Will the cryptocurrency buzz lift NVIDIA Corporation to a Q2 earnings beat? More importantly, Is NVIDIA stock a good buy at new all time highs?
Santa Clara, California-based NVIDIA Corporation (NASDAQ:NVDA) is set to report its Q2 earnings this week, after market close on the 10th of August. Trading action at the NVDA counter had been largely muted in the lead up to the earnings announcement prior to the last trading session, which saw NVIDIA stock trade at new all time highs before closing the session at $172.35 a share. NVIDIA stock has shot up like a rocket this year, gaining over 60% in the year-to-date, outperforming the Nasdaq Composite (INDEX:COMPX) by a factor of 3. Backed by the wave of cryptocurrency, which drove GPU demand in Q2, will NVIDIA Corporation trump Wall Street estimates? Is NVIDIA stock setting up for a strong post earnings rally?
NVIDIA Q2 Earnings Wall Street Estimates
The current Wall Street consensus expects the Jensen Huang led GPU maker to report non-GAAP earnings of 70 cents a share, up from an EPS of 40 cents in Q2 2016, good for a 75% YoY growth print. On the top line front, Wall street analysts expect the company to report revenue of $1.96 billion, good for a 37.3% year-over-year growth. 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 $1.95 billion (+/- 2%), implying a revenue range of $1.91 - $1.99 billion, translating to YoY growth of 33.5% at the lower end and 39.2% at the higher end.
NVIDIA Earnings History And Earnings Whisper
NVIDIA has a history of crushing Wall Street estimates, having beaten consensus revenue/earnings estimates in each of the last 8 quarters. In fact, the company has beaten the top end of Wall Street estimates in each of these quarters, implying that Wall Street is yet to warm up to the strong growth cycle the company currently finds itself in. NVIDIA has also beaten the high end of the Wall Street revenue estimate in 7 out of the last 8 quarters. Looking at the more recent earnings history, the company has delivered an average earnings surprise of 23.2% over the last 4 quarters, which is further proof that Wall Street 'models' are yet to catch up with the rapid growth at the firm.
In addition to the favorable comparisons vs analyst estimates, NVIDIA has also met/beaten the top end of the management guidance in each of the last 8 quarters. The strong earnings history implies that NVIDIA could be in for yet another earnings beat. The case for an earnings beat is also supported by the current NVIDIA Q2 earnings whisper number, which is currently at $0.81, implying an 11 cent beat. NVIDIA stock is known to make big moves following the earnings announcement, with an average gain of 16.4% in the week immediately following the earnings announcement.
Investors Should Also Watch
NVIDIA stock is currently trading at a trailing twelve-month (TTM) price-to-earnings ratio 58x earnings, which isn't anywhere close to cheap. Given the massive expectations currently baked into the stock, a miss on the Q3 earnings release could see the stock give up most of the recent gains. NVIDIA, along with AMD, was a beneficiary of the cryptocurrency wave, which could have a telling impact on the Q2 numbers. As we had noted in a recent post, NVIDIA jumped onto the cryptocurrency opportunity by releasing GPUs tailored for needs of crypto miners. Investors should watch out for any commentary on this front, particularly whether this demand is sustainable or not. Meaningful revenue contribution from the cryptocurrency fad could position NVIDIA for a Q2 beat while also helping management guide higher than expectations for the coming quarters.
At the segment level, investors should keep a close tab on the datacenter, automotive and gaming segments. 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. The Gaming segment is where the company makes most of its 'profits'. Given the fact that these three segments contribute nearly 80% of NVIDIA's overall revenue, investors should look out for any commentary on these fronts.
Playing NVIDIA Stock Through Q2 Earnings
We believe that NVIDIA stock is a solid long term buy, given that the company is the AI/datacenter/autonomous-driving industries, all of which are expected to grow over the next few years. However, as a word of caution, considering the recent run-up in NVIDIA stock price, profit booking following the earnings call cannot be ruled out. Hence, an earnings beat might not necessarily guarantee an upswing in NVDA stock price. Therefore, long term investors looking to enter into NVDA stock should buy a partial stake in the lead-up to the earnings, and look to add more NVIDIA shares in the case of any post-earnings dip. In case of a post-earnings rise in the stock price, investors should adopt a staggered approach to accumulating positions in the stock, given that the elevated valuations and the recent rise in the stock price, do not rule out the chances for a short-term pullback in NVIDIA stock price.
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