Nvidia Stock, AI Leader, Has Ugly Reversal With Earnings Due — Is It A Buy?

By Aparna Narayanan, Investing.com

Nvidia (NVDA), a giant in data centers and gaming, continues to sizzle. Analysts on Wall Street pounded the table for the AI chip leader ahead of its earnings report tomorrow. Is Nvidia stock a buy after a bearish reversal Tuesday?

Semiconductor, AI News

Nvidia is due to report its fiscal second-quarter results on Wednesday, after the market close. After strong results and blowout AI-driven guidance the prior quarter, expectations are running very high.

On Aug. 21, analysts at KeyBanc, HSBC and BMO Capital raised price targets on Nvidia stock ahead of its earnings report. In fact, more than 12 Wall Street firms have hiked price targets since the start of last week, according to FactSet.

Wedbush analyst Dan Ives wrote in an Aug. 20 note to clients that he expects a bullish outlook from the chip giant. The analyst anticipates a "tidal wave" of AI spending, which he believes is real and transformational, not hype.

Still, with Big Tech selling off, Ives says Wall Street is focused on Nvidia's guidance to assess "the true demand and growth trajectory" of AI (artificial intelligence) spending for the rest of 2023 and 2024.

Earlier in August, Nvidia unveiled its next-gen AI super chip: the GH200, coming next year.

Nvidia taps the emerging market for generative AI. Generative AI can create content, including written articles, from simple phrases by analyzing vast amounts of data. It can also write programming code.

For those looking for the top large-cap stocks to buy now, here's a dive into the AI chip leader.

Nvidia Stock Technical Analysis

Shares of Nvidia popped 8.5% Aug. 21. The top chip stock rebounded from the 50-day moving average as well as the 21-day exponential moving average.

Nvidia stock broke a short-term trendline and also cleared the 452.68 short-term high. Under normal circumstances, either of those moves would serve as an early buy point. But upcoming earnings make a purchase extremely risky, and the stock market's "in correction" status takes buys, for now, off the table.

On Aug. 22, NVDA fell 2.8%, ending near session lows after rising to a record high intraday. The ugly reversal highlighted the risk of earnings volatility, especially for a big winner like Nvidia.

One option is to study up on IBD's earnings options technique, which provides a strategy that minimizes risk around earnings.

The broader market is struggling to recover from a sharp sell-off, including many other chip and AI leaders. Nvidia has mostly held up better than growth stocks at large.

The relative strength line has risen to highs with the stock, the IBD MarketSmith charts show. A rising RS line means that a stock is outperforming the S&P 500. It is the blue line in the chart shown.

NVDA joined the prestigious IBD Leaderboard in February on an earnings gap-up. It surged again in May on blowout earnings and strong guidance.

Year to date, Nvidia stock has more than tripled in 2023, after crashing in 2022.

NVDA earns an IBD Composite Rating of 96, out of a best-possible 99. In other words, Nvidia stock is in the top 4% of all stocks in terms of technical and fundamental metrics.

Investors generally should focus on stocks with Comp Ratings of 90 or even 95 and above. Nvidia stock often earns a spot on the IBD 50, Big Cap 20 and Sector Leaders lists.

The IBD Stock Checkup tool shows that NVDA carries a Relative Strength Rating of 99. That means it has outperformed 99% of all other stocks over the past year.

The iShares PHLX Semiconductor ETF (SOXX) holds both Nvidia stock and AMD stock.

Nvidia Earnings

Nvidia's EPS Rating is 69 out of 99 and its SMR Rating is a B, on a scale of A to a worst E. The EPS rating compares a company's earnings growth to other stocks. Its SMR Rating gauges sales growth, profit margins and return on equity.

On May 24, the chip giant delivered a big beat-and-raise report. The Nvidia earnings report included a bullish, AI-fueled sales forecast.

The Santa Clara, Calif.-based company earned $1.09 a share on sales of $7.19 billion in the quarter ended April 30. Year over year, Nvidia earnings dropped 20% while sales fell 13%. But the results easily outpaced Wall Street's expectations.

In Q1, data-center sales rose 14% to $4.28 billion. Gaming-chip sales fell 38% to $2.24 billion.

For the full year, analysts now expect Nvidia earnings to rebound 148% as sales jump 65%. Last year, Nvidia earnings fell 25% per share.

Out of 50 analysts covering NVDA stock, 43 rate it a buy. Six have a hold and one has a sell, according to FactSet.

NVDA Backstory, Rivals

The fabless chipmaker pioneered graphics processing units, or GPUs, to make video games more realistic. It's expanding in AI chips, used in supercomputers, data centers and drug development.

Nvidia's GPUs act as accelerators for central processing units, or CPUs, made by other companies. It's working on "supercomputers" combining its own CPUs and GPUs.

In addition, Nvidia chips are used for Bitcoin mining and self-driving electric cars.

Nvidia has made a big push into metaverse applications.

Fabless chip stocks include Qualcomm (QCOM), Broadcom (AVGO) and Monolithic Power Systems (MPWR).

Currently, the fabless group ranks No. 30 out of 197 industry groups. Fabless companies design the hardware while outsourcing the manufacturing to a third-party firm.

For the best returns, investors should focus on companies that are leading the market and their own industry group.

Is Nvidia Stock A Buy?

On a fundamental level, Nvidia earnings are expected to return to growth. They should more than double this fiscal year, driven by booming chip sales for data centers and artificial intelligence.

The fabless chipmaker is expanding in other growth areas such as automated electric cars and cloud gaming as well. The adoption of the metaverse and cryptocurrencies could further stoke demand for Nvidia chips.

However, macroeconomic uncertainties and risk of global recession linger.

NVDA stock has staged a massive comeback, more than tripling in 2023 so far. Shares are in buy range from their latest breakout. But the AI chip leader's earnings Wednesday and overall market conditions are factors to consider before making any new or additional purchase.

Bottom line: Nvidia stock is a buy right now, but only in purely technical terms. The risk of a negative earnings reaction, and a market in correction counsel against new purchases.

As a chip company with exposure to top growth markets, Nvidia is always one to watch.

Check out IBD Stock Lists and other IBD content to find dozens of the best stocks to buy or watch.

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