October 26, 2015
It's Not Too Late to Buy
This Stock's Major Uptrend
By Melvin Pasternak and Deborah O'Malley
While companies like Google (NASDAQ: GOOGL) and Apple (NASDAQ: AAPL) are experimenting with the first self-driving cars, completely autonomous vehicles are probably at least a few years out. However, the technology that is making its way onto the road right now is still pretty amazing.
For instance, with Tesla Motors' (NASDAQ: TSLA) new autopilot system, its cars can brake, steer, accelerate, decelerate, change lanes and avoid obstacles by themselves.
Fully and partially self-driving cars rely on millions of miles of driving videos and data, which are fed into a computer's data model. That's where today's stock pick comes in.
Nvidia (NASDAQ: NVDA), best known for powering PCs and video games with graphic pro-cessors, has made the leap into driver assistance and display systems.
The company makes high-performance chips that enable driver assistance systems to process massive amounts of data. It sells a Tegra X1 chip for automotive and gaming uses, and this summer started shipping its latest Drive PX computing system for self-driving cars and driver-assist applications.
Tesla uses Nvidia chips in the 17-inch screen and the instrument cluster for its Model S and might use the Drive PX in its Model X SUV. Meanwhile, Audi also uses Nvidia's technology in its Audi A8 traffic jam system.
Sales in Nvidia's automotive segment are surging. They are expected to reach $183 million this year -- up from just $23 million five years ago. In May, the company said it had already booked more than $2 billion in future automotive business -- mostly in digital display and driver assist chips. By 2020, management said it expects to see its chips installed in more than 32 million vehicles.
The automotive business presents the company with tantalizing growth opportunities, but sales from that segment currently account for only a small portion of total revenue. Processors used in video gaming technology -- of which Nvidia dominates 80% of the market, according to market research firm Mercury Research -- and PCs make up the core of the company's business.
And business is good. While the company has seen a slowdown in the PC original equipment manufacturer market, gaming revenue was $661 million in the most recently reported quarter.
Overall revenue for the quarter rose 4.5% from a year ago to $1.15 billion, beating estimates of $1.01 billion. Adjusted earnings of $0.34 per share were 13% higher year over year and soared past expectations of $0.10.
The company's outlook was also strong. For the upcoming fiscal third quarter, scheduled to be reported in early November, management said it expects revenue in the range of $1.16 billion to $1.2 billion. Prior to the announcement, analysts had been expecting revenue of $1.1 billion for the quarter.
Turning to the chart, the stock has handily outperformed the broader market, up 43% year to date compared with a 0.8% loss for the S&P 500.
As the chart shows, NVDA peaked near $16 in early 2012 before declining below $11 in November of that year. It is from there the current uptrend line can be drawn.
It took roughly two years for the stock to complete a rounded base and break out above $16 in February 2014. Shares then traded sideways in a narrow range defined roughly by support at $17 and resistance at $19.
In October 2014, NVDA marginally broke support near $17, but then immediately rallied. By the end of that year, it had advanced to $21. A shallow pullback saw shares return to support just below $19, which had been a resistance level for much of the middle of 2014.
By late March 2015, the stock advanced almost to $24, but pulled back to $19 support one more time in July, touching the major uptrend line drawn from the October 2012 low. That trendline now intersects a little above $20.
NVDA went largely sideways between $19 and $24 between March and late September, forming a large rectangle on the chart. In late September, shares took out $24 resistance and have been trending higher ever since.
A small accelerated trendline can be drawn from the July low, which currently intersects at about $21.80. There should be good lateral support near $24, which was the resistance level between March and late September. I am going to place my stop-loss at $23.79, just under this support.
Recommended Trade Setup:
-- Buy NVDA at the market price
-- Set stop-loss at $23.79
-- Set price target of $32.95 for a potential 15% gain by Q2 2016
You could actually turn this move into a into a 35% profit risking less than $600 if you follow a strategy known as the Levy Technique. Learn more here.
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