5 Reasons to Own Nvidia (EPS Preview)
NVDA Earnings Date: Wednesday, August 23rd, after the market close
The AI Leader
Zacks Rank #1 (Strong Buy) chip stock Nvidia (NVDA) benefits significantly from AI (Artificial Intelligence) due to its specialized hardware and software solutions tailored to AI workloads. Nvidia’s powerful GPUs (Graphics Processing Units) are well-suited for AI tasks like deep learning, data analysis, and complex computations. Because Nvidia’s AI offerings have positioned the company as a critical player in the AI ecosystem, the stock has ripped due to the ongoing “AI Revolution”. Below are 5 reasons the stock can continue higher into year-end:
Robust Earnings History
Over the past 16 quarters, Nvidia delivered surprises in every quarter, except for two quarters in the middle of the 2022 bear market.
Image Source: Zacks Investment Research
In the past five quarters, Nvidia shares have moved by an average of +5.95% the day after NVDA earnings were reported. The options market implies a move of about 10% this quarter following the earnings release.
Lofty but Attainable Expectations
From a data perspective, NVDA enjoys a positive Zacks Earnings ESP (Expected Surprise Prediction Score). A positive ESP score means that NVDA has recently seen positive earnings estimate revision activity. The idea is that the more recent the information is, the better the predictor of the future. The technique has proven to be very useful for finding positive surprises. When you combine a Zacks Rank of #3 or better (NVDA is the best possible #1) with a positive earnings ESO, stocks produce a positive surprise 70% of the time.
Image Source: Zacks Investment Research
If Nvidia can meet or exceed expectations as I expect it will, the company is about to enter an exponential “hockey stick growth” phase.
Image Source: Zacks Investment Research
Scorching Growth Makes Up for Sky-high Valuation
A bear argument against owning Nvidia is its forward p/e ratio of 59.94. However, amateur investors must understand that institutions pay a premium for growth. Last quarter, Nvidia raised its earnings expectations for this quarter to a mind-boggling $11 billion ($4 billion more than consensus estimates). Nvidia also has the rare combination or what I call “The Magic Elixir” that institutions look for which includes
· Liquidity (50 million shares traded a day)
· Innovation (the leader in chips used for AI)
· High-growth (this quarter, earnings are expected to grow 300% year-over-year)
The AI Arms Race
Microsoft (MSFT) and Alphabet (GOOGL) are the early leaders in the AI “Chatbot” realm. However, the race to AI supremacy is in its infancy. In the past few weeks, rich countries like China and Saudi Arabia ordered millions worth of Nvidia chips. Though only a handful of companies will ultimately be the Chatbot leaders, many companies will try, which in itself is a positive for Nvidia. In other words, the “pot of gold” is so large that Nvidia will make a fortune selling the “picks” needed for AI. One company to watch is Chinese internet giant Baidu (BIDU), who is looking to unveil a more powerful Chatbot than the popular ChatGPT.
Relative Strength
Observing the price action of a stock relative to the market is one of the most powerful indicators of strength. From a relative strength perspective, NVDA sticks out like a sore thumb versus the market and competitors like Advanced Micro Devices (AMD) and Intel (INTC). NVDA shares are up 213% year-to-date, while the S&P 500 Index ETF (SPY) is only up 15%.
Image Source: Zacks Investment Research
Furthermore, NVDA notched all-time highs Tuesday (before fading), while the Nasdaq 100 ETF (QQQ) is off its 52-week high by 6%.
Smart Money (Bonus)
Because of their deep pockets, institutional investors are the “whales” that drive stocks higher. Stanley Druckenmiller and David Tepper are both billionaires who are considered some of the smartest money on Wall Street. In the latest 13F filing, Druckenmiller added 20% to his NVDA position, while Tepper increased his by 580%! NVDA is the top holding in both portfolios.
Conclusion
Nvidia has everything an institutional investor looks for in a stock including, liquidity, growth, and groundbreaking innovation. While expectations are lofty for the stock, several data points suggest they are attainable. Look for NVDA shares to be higher 6-12 months from now.
Zacks Names #1 Semiconductor Stock
It's only 1/9,000th the size of NVIDIA which skyrocketed more than +800% since we recommended it. NVIDIA is still strong, but our new top chip stock has much more room to boom.
With strong earnings growth and an expanding customer base, it's positioned to feed the rampant demand for Artificial Intelligence, Machine Learning, and Internet of Things. Global semiconductor manufacturing is projected to explode from $452 billion in 2021 to $803 billion by 2028.
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