November 14, 2018
If you've been reading me for a while, you know that I've been recommending NVIDIA Inc. (NVDA) for some time. I currently recommend the graphics card maker in my Growth Investor, Accelerated Profits and Platinum Growth Club newsletters. I also picked it for my publishers' "10 Best Stocks for 2018" contest.
However, NVDA was knocked down a peg by the tech pullback in October. So, a lot of folks have been asking about it. Leading up to October, NVDA had been on a meteoric rise. From October 2017 through October 2018, NVDA rallied 62%. From October 2016 through October 2018, the stock surged over 300%. In the three newsletters that I recommend NVDA in, we're sitting on triple-digit gains.
But, if you look at the stock's Portfolio Grader rating, you can see it's a little complicated. Yes, the company has been recently downgraded to a C-rating because of its Quantitative Grade, which impacted its Total Grade. There's been a lack of near-term buying pressure, but there's still solid upside potential over the longer term.
For one, NVIDIA's fundamentals are still strong. The company's sales growth is excellent; last quarter, NVIDIA posted 40% sales growth. NVIDIA also earns an "A" for earnings growth. Yes, earnings momentum has slowed a bit, but that's not uncommon for a company that's sustained strong earnings for several quarters running. Factoring this all together, NVDA earns a B for its Fundamental Grade.
So, with NVIDIA's third-quarter earnings report just around the corner, should we sell NVDA? Or, should we continue holding it through earnings? Let's find out.
First, let's revisit what makes NVIDIA tick. NVIDIA has been a pioneer in the technology industry for years. The company is most well-known for inventing the world's first graphics card (GPU). As the soul of a PC, GPUs are used to speed up the production of images on electronic devices. GPUs power practically everything, from supercomputers to data centers, from drones to vehicles.
NVIDIA has gone from a niche graphics card maker to one of the most powerful semiconductor companies in the world, in a relatively short amount of time.
Yet, the company refuses to sit on its laurels. It's constantly innovating and developing new products. Recently, NVIDIA introduced the world to its newest GPU platform, Turing. This new platform makes ray tracing a reality. Never heard of ray tracing? It's an advanced method of processing light rays to display realistic and lifelike reflections and shadows.
Company management dubbed Turing the company's "most important innovation in computer graphics in more than a decade." Analysts are also excited about Turing. It's expected to drive a major upgrade cycle over the next year, as video gamers will be scrambling to update their gaming computers.
So while NVDA has pulled back, it still is an analyst favorite. Since NVIDIA's big announcement a few months ago, the stock has been upgraded several times. This week, Susquehanna upgraded it from "Neutral" to "Positive." A few weeks ago, JP Morgan upgraded NVDA from "Neutral" to "Overweight."
And it's easy to see why: NVIDIA still has excellent forecasted sales and earnings. For the upcoming third-quarter report, the consensus estimate is for earnings of $1.71 per share on $3.24 billion in revenue. Compared with Q3 2017, this represents 28.6% earnings growth and 22.8% sales growth. NVIDIA has beaten estimates for the past 10 quarters running, and it has posted double-digit earnings surprises for three of the past four quarters.
I must also mention that, even with its meteoric rise, NVDA trades at a pretty reasonable valuation—25 times forecasted earnings.
So, I've been advising my readers to hold NVDA through Thursday night's earnings report. The stock has become a little too risky to earn a buy recommendation from me, but I do expect that NVDA will rebound after announcing earnings.
The bottom line: If you currently own NVDA shares, I recommend continuing to hold them through earnings.
For those of you who subscribe to one of my premium newsletters, I'll have an update on NVDA after it posts earnings. In the meantime, continue holding your NVDA shares.
That's all that I have this week—I'll be in touch early next week with your weekly upgrades and downgrades in Portfolio Grader.