Despite Headwinds, NVDA Stock Looks Compelling Ahead of Earnings

Stocks to buy

The stock market rout in October hit a lot of stocks hard, and once high-flying chipmaker Nvidia (NASDAQ:NVDA) was among the hardest hit. In October, NVDA stock was a stock that had gone from $25 to $300 in just three years. Now, Nvidia stock is a stock that has dropped more than 30% in just over a month.

To be sure, the recent drop in NVDA stock isn’t entirely unreasonable. This business is staring at some material near-term headwinds which could and should dampen financials over the next few months.

But, recent weakness in NVDA is ultimately a buying opportunity. This is a company not just with exposure to the most promising and robust growth themes in the semiconductor world over the next several years, but with an unchallenged leadership position in each of those secular growth markets. Near-term trade and cryptocurrency mining headwinds will inevitably fade with time, and when they do, the market will re-focus it’s attention on Nvidia’s robust growth fundamentals in AI, IoT and datacenter.

When that happens, Nvidia stock will roar higher. This rally may not happen right away. But, within the next several years, NVDA stock should rise meaningfully from current levels.

Near-Term Headwinds Will Create Earnings Noise

NVDA stock hasn’t dropped more than 30% over the past month without reason, and it would be foolish to ignore these reasons ahead of the company’s third-quarter earnings report.

The whole semiconductor industry is a mess right now. Broadly speaking, demand is finally slowing, and supply is finally building. This downturn in semi market fundamentals has affected everyone. In October alone, Advanced Micro Devices (NASDAQ:AMD), Texas Instruments (NASDAQ:TXN), STMicroelectronics (NYSE:STM), and Western Digital (NASDAQ:WDC) all either reported earnings misses and/or gave weak guides.

Of course, Nvidia is exposed to those same semiconductor market headwinds, and those headwinds will create near term earnings noise. That is why EPS estimates for the current quarter have trended down by roughly 6% over the past 90 days.

But, the big headwinds facing the semiconductor market are the sudden disappearance of cryptocurrency mining demand, and stagnating smartphone demand. Nvidia had a ton of cryptocurrency demand, but the big crypto hit happened last quarter, when crypto related revenues fell to under $20 million, versus $100 million expected. Moreover, Nvidia’s guide for this quarter called for zero crypto revenue.

Also, Nvidia isn’t a smartphone company. Smartphone wasn’t mentioned once in the company’s most recent earnings call, nor was it mentioned once in the most recent 10-K filing, and that’s because Nvidia has very little smartphone exposure.

Thus, in the big picture, Nvidia is well protected from near term weakness across the semi market. That isn’t to say these headwinds won’t create noise. They will. But, it is to say that these headwinds won’t create that much noise in the big picture.

Long-Term Upside Is Supported by Powerful Drivers

Near-term earnings noise and concern about Q3 numbers and the Q4 guide are warranted given broadly weakening fundamentals in the semi industry. But, this noise in NVDA stock is ultimately just a long-term buying opportunity.

Nvidia will arguably morph into the most important company in the world over the next decade because Nvidia creates the chips that are the building blocks of tomorrow’s most important technologies, namely AI, IoT and cloud.

Right now, Nvidia’s core markets are gaming, professional visualization, data centers and automotive. Each of those markets will continue to grow at a robust rate over the next several years. Gaming demand will boom as eSports goes global and mainstream. Professional visualization will become exceedingly important as the world becomes more visual than ever. Data center demand will continue to rise thanks to the increasing volume and usage of digital data. Automotive demand will also rise as self-driving technologies advance and go mainstream.

Those growth pillars alone are enough to support a robust growth narrative over the next several years. But, that’s not why you buy NVDA stock. You buy NVDA stock because the company is rapidly expanding within its growth verticals.

As AI and IoT become more prevalent technologies globally and start to become integrated into many different industries, Nvidia’s addressable market will grow by a huge amount. NVDA will start to service markets like department stores and grocery stores, which will utilize automated checkout. The company will also service the restaurant industry, which will employ AI-powered ordering in kiosks, and the medical technology field, which will use robotic surgery assistants. And, that’s just the tip of the iceberg.

All together, Nvidia’s addressable market is quite huge. The company is currently tapping just a small portion of it. Thus, as long as this company can maintain its leadership in AI markets, NVDA stock is supported by some of the most powerful growth drivers in the market.

Bottom Line on NVDA Stock

For the Q3 report, analysts are expecting EPS of $1.71 against revenue of $3.24 billion. Meeting analyst estimates would represent an increase of 28.6% and 22.8% respectively from the year-ago quarter despite the near-term noise and the huge dip.

And there is a lot of near-term noise surrounding Nvidia stock ahead of its Q3 earnings report. It’s anyone’s guess how this noise will play out in the short term, especially against the backdrop of broader market volatility.

But long term, this noise is a compelling buying opportunity. NVDA stock is supported by exceptionally promising growth fundamentals, and those fundamentals are being undervalued by the market.

As of this writing, Luke Lango was long NVDA.

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