Chip firm Nvidia Corporation (NASDAQ:NVDA) plans to release its fourth-quarter and full-year results to the investment community after the bell on Thursday, Feb. 9. In full disclosure, I’ve been slow to warm to Nvidia’s investment appeal, and in the meantime, NVDA stock has nearly tripled.
The key to the forthcoming earnings release will be growth — just like it is for any company. So far, the earnings momentum and increases in analyst projections suggest Nvidia’s prospects are bright.
But will NVDA stock holders have to tolerate some bumps along the way?
Nvidia Earnings Expectations
In my last update on Nvidia in early December, I suggested keeping an eye on earnings trends. At that time, full-year earnings estimates (the average of the earnings all analysts covering the name expect the company to report) had jumped nearly 32% — from $1.84 to $2.42 per share. It’s a key reason NVDA stock has rallied so strongly.
The current full-year estimate for Nvidia earnings (according to Yahoo Finance) is $2.41 per share. It relays that 19 analysts have provided estimates. That’s about flat over the past 60 days, but actually down slightly from the $2.45 projected 30 days ago.
But really, this is splitting hairs. It’s very likely NVDA reports a solid quarter in terms of bottom-line growth.
And sales growth is projected to be stellar. Analysts expect at least a 36% annual bump to $6.84 billion. Next year, top-line growth is projected to slow to 16% for full-year sales of nearly $8 billion; 2018 profits are currently pegged at $2.71 per share.
The Business Case for NVDA Stock
With a current share price of $117.40, the forward price-to-earnings ratio on NVDA stock sits right below 50. That’s a rather lofty multiple, and it essentially means that Nvidia must grow rapidly. Otherwise, that quickly surging share price could take a similarly speedy tumble.
Fortunately, Nvidia operates in some of the most exciting growth areas for semiconductors. The company is best-known for graphic chips, and in particular its graphic processing units, or GPUs. The company boasts it is the “world leader” in visual computing. This looks accurate — a recent Barron’s article pegged its GPU market share at 68%. This is one of the most compelling spaces in the semiconductor industry.
Nvidia’s chips are an integral component in the ecosystems that are pioneering growth in virtual reality, cloud computing, machine learning, and self-driving cars. These are some hugely disruptive industries that could end up revolutionizing many facets of the gaming, computing, and automotive industries.
The company’s gaming business is the largest operating unit and growing 30% per year on average since 2013. Its data center business (to support cloud computing) is expanding at a more rapid clip — 40% annually. And automotive is skyrocketing 75% annually, though from a very small initial base.
In some respects, and provided you are comfortable with the lofty valuation, Nvidia is a very compelling way for broad exposure to multiple disruptive industries.
NVDA adds exposure to the cloud-computing excitement that is creating a buzz at giant tech firms including Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and Alphabet Inc (NASDAQ:GOOGL).
Tesla Inc (NASDAQ:TSLA) is in the pole position in the autonomous automobile charge. The Nvidia Drive PX 2 computing platform currently powers the Tesla auto models that already have self-driving capabilities.
The Competition
More direct competitors include Intel Corporation (NASDAQ:INTC) and Advanced Micro Devices, Inc. (NASDAQ:AMD), both of which are looking to grow in these newer markets. Both key rivals are also likely to benefit from GPUs used to power gaming systems, machine learning, and servers used for cloud computing.
Intel is somewhat hamstrung from its dominant market share in personal computing. Its 80% market share to power personal computers and related devices has literally resulted in hundreds of billions of dollars in cash flow over the past several decades. This gives it unmatched rivalry to invest in new technology and keep a leadership position over chip competitors. But computing is mature and barely expanding.
AMD had been thought to have lost its way. Years of mismanagement allowed Intel to expand on its dominance and nearly put AMD out of business. But new management appears to have reinvigorated AMD, and investors are starting to believe it can also benefit from the same markets Nvidia is pursuing.
Bottom Line on NVDA Stock
In a recent interview, market strategist Ed Yardeni pegged semiconductor stocks as one of his favorite industries for 2017. In his words, “we’re talking about major secular disruptions in autos, consumer electronics, and gaming.” Chips that power data warehouses to serve the rise in cloud computing represent yet another market for these firms.
NVDA stock is an investor’s best bet to gain exposure to these markets. The rub, of course, is its valuation already reflects many more years of rapid growth.
AMD is an interesting turnaround play, though with its current low levels of profitability, the trading multiples are also lofty. Intel is a much safer bet in the microchip space. Its forward P/E is below 15, and there is a modest dividend yield of 2.86% that should grow over time.
I suggest taking a wait-and-see approach to Nvidia earnings. The fourth quarter is likely to impress, but given the lofty valuation, any hiccup in the expectations could result in a fair amount of share price volatility.
As of this writing, Ryan Fuhrmann did not hold a position in any of the aforementioned securities.
