To The Moon

$NVIDIA Corp(NVDA)$ will release its 2Q earnings after bell on August 24.

Prior to the official earnings release, Nvidia had issued an earnings warning. The data showed that second-quarter revenue was only $6.7 billion, significantly less than the company's guidance of $8.1 billion.

It was indeed a shock to the capital market. But the share price rose instead after the release.

$NVIDIA Corp(NVDA)$ has risen 5.5% since the warnings was released, ahead of the $NASDAQ(.IXIC)$'s 2.5% gain over the same period.

You may be baffled by this result:

1. Shouldn't the stock price continue to go down after warnings?
2. How come the stock price went up instead?
3. Why is the stock move so counter-intuitive?

Simply put, Nvidia as a cyclical stock, the release of warning is often the bottom of the industry. Although it needs 3 quarters to rivive, the most pessimistic moment has passed.

Considering that the corresponding negative factors have been priced in the stock price, the stock price will naturally rise after the warnings.

For a detailed analysis, please refer to Nvidia Plunged After Its Warnings; It Will Rise After...

This article will analyze the future trend of Nvidia after the release of the earnings report.

1. Learning from history

Since semiconductor is cyclical, it is necessary to know how Nvidia's stock price moved during the last semiconductor down cycle.

The following chart shows Nvidia's 2018-2019 down cycle trend and performance changes.

Data from Tiger Trade app

• How to understand this chart?

1. Looking at the share price trend, before the warnings, the share price started to fall in the first half of this year.

2. When management gave negative earnings guidance for next quarter ( the 1st red circle), the stock price plunged but bottomed out quickly.

3. When $NVIDIA Corp(NVDA)$ released the worst earnings ( the 3rd red circle), it plunged to the bottom again but not further.

4. Subsequently, as the revenue growth improved ( the 4th red circle), Nvidia's stock price moved up and hit a new all-time high.

You can look at this chart to learn about Nvidia's quarterly revenue and growth yoy.

Note that Q4 of fiscal 2019 corresponds to the natural quarter ending January 28, 2019.

2. Forecast

Nvidia is likely to give negative guidance for the next quarter in its earnings report on August 24, as it did in 2018.

The price of $140.55 this year should be the lowest point, considering that the warnings already brought a capital market shock.

But as with the 2018-2019 trend, semiconductor downside cycles tend to take about 3 quarters to digest inventory. While Nvidia shares may have reached the bottom early, the market does not have the momentum to support a significant rally in shares amid declining earnings.

From the P/E valuation, Nvidia is still as high as 44x, and the stock price cannot be driven up just by improving valuation.

Conclusion

Therefore, I think Nvidia is expected to replicate the last downward cycle. It may take 3 quarters to bottom out .

When Nvidia revenue growth begins to pick up, a new round of semiconductor upturn cycle will begin and the stock price may return to the high point of $346.