Analysts predicted that chip firm Nvidia Corporation (NASDAQ:NVDA) would report a strong fourth quarter and end to its full fiscal year. That was definitely the case when the company reported on the quarter a couple of weeks ago. Strangely, though, NVDA stock is down nearly 13% since the earnings release.
Following the earnings release, a number of analysts curbed their enthusiasm for Nvidia stock.
They cited competitive pressures in gaming chips from the likes of Advanced Micro Devices, Inc. (NASDAQ:AMD), having to compete with industry giant Intel Corporation (NASDAQ:INTC), and uncertainty in NVDA’s newer markets.
The buzz surrounding Nvidia stock’s prospects is sourced in its data center, artificial intelligence and automotive businesses. These are newer and growing rapidly, but the company is still heavily reliant on gaming. It was a pioneer in developing graphics processing units for the PC gaming market as early as 1999.
In NVDA’s words, “GPU deep learning ignited modern AI — the next era of computing — with the GPU acting as the brain of computers, robots and self-driving cars that can perceive and understand the world. Today, Nvidia is increasingly known as ‘the AI computing company’.” This more or less sums up how the company would like to be known to customers and NVDA stock investors alike.
Is AI the New Hope for Nvidia Stock?
During the fourth quarter, Nvidia reported that data center revenue tripled and that AI is being rapidly adopted throughout the world. Total revenue jumped 55% to $2 billion. Gaming was the largest segment at over 62% of total sales. Growth was great at 66%. Its GPUs work in notebook games, and also the burgeoning virtual reality gaming market.
Rounding out the other business segments, professional visualization, which serves markets including super-computing workstations, reported solid revenue growth of 11% to $225 million, while data center tripled to $296 million. The data center business operates at the forefront of cloud computing and includes customers such as Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google, and Facebook Inc (NASDAQ:FB).
The automotive segment jumped 38% to $128 million. During the earnings conference call, NVDA announced a new partnership with Bosch (the largest auto supplier in the world) and it already works with auto manufacturers Audi (OTCMKTS:AUDVF), Mercedes-Benz, and Tesla Inc (NASDAQ:TSLA). Nvidia’s Drive PX 2 computing platform powers the autopilot systems being developed in self-driving cars.
Its remaining business unit is OEM and IP, which reported a loss in sales of 11%, down to $176 million. To echo some of the reasons a couple of analysts downgraded NVDA stock, the other businesses are growing rapidly, but Nvidia remains primarily a graphic chips company.
The company reported annual free cash flow production of $1.5 billion, or close to the $1.7 billion in reported profit for the year. This worked out to $3.08 per share, or $2.57 on a fully diluted basis. Cash on the balance sheet jumped to $6.8 billion, against only $2 billion in long-term debt. Clearly, NVDA controls its own future and is in great shape financially.
For the coming year, analysts project full-year earnings of $2.83 per share and a 16% jump in sales to $8 billion. The estimates for the next year (fiscal 2019) call for $3.34 in earnings and a 12% jump in sales to $9 billion.
Bottom Line on NVDA Stock
Nvidia’s earnings estimates have moved up since the strong fourth-quarter results. Right now, the forward price-to-earnings ratio is about 37. That drops to 31 the following year, assuming earnings come in as projected.
That still represents a relatively high P/E ratio that is about double the market average. A rich valuation for the Nvidia stock price leaves big downside risk if profits fall unexpectedly, and the industry risks are also great. The chip business is extremely competitive and fast moving.
A safe way to play the growth in all chip markets is through industry titan Intel. It is broadly diversified and already serves the computer and data center spaces. It can relatively easily acquire its way into gaming and automotive. AMD represents an interesting turnaround play in these markets, but does illustrate how trying to compete directly with Intel can turn out badly.
I remain extremely interested in Nvidia stock as an investment, but am still on the fence. This is due primarily due to its lofty valuation and competitive pressures, though I do like that free cash flow production is stellar.
NVDA stock is moving up currently following an upgrade from Goldman Sachs. That being said, it operates in some of the most compelling growth areas for semiconductors. Many investors have already decided it is worth the risk and that growth should be solid for many years to come.
As of this writing, Ryan Fuhrmann was long shares of Facebook.
