Buy Nvidia (NVDA) Stock Ahead of Q1 Earnings, Despite Semiconductor Industry Concerns?

It's time to see if investors should consider buying Nvidia (NVDA) stock before the semiconductor firm reports its Q1 fiscal 2020 financial results on Thursday, May 16. Read More...

Shares of Nvidia NVDA have climbed roughly 30% so far this year as part of the broader market comeback, driven by tech giants such as Apple AAPL and Facebook FB, along with fellow semiconductor firms like Advanced Micro Devices AMD. Despite Nvidia’s overall 2019 strength, NVDA stock has fallen 8% over the last month as reports from some of its peers show continued industry headwinds.

Now, with U.S./China trade war issues back in the headlines again, it’s time to see if investors should consider buying Nvidia stock before it reports its Q1 fiscal 2020 financial results on Thursday, May 16.

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Nvidia had been one of Wall Street’s top performers over the last several years until its October 2018 selloff. The company and many of its peers suffered along with much of the market. However, real issues began to surface in the historically cyclical semiconductor industry. Then, Nvidia, which has long been a GPU giant—helping drive the rise of more life-like graphics in the video game industry—reported poor fiscal fourth-quarter results in early February.

The company’s quarterly revenue dropped 24%, as cryptocurrency-based demand fell. In fact, CEO Jensen Huang said Q4 was “an extraordinary, unusually turbulent, and disappointing quarter.”

Nvidia also faces a potential slowdown in its data center business. On top of all that, we have already seen quarterly results from Intel INTC, AMD, Micron MU, and Lam Research LRCX. Total Q1 earnings for chip companies that have reported results are down -18.5% from the same period last year on -5.5% lower revenues (also read: Detailed Look at Q1 Earnings Season).

As we mentioned at the top, shares of Nvidia have fallen roughly 8% over the last month. Jumping back further, we can see that NVDA has been a top semiconductor performer over a five-year stretch. Shares of Nvidia closed regular trading Wednesday up marginally to $173.92, which marked a roughly 40% downturn compared to its 52-week high.

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Moving on, our current Zacks Consensus Estimate calls for Nvidia’s Q1 fiscal 2020 revenue to tumble 31.4% to hit $2.20 billion. This would mark an even larger decline than Q4’s 24% fall. Looking ahead to the second quarter, the company’s revenue is projected to slip 17%.

Meanwhile, at the bottom end of the income statement, Nvidia’s adjusted first-quarter earnings are projected to nosedive 60% to $0.82 a share. This negativity is projected to repeat itself to the tune of a 42% earnings decline in the second quarter.

Overall, Nvidia’s adjusted full-year earnings are projected to fall nearly 20% on the back of a 4.5% drop off in sales. Despite the current-year negativity, investors should note that the company’s fiscal 2021 revenues are projected to jump nearly 20% above our 2020 estimate. This would see the company easily top 2019’s $11.72 billion. Furthermore, its 2021 earnings are projected to soar 37% above our current year estimate.

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Nvidia is currently Zacks Rank #3 (Hold) that has experienced almost zero earnings estimate revision activity over the last 60 days, which means analysts haven’t updated their outlooks. Therefore, it might be best to wait to see Nvidia’s actual quarterly results and how Wall Street reacts. More importantly, those interested in NVDA stock should pay close attention to management’s guidance.

Despite its recent downturn, NVDA stock is trading at 34.4X forward 12-month Zacks Consensus EPS estimates, which marks a significant premium to its industry’s 13.9X average and hovers right around its own five-year median of 32X. Nvidia’s price/sales ratio of 8.9 also rests far above its industry’s 2.48 average. These valuation metrics make Nvidia stock harder to consider at the moment.

In the end though, Nvidia looks set to return to some of the growth that helped its stock price soar for years. The company also announced in early March that it is set to purchase Mellanox MLNX. The deal, which is valued at $6.9 billion, would be Nvidia’s largest-ever purchase. The deal hopes to bolster NVDA’s data center business and more in the cloud computing age.

Nvidia is scheduled to release its Q1 fiscal 2020 earnings results on Thursday, May 16. Make sure to come back to Zacks for a complete breakdown of the firm’s actual quarterly earnings results.

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