driving demand for the GPUs. This bodes well for NVIDIA’s uptrend as well.

The company also focuses on selling its Arm-based Tegra CPUs for connected and driverless cars. Those high-end chips power infotainment and navigation systems and help driverless systems process what they’re “seeing” on the road. NVIDIA’s automotive revenue plunged 47% year-over-year to $111 million last quarter as the pandemic disrupted auto plants worldwide, but that business could recover quickly after the crisis ends. As we all know, Artificial Intelligence, Autonomous Driving, Internet of Things, Machine Learning etc. are all trends that will define the way the world will look in the coming decades. Thus, NVIDIA is currently in a unique position for benefiting from all of these high-growth trends in the future, as it is currently a leader in all of them.

Wall Street expects NVIDIA’s year-over-year revenue and earnings to rise 45% and 57%, respectively, this year, as the growth of its gaming and data center segments offset the slower growth of its other businesses. The stock still looks reasonably valued at less than 50 times forward earnings, and it remains a solid long-term play on the AI and driverless vehicle markets.

NVIDIA is a high-growth stock with an extremely stable financial position and a remarkable balance sheet. As of Jul 26, 2020, the company had cash and cash equivalents of nearly $10.98 billion, which is significantly higher than its total debt of $6.96 billion. Since it has net cash available on its balance sheet, the existing cash can be used for pursuing strategic acquisitions, investment in growth initiatives and distribution to shareholders.

Technical Analysis

By looking at the daily chart, we can see the strong bullish rally that has occurred in the last 6 months taking the price from the March 19th lows of around $180 to the highs at $590, thus representing a 228% increase in 5 months. The all-time highs were reached in the beginning of September and ever since then, we have seen a volatile roller-coaster price action for the stock and the SPY ETF altogether. An initial correction took the price down with over 21% in less than 2 weeks throughout the first half of September. Then, we saw another sharp rally as the price made an attempt to re-test the all-time highs and the psychological resistance lying there. However, the stock failed to break the $580 resistance in the first half of October, which was then followed by a sharp drop of the price in the lead up to the US Presidential Elections. Now, with the elections behind us the stock has made another (3rd) attempt to continue its outstanding bull rally, and it seems that its getting ready to challenge the $590 all time highs. However, the bullish momentum now seems relatively weaker than the one we saw in early September as the RSI is trading significantly lower. This in turn might be a signal that one of the best performing stocks so far this year and a company that we firmly believe in for the long term, might be due for a pullback from the current all time high levels. A potential rejection at $590 for a third time in the last 2 months will form a Triple Top reversal pattern on the daily chart. Does, this remind you of something? Well, that is exactly what we got from the SPY, PYPL and AMD daily charts – a relatively weaker attempt for a push above the ATH, with two prior strong rejections at the current levels.

We would wait for a short-term pullback towards the $510 mark and start buying just above the support at $509. Should the price drop further, we would be interested in adding more to our buy positions at the $440 and $400 levels, which would improve our average cost basis. Our first take-profit target would be set at $625, followed by the next target at $690 where we would be fully cashing in our profits.

The stock is currently sitting at the $583 mark after rebounding from the strong diagonal, horizontal and dynamic trendline support around $500. The initial downward correction was anticipated in the lead up to the elections as when there are high levels of uncertainty in the market, then even the best stocks out there could become vulnerable. Additionally, lets not forget that NVIDIA’s stock has already appreciated with the staggering 228% from its March lows, thus these current corrective movements, could very well be considered healthy and necessary for the continuation of the uptrend. However, it is of essential importance to note that if the stock fails to resume its uptrend by pushing to a higher high soon, then this might create a very strong reversal technical pattern called a Triple Top formation. The neckline of this figure would be around the $505 mark and a potential break there could open up the doors for a much larger decline towards the $420 level.

While we believe that the stock market in the US is currently holding a lot of intrinsic risks – COVID-19, presidential elections, the economic recovery etc. – and that we could be in for a sideways and choppy price action in the coming months, we see the winners continuing to win. We remain cautiously bullish on NVDA’s stock and believe that any profit-taking corrections and potential larger price declines would give us a great opportunity to buy the stock at a good discount and hold it for the long term. This, in turn would give us a chance to maximize our profits to the upside, once the stock resumes its strong uptrend. Furthermore, some of the technical indicators that we are monitoring closely (50 DMA, 100 DMA, Bollinger Bands, RSI etc.) are currently showing that the price might not have enough steam to break the current diagonal trendline, horizontal and psychological resistances that it faces. The exhaustion of the recent up move could be signaling that a potential short-term decline could be just around the corner. Thus, we are not advising our followers to go ahead and start buying the stock right now at its current highs, but to rather wait for a better entry point that we believe will present itself in the coming days and weeks.

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