Nvidia Stock Analysis as Top Supplier TSMC Reports Booming Sales

Key Insights

• Nvidia stock price has dropped into a local correction this month.
• The decline is mostly because of the weakness in the technology sector.
• The company may benefit from the latest TSMC sales report.

Nvidia stock price remained under pressure this week as a risk-off sentiment prevailed in the market this week. NVDA dropped to the crucial support level at $200, down by 13% from its highest point this year. This retreat may form a good entry point after TSMC announced that its sales continued soaring in May.

Nvidia Stock May Benefit From the Ongoing TSMC Boom

Nvidia, the biggest semiconductor company in the world, does not manufacture its chips. Instead, it designs them and hands them over to Taiwan Semiconductor, which runs the biggest fabrication business in the world.

Therefore, watching TSMC’s financial reports can provide hints on whether its business is doing well. In a statement today, June 10, TSMC said that its revenue jumped by 30% in May to over 416 billion Taiwanese dollars, which is equivalent to $13.10 billion.

The company said that its business was thriving amid the elevated AI demand in the United States and other countries. As a result, there is a likelihood that the upcoming Nvidia results will show that its revenue growth is accelerating.

The most recent earnings report showed that its business continued firing on all cylinders. For example, its revenue jumped by 85% in the first quarter to $81 billion, much higher than what analysts were expecting. It was also higher than what the company provided in its previous guidance.

The company expects that its second-quarter revenue will be $91 billion, a figure that we believe is highly conservative. As a result, analysts believe that the company will hit revenues of over $400 billion this year, followed by over $558 billion next year.

NVDA Stock Has Become Highly Undervalued

A key factor about NVIDIA is that its business has become highly undervalued despite the ongoing revenue and profitability growth.

There are several ways to look at this valuation issue. One of them is to look at its revenue growth and margins. The company has a forward annual revenue growth of 81% followed by 40% next year. It has a net profit margin of 54%.

Therefore, using this year’s numbers, its Rule-of-40 metric is 135%. Also, using its next year’s numbers, its multiple is 94%. All these numbers are higher than 40, meaning that the company is highly undervalued.

Another way to look at its valuation is to compare its forward price-to-earnings (PE) ratio, with its competitors and the S&P 500 Index. Based on its strong revenue and profitability growth, it needs to have a much higher valuation metric than all these assets.

According to FactSet, S&P 500 Index has a forward PE ratio of 21 and an earnings growth of 28%. In contrast, despite its stronger revenue and profitability growth, the company has a forward PE ratio of 23 on a non-GAAP basis and 22 on a GAAP basis.

The other valuation metric to consider is PEG, which compares a company’s growth with its earnings and growth. It has a paltry multiple of 0.52, much lower than the sector median of 1.40.

Nvidia Share Price Technical Analysis

The daily chart shows that the NVDA stock price has suffered a big reversal and moved into a correction. It has slumped by over 13% from its highest point this year and moved below the key support level at $212.

There are signs that the stock has also formed a small double-top pattern, a common bearish reversal sign in technical analysis. This means that it may face some volatility in the near term.

In the longer term, however, the stock will likely bounce back, and possibly retest the year-to-date high of $235. A push above that level will point to more gains over time, with the next key level to watch being at $250. In the future, it may jump to $300 as investors price in its strong fundamentals.

The post Nvidia Stock Analysis as Top Supplier TSMC Reports Booming Sales appeared first on The Market Periodical.