Since March 6, shares of semiconductor giant Nvidia Corporation (NASDAQ:NVDA) have risen over 37%, climbing from $97.67 to north of $135 on May 16. Why is this significant for NVDA stock? It was then — on March 6 — I told you Nvidia stock has bottomed.
As it stands, both predictions, including my telling you on May 4 that NVDA stock would reach $130, has proven correct. Thanks to the company’s breathtaking earnings results last week, my crystal ball now says Nvidia stock will reach $150, delivering nearly 15% gains from current levels of around $135.
Ahead of its latest report, there were questions about the company’s competitive position with the likes of Advanced Micro Devices, Inc. (NASDAQ:AMD) and Intel Corporation (NASDAQ:INTC). It was believed that the growth story was over.
Reasons to Like Nvidia
Nvidia shares in April were under heavy selling pressure after analyst Mike McConnell at Pacific Crest, concerned about signs of desktop saturation, lower margins from Nintendo and a slowdown in the NVDA datacenter, downgraded the stock to “Underweight” from “Sector Weight.”
Nvidia, however, had other ideas. Revenue in the most recent quarter not only surged 48% year over year to $1.94 billion, beating analysts estimates, NVDA also crushed EPS estimates by a whopping 18 cents.
The 18-cent beat was driven by stronger-than-expected net income that doubled on a non-GAAP basis to $533 million. This, combined with operating income rising up 98% to $637 million, erased any fears that Wall Street had about margin compression. Gross margin rose to 59.6%. Datacenter segment revenue — now a significant source of strength for the company — was the important growth area, surging 186% year over year to $409 million, marking a sequential rise of 38%.
“Our Datacenter GPU computing business nearly tripled from last year, as more of the world’s computer scientists engage deep learning,” said founder and CEO Jensen Huang. As it stands, not only is Datacenter revenue now second only to gaming in terms of percentage gain, it is now growing at a much faster rate.
The analysts who were concerned about NVDA losing in the desktop market overlooked the fact that the company is expanding beyond desktops. The Automotive segment, for instance, grew 24% year over year to $140 million. And there seems to be no signs of slowing down. On the conference call with analysts the company said it was engaging with more than 225 different auto industry customers for its Drive PX 2 hardware solution for autonomous vehicle processing. Huang noted that NVDA is well-positioned for the AI revolution and the company’s strong GPU platform assures that it has a place in the space.
And with second-quarter revenue guidance for $1.95 billion, calling for 36% year over year growth and gross margin expected to be 58.5% at the midpoint, NVDA stock will continue to pay.
Bottom Line for NVDA Stock
Nvidia not only crushed Wall Street’s first-quarter estimates on almost every metric, the company also raised full-year guidance. But while the forward price-to-earnings ratio at 39 suggests NVDA is no longer in the bargain bin, the fact that fiscal 2017 EPS of $3.08 per share will grow at 20% implies there’s still a strong money-making business being cultivated.
And with gross margins still rising, combined with growth in datacenter, automotive and gaming, NVDA stock should reach $150 by year’s end.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.
