NVIDIA Firing On All Cylinders After Pandemic Shutdowns

NVIDIA Corp. (NVDA) beat top and bottom-line estimates in May, reporting a profit of $1.80 earnings-per-share (EPS) while Q1 2020 revenue rose an impressive 38.7% year-over-year to $3.08 billion.  First-quarter shutdowns generated an unexpected windfall for the graphics chip giant, with lockdowns spiking demand for video gaming hardware and data center products that stream video. The company expects continued to benefit from these segments in the second quarter, leading them to raise Q2 2020 revenue guidance from $3.37 billion to $3.65 billion.

Many gains from the expanded digitization of business and home entertainment due to the pandemic could be long-lasting or permanent, with thousands of corporations likely to grow their virtual meeting spaces at the expense of business travel, which may not return to 2019 levels for years.  A handful of chip manufacturers that include NVIDIA stand to benefit from this paradigm shift, which has now lifted the stock to another all-time high.

Wall Street Outlook

Not everyone is bullish on NVIDIA’s outlook. Morgan Stanley downgraded the stock on June 16, with analyst Joseph Moore noting that “even with the best 5-year growth prospects in semis, the current P/E of 59x simply leaves very little room for error. 80% organic growth in HPC/cloud last quarter is probably the high watermark, and we see business plateauing beyond July.” He also takes a skeptical view about the gaming space, declaring “we remain tactically uncertain about when those products will be released.”

However, Wall Street consensus remains decidedly bullish, with 27 ‘Buy’ and just 4 ‘Hold’ recommendations. Not one analyst currently recommends that shareholders sell their positions at this time. Price targets currently range from $260 to a street high $420 while the stock is now trading less than 50 points below the high target. This is an advantageous position because modest gains from here are likely to trigger further upgrades and higher targets.

NVIDIA Technical Price Action

NVIDIA price action has been outstanding since a furious 57% correction ended in December 2018. The recovery wave through 2019 finally completed a round trip into the prior high in February 2020, just in time for the first-quarter decline. However, the second quarter bounce carved the handle of an 18-month cup and handle pattern, yielding a June breakout that now establishes a measured move target above 450.