NVIDIA shares surged last week on strong analyst estimates and the announcement of a 4-to-1 share split. Nvidia is reporting its first quarter this Wednesday, with earnings and earnings expected to hit record highs. But is it worth buying stocks at the peak?
NVIDIA (NVDA) is a global leader in the production of chips for PCs, data centers and cars, and recently expanded its range by offering chips for cryptocurrency mining.
NVIDIA rival AMD (AMD) has already announced a first quarter ending March 2021 that surpassed Wall Street estimates and posted record earnings.
NVIDIA will release its first quarter results on Wednesday, May 26, after the market close.
On February 24, NVIDIA executives said they expected first-quarter revenue to grow 71% to a record $ 5.30 billion, higher than initial forecasts and analysts’ estimates.
However, investors should not rush to buy on the eve of high performance, paying attention to the following points:
despite record revenues of $ 5 billion in the fourth quarter and a strong outlook for the first quarter, NVIDIA shares are down 20% in 8 trading days since the report.
The fact is that NVIDIA Chief Financial Officer Colette Kress warned investors during the report that due to the global chip crisis, the company’s flagship gaming chips, unveiled last fall, are likely to be in short supply in the first quarter.
Considering that the situation may not be resolved in the coming year, this represents a risk for NVIDIA’s sales. Marketnfo.pro wrote about the problem in the article “The global shortage of microcircuits may last until 2023”.
In addition, NVIDIA shares have already increased by 29% from the low in March – in such cases, analysts often say that expectations of higher results have already been taken into account by investors and are included in the price.
Market experts welcomed the announced launch of the NVIDIA CMP (Cryptocurrency Mining Processor) line of GPUs for cryptocurrency mining, announced in February. The company expects its sales to generate about $ 50 million in revenue in the first quarter.
However, in recent days, cryptocurrency prices have dropped sharply, as a result, the company risks not fulfilling its forecasts, which will disappoint investors.
There have already been examples in the history of NVIDIA when favorable conditions changed with downturns:
– In 2018, NVIDIA faced a short-term decline in demand for data center chips and gaming chips – the share price fell 40% from August 2018 to July 2019 due to a pause in customer spending.
– Likewise, the cryptocurrency price crash in 2018 led to a decline in chip sales in calendar 2019.
There are also risks to the reality of NVIDIA’s acquisition of UK tech company Arm, which represents a huge development opportunity.
The deal will take place no earlier than 2022 and the British authorities have already launched an investigation against it, because in the face of high competition and a shortage of semiconductors in the world, the UK sees the merger as a threat to national security.
This raises the question – are the future benefits of this deal included in NVIDIA’s current price?
However, Wall Street is optimistic, with a number of analysts raising their valuations for NVIDIA shares in February, April and May, given the company’s AI leadership and huge market opportunities in the cloud and data center markets.
NVIDIA shares up 2.6% on Friday amid news of a stock split
Nvidia announced on Friday that it will split its shares in a four-to-one ratio to make it more accessible to investors and employees.
Nvidia’s board of directors has approved the share split, but it still needs to be approved by shareholders at the company’s annual meeting on June 3.
If approved, each registered Nvidia shareholder will receive three additional common shares for each share held by the company at the close of business on June 21. Nvidia shares will begin trading with a split adjustment on July 20.
The experience of the Apple (AAPL) and Tesla (TSLA) stock split last year showed that stocks tend to rise after such an announcement, but may fall once trading starts with it.
Wedbush Securities analyst Matt Bryson on Friday raised his target price for Nvidia shares from $ 600 to $ 640 as “continues to believe that Nvidia will achieve long-term results from its leadership in artificial intelligence and gaming.”
On Thursday, Oppenheimer analyst Rick Schafer retained his “above market” rating for Nvidia shares with a 12-18 month target price of $ 700 versus the current level of less than $ 600.
Schafer sees first-quarter growth potential for Nvidia from sales of chips for gaming PCs and cryptocurrency, but believes that the semiconductor shortage could persist until the end of the year and affect sales growth potential.
Given the above conditions, the risk of buying NVIDIA shares at current price levels is justified if you are a long-term investor and are willing to hold the purchased shares for several years.
Thus, over the past five years, NVIDIA’s earnings per share have grown from $ 1.08 to $ 6.90 by the end of FY2021. of the year in January. This improvement is due to
the fact that the company has reoriented to selling chips with higher margins – for the data center segment.
At the same time, conditions for some of NVIDIA’s key markets in 2021 – automotive, cryptocurrencies and PC chips – look unstable, and a decline in sales on them may affect the company’s results, it is important to keep this in mind.