Microprocessor firm Nvidia Corporation (NASDAQ:NVDA) has nearly tripled so far this year. Investors are growing increasingly enthusiastic that its transformation from a purely graphics chip firm to a purveyor of graphics processing units (GPUs) will send sales and cash flow — and as a result, NVDA stock — significantly higher in the coming years.
Based off the run in Nvidia shares, the company is already a bona fide success. But most of the run has come on an expansion of NVDA’s earnings multiple. That said, earnings expectations have run 32% higher — from $1.84 per share to $2.42 per share — over the past 90 days. That’s pretty solid earnings momentum.
The key question for prospective investors: Will the momentum in fundamentals continue? Based off current valuations, significant growth already is priced into NVDA stock. That could leave a lot of room for disappointment.
On the flip side, the markets that Nvidia is actively targeting are arguably in a revolutionary stage.
A Look at Nvidia’s Recent Results
Revenue for Nvidia’s third quarter jumped 53.5% to $2 billion. Management called it a “breakout” quarter where revenue and earnings hit records. Net income jumped to $570 million, or 94 cents per share of NVDA stock.
Growth was strongest in selling chips and related systems that power video games, datacenters run by the likes of International Business Machines Corp. (NYSE:IBM) and a burgeoning automotive market.
Nvidia’s most important segment is gaming. Customers in this segment include Sony Corp (ADR) (NYSE:SNE) and its PlayStation franchise. The company mentioned games including Battlefield 1, Call of Duty, and eSports for deploying its Pascal-based graphics processing units (GPUs). Annual gaming growth has been stellar at 30% annually over the last three years.
Gaming sales increased 63% and exceeded $1 billion to account for more than half of total revenue. Professional visualization is the next largest unit but only saw a modest increase to $207 million in quarterly sales. This unit provides chips for a mix of industries, including media and entertainment.
Automotive sales jumped 61%, but at $127 million are still a small percent of the total pie (6%). The auto segment has huge upside potential because of excitement surrounding development of self-driving cars.
Nvidia’s Growth Drivers
Nvidia serves huge markets that continue to grow. It estimates the gaming market at $100 billion and its market share at only 3.5%.
Automotive represents a total market over $10 trillion. Nvidia is fast positioning itself as the chip provider of choice to automotive companies. Its systems are already present in more than 10 million vehicles around the world. During its earnings conference call, it detailed that Tesla Motors Inc (NASDAQ:TSLA) is powering its autonomous car system with its Nvidia Drive PX 2 that are more than 40 times faster than earlier technologies.