Back on August 10th, Nvidia Corporation (NASDAQ:NVDA) reported a blow-out quarter, with revenues up 56% to $2.23 billion and EPS (earnings per share) up a sizzling 124%. The guidance was also robust which both hurt and helped Nvidia stock.
The summer has been a mixed bag for tech stocks, with top operators like Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL,NASDAQ:GOOG) generating losses. Even for companies that posted strong quarterly results, it did not seem to matter much as Wall Street has been fairly demanding lately. But for Nvidia stock, the “whisper numbers” were even higher, which helps to explain why the shares dropped by 5% on heavy volume. Now it’s true that the stock has since gone on to make up for much of the losses. And of course, the return for the year is still a hefty 55%.
Can Nvidia Stock Continue to Grow?
So yes, the tough question is: What’s next? Is there more upside? Or is the recent weakness a sign of a toppy valuation?
Well, for the most part, I think the bull case is still intact, especially for those investors who take a longer-term perspective on things. The main reason is that the growth story is still in full force as the company should benefit from several secular trends.
One is the datacenter market. During the quarter, revenues soared by over 250% to $416 million. This represented five consecutive quarters of triple-digit growth.
A key is that Nvidia’s core GPU (Graphics Processing Unit) chips, which have historically been focused on the gaming market, have proven ideal for categories like deep learning, AI (Artificial Intelligence) and high-performance computing. Customers want these kinds of technologies because they allow for ginning up critical insights, such as about customer trends.
All in all, AI is likely to be pervasive across many industries. According to research from International Data Corporation (IDC), the global spending is projected to go from $12.5 billion this year to $46 billion by 2020. This comes to a compound annual growth rate of 54.4%.
Keep in mind that Nvidia continues to push the innovation curve. To this end, the company has recently launch its Volta-based V100 accelerator, which is a next-generation technology. The chips allow for a 10X improvement in deep learning power and is available for the AI frameworks of Google and Facebook Inc (NASDAQ:FB). But there are also strategic partnerships with operators like Baidu Inc (ADR)(NASDAQ:BIDU), Volkswagen and Foxconn.
Then there is the automotive segment. While revenues were up only about 19% to $142 million in the latest quarter, the growth is still likely to accelerate. Note that NVDA has signed up more than 225 customers for the DRIVE PX AI system. Although, for Nvidia stock, the major driver is likely to be Tesla Inc (NASDAQ:TSLA), which is expected to substantially ramp production with the Model 3.
Bottom Line On Nvidia Stock
Oh, and of course, the gaming business still represents a key to the growth story. During the most recent quarter, the revenues jumped by 52% to $1.19 billion and the sequential growth rate was about 15%. Gamers certainly want advance chips like Nvidia’s to get the realistic experiences of titles like Call of Duty and Destiny. The company has also expanded its technology to laptops and notebooks, which should open up even more market opportunities.
Yet the nagging issue for many investors is the valuation. Let’s face it, the shares are trading at nose-bleed levels, with the forward price-to-earnings ratio at 42X. By comparison, many other chipmakers like Texas Instruments Incorporated (NASDAQ:TXN) and Intel Corporation (NASDAQ:INTC) trade at multiples below 20X.
But then again, growth usually comes at a premium. Besides, Nvidia offers a way to get exposure to various megatrends that should propel the growth for years to come. In other words, so long as management continues to execute, which it has done consistently for years, then Nvidia stock looks like a pretty good bet.
Tom Taulli runs the InvestorPlace blog IPO Playbook and is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
