Should Nvidia Corporation Be on Your Dream Team?

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Nvidia Corporation (NASDAQ:NVDA) has been part of Jim Cramer’s dream team, a group of stocks that’s “built for the ages.” NVDA stock was among the nine starters the Mad Money host selected to deliver out-sized returns over the long haul.

nvidia stock“As you can see, this is a team that’s built for the ages, not just built for the season. Yes, it’s a bullish team, I acknowledge that. It’s not as defensive as some would like. You can keep some cash on the sidelines for a decline,” Cramer said August 31 on CNBC. “But if you wanted a playoff-ready team of stocks, it is this one, and it’s seasoned, it’s ready, it’s stacked, it’s loaded and it’s in total beast mode.” 

Is he right? Should Nvidia stock be on your dream team? Let’s consider the possibilities.

What’s the Attraction of Nvidia Stock?

Well, to begin with, as Cramer suggests, it’s a very resilient stock. Nvidia announced its Q2 2018 results August 10 after the markets closed. Investors, disappointed that its data center revenue missed analyst expectations by $6 million, sent its stock down by 5.3% in next day’s trading.  Like a champion, it bounced back in the next day of trading after investors had a weekend to digest the entire report. It jumped 8.0% on August 14 putting it $3.65 higher than where it traded before releasing second-quarter earnings. 

CNBC characterized the 5.3% decline as “plunging” when in reality it was a pretty standard drop in price for NVDA stock, something I referenced in my August 14 article about the company.

Volatility and Nvidia stock go hand in hand just like peanut butter and jelly. It is a fact of life for shareholders. If you can’t stomach what my colleague Tom Taulli refers to as “periodic drop-offs,” you shouldn’t own its stock. 

Back to its data center revenue.

The $6 million miss between the analysts’ estimate and the actual result was a 176% year over year increase in revenue. Nvidia missed the estimate by a mere 1.4%. The size of growth combined with the slim margin it missed by suggests this isn’t something for investors to worry about.

Not even for a second.

The fact is, Nvidia’s Q2 2018 results saw all five of its product areas deliver healthy revenue increases, most notably from its data center customers, as did all six of its geographic regions where it operates.

You could make the argument that the data center revenue only increased by 2% in the quarter on a sequential basis, but in my opinion, that’s almost like grasping at straws, because it was the data center’s eighth consecutive sequential revenue increase.

There’s a Lot to Like

I’m on record stating NVDA stock will hit $200 before Advanced Micro Devices, Inc. (NASDAQ:AMD) hits $16. Naturally, that means I’m bullish about Nvidia relative to AMD.

That was in May. Since then, Nvidia’s delivered solid results, yet it struggles to get past $170. That said, it’s still up 20.2% since May 24 through September 7. AMD is up 16.0% over the same period, so they’re running pretty close.

My biggest concern, and it’s more a cautionary note rather than an outright warning, is that Nvidia’s starting to pay top dollar for its share repurchases. In the second quarter, it paid $151.60 per share to repurchase $758 million of its stock. Its high and low during the second quarter of $169.93 and $102.56 respectively, it paid 11.3% more than the $136.25 midpoint during the quarter.

It tells me two things.

First, and there’s a positive aspect to this, is that significant share repurchases often indicate that a company doesn’t have a better use for its free cash flow. While I never like to see CEOs overpaying for their stock, in Nvidia’s case, it could indicate management is confident about the future, which is a good thing.

Secondly, and this is a lot less likely, is that management feel its stock is worth more than $151.60 per share; rarely does the C-Suite know the intrinsic value of its stock. It’s overpaid for its stock. Now, shareholders better hope that it continues to execute at a high level, or that spending will come under question.

But, as I said, it’s more me nitpicking than a deal breaker.

Should NVDA be on Your Dream Team?

If it’s not in the starting lineup, it’s at least got to be on the bench. 

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.

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