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.
The datacenter segment is another growth avenue. NVDA partners with VMware, Inc. (NYSE:VMW) and Citrix in this market. So far this year, growth is running at 121% to represent the fastest growth market for the company. Its datacenter GPU also happens to be known as Tesla, and it has been used in scientific applications to help improve heart surgery and mapping of the human genome.
Artificial intelligence also is turning out to be a huge growth avenue. Nvidia defines AI as the use of computers to recreate human thinking and intelligence. This covers deep learning frameworks, such as big data applications that collect and track information on servers and cloud-based networks. It also covers self-driving cars where AI technology drives an automobile and helps steer it clear from accidents.
Bottom Line for NVDA Stock
Nvidia is ambitiously pursuing growth in gaming, automotive, as well as artificial intelligence applications. Based off total expected revenue growth of 37% to nearly $7 billion for this year, the potential appears to be great.
Unfortunately for prospective investors in NVDA stock, the share price has continued to move upward and may have run ahead of what is supported by the fundamentals. The profit expectation for this year is $2.42 per share. The stock is currently trading at 38X these estimates.
This doesn’t mean that investors should avoid the stock completely. Keep an eye on the earnings trend — if it continues to move upward, the stock should continue to move upward. The chip business is also cyclical — an overall downturn in the industry could knock Nvidia stock down too.
Looking at Nvidia’s past results could also deceive investors. Sales had been stuck in the $4 billion range for the better part of a decade. That ticked up slightly over the last couple of years, and appears to be building steam.
Given the vastness and growth potential of the current markets being served, the upside in NVDA stock is appealing.
As of this writing, Ryan Fuhrmann did not hold a position in of the other aforementioned securities.