How good is life at Nvidia (NASDAQ:NVDA)?
It’s so good that the company is handing out raises rather than pay cuts as COVID-19 ravages the planet.
It’s so good it has the cash to complete the $6.9 billion acquisition of Mellanox Technologies (NASDAQ:MLNX), which Chinese regulators have now approved. Once the deal is done Nvidia should still have about $4 billion in cash on hand.
It’s so good that analysts are raising earnings estimates. Shares open April 22 at $274.50, up over 15% on the year.
Life at Nvidia is very, very good, but you should know why before you buy.
Cloud Is Essential
Nvidia’s graphics processors should now be called Artificial Intelligence processors. They’re at the heart of today’s cloud computing upgrades.
Nvidia doesn’t just make cloud computing chips. It also writes software that optimizes them. The software is being used by all major cloud platforms in both the U.S. and China.
This is letting gaming, Nvidia’s original niche, finally move to the cloud. It’s creating new applications in what I call the “Machine Internet.” It’s giving Nvidia what analysts call a “runway,” long-term predictable growth.
Events make that growth look choppy if you look at the company’s results. An inventory recession, then COVID-19, mean fiscal 2020 sales were down 8% from the year before. Profits were down by one-third. But Nvidia’s center of manufacturing is Taiwan, which has handled the virus well.
Once Mellanox is in the fold, its networking fabric will give Nvidia an even bigger play on the cloud. Mellanox provides an immediate pop to earnings, with 15% of its revenue last year hitting the net income line.
NVDA Stock an Analyst Favorite
That’s why, when the virus was killing markets in March, I suggested investors buy NVDA stock. The shares have risen 10% since then.
This does not make me a genius. Over half the company’s 38 analysts had it on their buy lists for April, according to Yahoo Finance. It’s even more popular at Tipranks, where 26 of 31 say “buy” and have a $306 per share price target.
Nvidia has been consistently beating analyst earnings estimates, most recently by 22 cents per share or 13%. The consensus number on its April quarter is $1.36 per share on revenue of $3 billion .
Mellanox reports April 23, with analysts expecting $1.72 per share of earnings and hoping for $1.79 on revenue of $346 million. If Mellanox beats its own number, Nvidia’s estimates move up.
Pick Your Spot
The volatility created by COVID-19 means there is an opportunity for investors whenever Nvidia’s stock falls. During 2020 Nvidia shares have traded below $200, and as high as $314.
The stock’s volatility comes from its initial niche in graphics cards for game machines. Speculation is that the fall in consumer spending will hit this part of the business. Even if it does cloud sales, and the rise of cloud gaming, should keep things humming along.
The Bottom Line on NVDA Stock
I took my own advice to buy Nvidia shares last May, at $151. I reinvest the tiny, 16 cent per share dividend back in the stock. You do that on stocks whose price is rising.
The party is far from over with Nvidia stock. Cloud gaming and the rise of the Machine Internet should keep sales strong. This is true even as Cloud Czars like Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL,NASDAQ:GOOG) invest in their own graphics chips, thanks to Nvidia’s software.
Software is the key point. In the 21st century hardware is software. Nvidia, like most chip companies, is “fab-less,” creating chip designs made by others. It’s a cloud software house disguised as a chip company, and it’s a core holding for any long-term investor.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in, AMZN, MSFT and NVDA.