Nvidia Continues to Adapt to Changing Climate

Shares of Nvidia NASDAQ: NVDA were trading down 4% at one point during Friday’s session following the company’s fiscal third-quarter earnings release on Thursday evening.

The California based company is known for producing the graphics processing units and chips used in the gaming, data center, and cryptocurrency mining industries and their earnings have waxed and waned with the fortunes of these industries.

Thursday’s report showed that Nvidia’s revenue has now declined four quarters in a row. Guidance for their fourth-quarter revenue came in lukewarm too, below what analysts were expecting while forecasted expenses were higher than expected. Revenue from their largest segment, gaming, was down 6% but still above analyst estimates as was EPS.

Despite this sense of neutral if not negative internal momentum, shares only saw moderate selling on Friday and were quickly bought off the lows. However, they are still fighting to claw back 2018’s 60% selloff. The lack of panic in the stock after this latest release suggests 2018’s selling might have been overdone and investors are comfortable with the stock at these levels with the company’s performance.

Challenges

Nvidia stock has certainly had its fair share of highs and lows in recent years. Shares went through a hyper-growth period with the cryptocurrency boom in 2016 and rallied over 1,200% in less than 3 years. Nvidia’s cards and chips established themselves as the most reliable product for mining. However as mining became less and less lucrative, demand fell.

The subsequent bursting of the cryptocurrency bubble wiped a huge chunk of revenue off the books and the stock was dumped as a result. Nvidia’s reputation for pleasantly surprising investors and analysts quarter over quarter in 2016 and 2017 has been significantly tarnished.

Demand has also been hurt by the continuing standoff in the US-China trade war. This has made accurate forecasting all the more difficult.

Learning to Pivot

However, Nvidia has a history of being able to successfully pivot and adapt to changing demands. Having supplied the chips for Sony’s Playstation 3 gaming console in 2006, investors were surely licking their chops at the prospect of a multi-year partnership. This was not to be however and Nvidia was dropped as the supplier for the Playstation 4 console.

So the company then successfully swung to providing the graphics processors used in PCs. A decade later they were back tapping into the console market, this time as suppliers for the Nintendo Switch. Looking ahead to 2020, the company is planning to continue its expansion into providing the chips used in data centers and is predicting strong revenue growth.

They beat Intel in a $7 billion bidding war for Israeli based chip maker Mellanox in March, suggesting management are on their A-game and boxing clever.

Looking Ahead

For investors looking to get involved in Nvidia stock, it’s worth noting that shares have strong support at $130. This was where the sellers hit the brakes after 2018’s selloff as buyers constantly stepped in at level. Shares have spent most of  2019 consolidating and have been climbing steadily in recent months. Shares have now reclaimed about half of the territory they lost in 2018’s big fall and are up 70% so far this year already. Investors must surely be sleeping a little easier.

August’s earnings, in particular, were the catalyst for this latest push and the moving averages had a bullish crossover following them. Based on Friday’s trading session, it doesn’t look at if this latest report is going to upset the apple cart too much.

Having survived a big scare following the crash in the cryptocurrencies, the future is starting to look brighter. All things considered, Friday’s price action indicates that shares are good value at these levels. Because investors didn’t run for the door at the continued lack of revenue growth, it looks like they think growth is going to come soon. If the company continues its track record of innovating and expanding into new markets, investors would do well to keep Nvidia on their watchlists.