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Nvidia: Make or Break Earnings

Written by Briton Ryle
Posted February 13, 2019

Graphic and artificial intelligence chipmaker Nvidia (NASDAQ: NVDA) might make or break this rally when it reports earnings tomorrow.

A couple weeks ago, Nvidia got whacked when it lowered earnings. It's a big cut: The Q4 revenue it will report tomorrow is now expected to be $2.2 billion instead of $2.7 billion. And that $2.7 billion estimate was the result of lowered guidance from November. So that's two warnings since November...

Of course, Nvidia isn't the only company that's lowered earnings estimates. FedEx, Intel, Caterpillar, and, of course, Apple have, too. 

Apple is the big dog in the tech sector. When it sneezes, the whole tech sector catches a cold.

Apple has been down as much as 40% since October. Granted, that's a pretty big sneeze. 

But from its highs of $292 on October 2nd, Nvidia's lows took it down 57%...

Here's the thing: You don't get to buy a quality stock like Nvidia at a 50% discount unless it's come down with a case of the sniffles.

All About China

OK, so it's more than a case of sniffles with Nvidia. China's economy has slowed. Spending there has been affected. The EU is barely growing. And the trade war with China is affecting businesses in some unpredictable ways... 

This is why chip stocks are called cyclical. When times are good, holy moly, they are good. Everything comes up roses. That's how Nvidia ran from $30 to $292 in two and a half years in the first place.

But when things go bad, it can look hopeless. That's where we are now. And it's also why we recommended Nvidia to The Wealth Advisory subscribers, you know, when there's blood in the streets. 

Nvidia's 52-week lows are $124 and change. Today, the stock was down as low as $151, and it's currently a bit over $154 as I write. Two things to conclude from this: One, at least some of the recent "surprise" warning is already priced in. If it weren't, the stock would be much lower. Two, plenty of investors are bullish. 

Trade Deal Coming Soon?

Finally, a word about China. The current weakness in the Chinese economy did not happen overnight. It's been building, and the Chinese government has responded with interest rate cuts, tax cuts, and lowered reserve requirements.

It's typically said that interest rate moves take six months to kick in. The last cut came in August. So we could start seeing some growth return to China fairly soon — that is if this trade war is nearing an end.

Markets are clearly excited that a trade deal may actually be in the works right now. Treasury Secretary Mnuchin says the talks are going well. And there was even a rumor that the Chinese president would show up. 

Nvidia will jump on any progress in trade talks. That's how important China is for chip stocks. But we've seen how that goes: The administration is hopeful one day and then pessimistic the next. The next announcements will probably be negative. 

And that's why tomorrow's earnings are so important.

One thing: If Nvidia does come out with weak guidance, shares could easily fall 10%. That would be the time to pick up a few if you are looking to own a great chip company.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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