Author: Leo Sun

Here’s the Average Social Security Retired Worker Benefit by Age

1 Stock Down 88% to Buy and Hold for 10 Years

3 Cathie Wood Stocks Expected to Rise 245% to 980% Over the Next Few Years

1 Semiconductor Stock Set to Join Apple, Microsoft, Amazon, and Alphabet in the $1 Trillion Club

Nvidia‘s (NVDA 2.54%) stock skyrocketed 24% on May 25 after the chipmaker posted its latest earnings report. For the first quarter of fiscal 2024, which ended on April 30, its revenue fell 13% year over year to $7.19 billion but exceeded analysts’ estimates by $670 million. Its adjusted net income declined 21% to $2.71 billion, or $1.09 per share, but still comfortably cleared the consensus forecast by $0.17.

Nvidia still faces a lot of near-term headwinds, but its sequential growth and strong outlook for the second quarter suggest it has reached its cyclical trough. Let’s see if Nvidia’s stock is still worth buying after its massive post-earnings rally.

Nvidia CEO Jensen Huang with his company’s RTX 4090 GPU. Image source: Nvidia.

Looking back at Nvidia’s cyclical slowdown

Nvidia’s GPU sales surged throughout the pandemic as consumers bought more PCs for online classes, remote work, and high-end gaming. The soaring use of cloud-based services also prompted more data centers to upgrade their servers. Its acquisition of the data-center networking company Mellanox in 2020 amplified that growth.

That’s why Nvidia’s revenue and adjusted earnings per share (EPS) jumped 53% and 73%, respectively, in fiscal 2021 (which ended in January 2021). In fiscal 2022, its revenue and adjusted EPS increased 61% and 78%, respectively.

However, those tailwinds abruptly dissipated over the past year as sales of new PCs cooled off in a post-pandemic market, and enterprise customers bought fewer data center chips as they grappled with the macro headwinds. Also, the crypto market — which had prompted many miners to buy Nvidia’s high-end GPUs — was disrupted by soaring interest rates and a retreat toward conservative investments. U.S. regulators also blocked Nvidia’s sales of high-end data center GPUs to China.

As a result, revenue remained nearly flat in fiscal 2023 as its adjusted EPS fell 25%. Its gaming revenue (34% of its full-year total) declined year over year during the past four quarters, as its data center revenue (56% of the total) decelerated for three consecutive quarters before accelerating again in the first quarter of fiscal 2024.

Data source: Nvidia. YOY = year over year.

Looking toward Nvidia’s cyclical recovery

Nvidia’s year-over-year growth rates look dismal, but its quarter-over-quarter growth tells a completely different story of its cyclical decline and subsequent recovery.

Data source: Nvidia. QOQ = quarter over quarter.

For the second quarter of 2024, Nvidia expects its revenue to rise 53% sequentially and 64% year over year to about $11 billion. That rosy outlook, which blew past analysts’ expectations for $7.1 billion, strongly suggests its cyclical slowdown is over.

During the conference call, chief financial officer Colette Kress attributed its stunning guidance to a “steep increase in demand related to generative AI and large language models” for its data center business. As for its gaming business, Kress said Nvidia was experiencing “strong sequential growth” in its sales of 40 Series GeForce RTX GPUs for notebooks and desktops.

Nvidia’s adjusted gross margin dipped 30 basis points year over year to 66.8% in the first quarter, but that still represented an improvement of 70 basis points from the fourth quarter. It expects that sequential expansion to continue with an adjusted gross margin of 70% in the second quarter as a favorable mix of higher-margin chips offsets its higher costs.

Nvidia’s forward valuations aren’t reliable anymore

Nvidia’s stock might seem pricey at more than 60 times forward earnings, especially when its GPU rival AMD (AMD 5.55%) has a forward price-to-earnings ratio of 28. But Nvidia’s valuations are still pegged to Wall Street’s cautious estimates — which were effectively rendered obsolete by its first-quarter earnings beat and second-quarter guidance.

Analysts had originally expected Nvidia’s revenue and adjusted EPS to grow 12% and 37%, respectively, in fiscal 2024. But its guidance suggests those estimates are too low, so the stock could actually be cheap relative to its near-term growth.

In other words, it still isn’t too late to buy Nvidia. Analysts clearly underestimated the growth potential of the generative AI market as well as the resilience of its high-end gaming market in this post-pandemic world, and its stock could blow past its all-time highs again as its sales of data center and gaming GPUs accelerate again.

