NVDA Stock Down Despite Beating Earnings and Revenue Estimates

Will Healy

Updated Fri, Aug 17, 2018, 9:13 PM

Nvidia (NASDAQ:NVDA) beat earnings and revenue estimates. Despite this good news, the world’s largest maker of graphics processors saw its stock sell-off in morning trading. This will likely frustrate investors as NVDA stock has struggled to move higher since the United States and China began placing tariffs on each other’s goods.

7 Stocks Warren Buffett Can’t Stop Buying

Although Nvidia faces its challenges, the company’s market position remains intact. If such worries persist, it could eventually create an opportunity to buy NVDA stock at a reasonable price.

NVDA Stock Down Despite Beating Estimates

The company reported second-quarter earnings per share (EPS) of $1.76. Wall Street consensus EPS estimates stood at $1.66 prior to the announcement. Nvidia earned 92 cents per share in the same quarter last year. Likewise, revenues of $3.12 billion came in ahead of analyst estimates by $20 million. Quarterly revenues grew by 39.9% year over year.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

Despite beating revenue and EPS estimates, NVDA stock fell in morning trading. Demand for chips used in crypto fell by higher-than-expected levels. As a result, predictions for third-quarter revenue now stand at around $3.25 billion, down from the previous $3.35 billion forecast.

NVDA stock has seen massive growth, especially in the previous two years. The company’s exposure to several of the major growth areas of tech such as artificial intelligence (AI), virtual reality (VR) and data centers have bolstered the stock. With the rise of bitcoin, many remained optimistic about the company’s prospects in crypto.

However, challenges have arisen in 2018, and NVDA has remained range-bound since February. With less movement in the cryptos recently, interest in mining has waned. Moreover, the ongoing trade war with China diminished optimism about the company’s prospects in the world’s largest country.

NVDA Stock Will Do Fine Without Crypto

Despite its struggles, I stand by my previous assertion that Nvidia has overtaken Intel (NASDAQ:INTC) as the world’s most important chipmaker. I also argued that investors should view crypto as “icing on the cake” rather than as a core niche. Since Nvidia has declined to forecast crypto revenue in future quarters, it appears that the company has has started betting that NVDA stock does not need icing at all.

The future of NVDA stock will revolve mainly around AI, VR and gaming. This will become especially true as self-driving cars and virtual worlds take on increasing importance. Competitors such as Intel and AMD (NASDAQ:AMD) will nip at its heels. Still, Nvidia continues to retain its edge in most of the niches related to this technology.

Valuations Falling for NVDA Stock

Prospective buyers should also look at the changing value proposition. Last year, I felt NVDA stock had become too expensive. Now, its price-to-earnings (PE) ratio has fallen to 43. The stock trades at 34 times forward earnings.

While I will not yet describe NVDA stock as a “buying opportunity,” we could be seeing such an event beginning to form. Though earnings growth will slow down in future years, analysts expect EPS to grow at an average annual rate of 23.2% over the next five years.

I do not think that stands as a high enough growth level to buy at the current PE. However, I strongly disagree with selling this stock because of anything that happens in the crypto market. I am much more concerned about a trade war. Even with such a threat, the technology produced by Nvidia and its peers has become too important to ignore. Hence, I believe the trade dispute will prove itself a temporary setback at worst.

The Bottom Line on NVDA Stock

News surrounding earnings is keeping NVDA stock stuck in a trading range, but such pessimism may eventually place the equity in reach for value investors. Nvidia beat expectations on both earnings and revenue in its second-quarter earnings report. Nonetheless, the ongoing trade war and reduced interest in crypto mining inspired a sell-off in NVDA stock.

Still, crypto is not a core niche for Nvidia, whereas a trade dispute with the world’s largest country should concern investors. However, given the importance of Nvidia’s technology to AI and VR, China will probably strike a deal that will allow Nvidia to sell in these markets.

10 Dividend Aristocrats You Never Have to Worry About

Furthermore, these concerns, combined with continued earnings growth, have helped to bring the PE ratio of NVDA stock down. If the PE continues to fall, investors can then buy into this growth story at a reasonable price.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.