Nvidia Corporation (NASDAQ:NVDA) stock is heading higher today after SunTrust upgraded NVDA stock to a “buy” and slapped a fresh $177 price target on the stock (which implies roughly 13% upside).
SunTrust analyst William Stein sees upside to current revenue and earnings-per-share estimates driven by outsized growth in the data-center, gaming and automotive markets.
Stein said that because growth in those markets is being under appreciated by the market, it isn’t too late to turn bullish on NVDA stock.
Is the analyst right? After all, NVDA stock more than tripled in value in 2016 on its way to being named the Yahoo Finance “Company of the Year.” After a pause in growth earlier this year, Nvidia has roared higher since a blowout first-quarter report. Shares of Nvidia are now up almost 50% year-to-date.
Again, the 50% year-to-date rally is after more than tripling in 2016. Is it really possible that its not too late to buy into this all-things-AI growth story?
A Lot to Like About the Nvidia Story
There is certainly a lot to like about Nvidia’s growth story. The company has successfully transitioned from a boring, old graphics chip company to an exciting, revolutionary GPU computing company exposed to all the growth markets investors want exposure to.
The first of these growth markets is computer gaming. It’s a $100 billion market, and NVDA is tapping only about 4% of it, implying huge multi-year growth potential through market share gains. Those market share gains are already happening. Gaming revenue jumped 49% year-over-year in Q1 to $1.03 billion.
Investors should expect similar scintillating growth over the next several quarters. Virtual reality, augmented reality and 4K gaming are the wave of the future in the gaming industry, and NVDA’s GPUs are designed perfectly to handle the high-end demands of these new gaming technologies.
The second of these growth markets is what Nvidia dubs “professional visualization.” Its essentially the usage of advanced virtual reality technology in a professional setting. NVDA’s GPU in this market, the Quadro, saw revenue growth of 8% year-over-year in Q1. Headline names such as Lockheed Martin Corporation (NYSE:LMT) and Ikea are using NVDA’s GPU for professional VR purposes. As this VR tech gets better and better, adoption of VR in the workplace will become more pervasive.
The third of these growth markets is data center, which saw revenues nearly triple year-over-year in Q1. This is the hyper-growth cloud stuff, and NVDA is at the center of this cloud growth story.
As of last quarter, all of the world’s major internet and cloud service providers used Nvidia Tesla-based GPU accelerators. That includes Amazon.com, Inc. (NASDAQ:AMZN), Facebook Inc (NASDAQ:FB), Alphabet Inc (NASDAQ:GOOG), International Business Machines Corp. (NYSE:IBM), Microsoft Corporation (NASDAQ:MSFT) and Alibaba Group Holding Ltd (NYSE:BABA).
The last of these growth markets is automotive. Revenues here were up 24% year-over-year last quarter to a record $140 million. The growth is coming from companies starting to leverage AI to solve the autonomous driving problem. Autonomous driving, like the other growth markets, is a multi-year growth story.
For the next several years, more and more companies will invest more heavily into leveraging AI to address the complex issues of autonomous driving.
Not a Lot to Like About Nvidia’s Valuation
Despite the robust growth story, the valuation is a head-scratcher. Nvidia does have a strong balance sheet with $6.2 billion in cash and $2.2 billion in debt. That gives the company a net cash positioning of $4 billion, or about $6.25 per share. Backing that out of the valuation, NVDA stock still trades at 43 times FY19 earnings estimates.
Meanwhile, earnings growth is expected to be 21% this year, slow to 14% next year and surge to 34% the year after that. All together, over the next three years, earnings are expected to grow at roughly 23% per year.
A 43 times ex-cash multiple for 23% growth is a rich valuation. All that means is that investors are pricing in big earnings growth to continue well after FY19. Considering the robust growth markets NVDA is exposed to, that may very well be the case.
NVDA stock is a richly valued growth stock with many years of promising growth ahead of it. Chasing the rally up here is risky in the short term, but may well be worth it.
As of this writing, Luke Lango was long FB and AMZN.