Best Buy‘s (BBY 4.28%) stock ticked up by 3% after the company delivered its latest earnings report. In its fiscal 2024 first quarter, which ended on April 29, the big-box retailer’s revenue dropped by 11% year over year to $9.47 billion, missing analysts’ estimates by $60 million. Its adjusted EPS fell by 27% to $1.15, but beat the consensus forecast by $0.05 per share.

Best Buy’s growth rates seem sluggish, but they cleared Wall Street’s low bar, which had been adjusted to account for the near-term macroeconomic headwinds. Let’s review the key facts to see if investors should buy, sell, or hold this retail stock.

Image source: Best Buy.

What happened to Best Buy?

Best Buy experienced a major growth spurt during the first couple of years of the pandemic as consumers bought new PCs to attend online classes, work remotely, and play graphically intensive video games. They also bought more TVs, streaming media devices, and other consumer electronics as they spent more time at home. Best Buy’s e-commerce expansion over the past decade also enabled it to offset its slower brick-and-mortar sales with accelerating digital sales.

As a result, Best Buy’s revenue rose 8% in its fiscal 2021 (which ended in January 2021), driven by its 9.7% growth in enterprise (domestic plus international) comps. Its adjusted operating margin expanded to 5.8% while its adjusted EPS surged by 30%.

In its fiscal 2022, Best Buy’s revenue rose 10%, its enterprise comps grew 10.4%, its adjusted operating margin expanded to 6%, and its adjusted EPS increased by another 27%. Investors were dazzled by those growth rates and bid its stock to a record high of $129.56 on Nov. 22, 2021. But today, the shares trade at about $71 — 45% below their peak.

Best Buy lost its luster for two reasons. First, sales of new PCs fell off a cliff as social distancing efforts were relaxed and people physically returned to schools and workplaces. Second, inflation broadly curbed consumer spending on big-ticket items like TVs and appliances.

In its fiscal 2023, Best Buy’s revenue declined 11% and its enterprise comps fell 9.9%. Its adjusted operating margin shrank to 4.4% as its adjusted EPS plunged by 29%. It also got off to a rough start in fiscal 2024. Its 10.1% slump in enterprise comps in fiscal Q1 was the retailer’s sixth consecutive quarter of declining enterprise comps. Its adjusted operating margin also fell sequentially and year over year to 3.4%.

Data source: Best Buy. YOY = year over year.

Best Buy management expects those headwinds will persist. For the full year, it expects revenue to decline by 2% to 5%, enterprise comps to dip 3% to 6%, adjusted operating margin to shrink to 3.7% to 4.1%, and for adjusted EPS to slide 8% to 19%.

So why would anyone buy Best Buy’s stock?

Best Buy’s growth is likely to remain sluggish until the macro environment improves, but the bulls believe it’s approaching a cyclical trough. It also isn’t drowning in unsold products like some other big-box retailers: Its inventory levels actually declined 14% at the end of fiscal 2023 and dropped 17% year over year in the first quarter of fiscal 2024.

More importantly, Best Buy isn’t aggressively flushing out those inventories with margin-crushing promotions. During the Q1 conference call, CEO Corie Barry said the company was “now fully normalized to pre-pandemic levels from both the percent of products being promoted and the depths of promotions.”

Furthermore, Barry predicted that calendar 2023 would mark the “bottom for the decline in tech demand” and that the company’s quarterly comps growth would “improve” throughout the rest of fiscal 2024 as it lapped its post-pandemic slowdown. That outlook suggests it might be a good idea to buy Best Buy’s stock before its growth accelerates again.

The stock also looks historically cheap, with a low forward price-to-earnings ratio of 12 and a high forward dividend yield of 5.3%. That combination of low valuation and high yield could limit its downside potential until its cyclical downturn finally ends.

By comparison, Target (TGT -1.29%) trades at 18 times forward earnings and pays a lower forward yield of 2.9%. Walmart (WMT 0.18%) has a higher forward multiple of 25, but pays an even lower forward yield of 1.5%.

Is it time to buy, hold, or sell Best Buy?

If you already own Best Buy, there’s no reason to sell it while it’s trading at such a steep discount to its big-box peers. Instead, investors should simply hold the stock, collect their dividends, and wait for the consumer tech sector to recover. I also believe patient investors should consider buying the stock at these levels. The company is better run than many other brick-and-mortar retailers, its valuation is attractive, and it could recover quickly once a new bull market finally emerges.