It is no longer news that Nvidia Corporation (NASDAQ:NVDA) is on fire, with NVDA stock looking to finish out the year on 200%-plus gains.
Our Joseph Hargett could barely type the words “going to $100” earlier this month before the stock opened for trading Dec. 16 at $99.48. Nvidia’s dominance in gaming will let it “ride in Santa’s Sleigh,” added our Serge Berger, and we assume that next year it’s going to drive the thing.
NVDA stock took off last month after reporting an October quarter that didn’t just blow out estimates, but blew analysts’ minds.
Revenue of $2 billion was 30% ahead of the previous quarter! Net income of $542 million, 83 cents per share, meant more than one-quarter of that money hit the bottom line. In the first three quarters of its 2017 fiscal year, NVDA has nearly reached the $5.1 billion in revenue achieved all last year. The company took out nearly $2 billion in new long-term debt during the third quarter and hardly anyone noticed.
Who wouldn’t want to get on board that train? But before you jump, it would be good to know why you’re jumping, and where this train is headed.
Artificial Reality
Gaming is, as Stephen Sondheim wrote, like finishing the hat where there never was a hat. Graphics chips (and Nvidia sells the fastest graphics cards in the world) render scenes from data so quickly, and so completely, it’s nearing the point where games are indistinguishable from reality.
It is an artificial reality, but if the data is real a computer can start dealing with the real world. That’s what self-driving cars are all about. When you have enough data — not just visual data, but directions and background and all the other things your brain processes as you drive — a computer can handle the road’s complexity and you can play video games on your way to the office.
Quick rendering creates real worlds out of virtual data, allowing doctors to get inside the hearts they’re operating on, creating traders with true intelligence and bringing computers into real-world decision making. It started with gaming, but it’s not just about gaming anymore.
While other companies abandoned the client for the cloud, Nvidia kept pushing the envelope. (Its fiscal year ending in January is a relic of the days when it relied on retail sell-through, on Christmas sales of game machines, for its numbers.)
Now the virtual worlds it renders are ready to take on the real world, opening vast new markets.
Everybody on Board With Nvidia
Assuming there is no recession, and that’s a big assumption, Nvidia should keep growing at its 28% per-year rate indefinitely, and its dominance within the niche means its margins should stay high.
It’s an easy call to make, so S&P Global Market Intelligence has made it, and Long Capital has made it. Zacks has made it and Evercore ISI has made it. The new price target is $120 and NVidia could blow past that early in 2017. Jim Cramer, who knows a good analogy, calls Nvidia a “Secretariat” among stocks. (If you’re not old enough to remember the 1973 Belmont, see the movie.)
There are still Nvidia bears, thankfully, like Pacific Crest, which sees high inventory and low sell-through on high-end graphics cards with Nvidia chips that Asian manufacturers are pushing out toward retailers. This would, at worst, be a speed bump. The company’s long-term future seems secure, and it’s the long-term — three-to-five years out — that investors should be looking at.
Bottom Line on NVDA Stock
At its current price, Nvidia is fully-valued, with a price-earnings multiple of 51. But if its October quarter became the norm for the next year you’re talking about a P/E of just 23.
Whether the economy delivers a stable enough environment to make that happen is the only question you need to ask. Nvidia is fully valued, but perhaps it is fairly valued, assuming the market as a whole is overvalued.
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
