Nvidia Corporation (NASDAQ:NVDA) has had a banner 2017. The NVDA stock price has doubled so far this year, and it has more than tripled in the last 12 months. NVDA news seemingly has been nothing but positive. Even in a very strong market for large-cap tech, NVDA stock has been a star.
But the stock hasn’t been without its skeptics.
It seems like ages ago, but as recently as early March NVDA had pulled back more than 15% and dipped below $100 on a pair of analyst downgrades. I’ve expressed some concerns along the way as well, citing potential competition from rivals like improving Advanced Micro Devices, Inc. (NASDAQ:AMD) and an awakened Intel Corporation (NASDAQ:INTC).
At this point, however, the bear case for NVDA stock seems shattered. The company posted another earnings blowout last week. Artificial intelligence adoption is gaining speed. The valuation looks high – but NVDA news is nothing but good and there are years of growth ahead of the company.
Over the past few years, Nvidia has made fools of bearish observers (myself included). At this point, it’s silly to keep fighting the tape and Nvidia’s growth.
More Good NVDA News: Blowout Earnings
Nvidia’s fiscal Q3 earnings were something close to flawless. Non-GAAP EPS of $1.33 beat consensus expectations by 38 cents. Revenue, too, beat analyst expectations, rising 32% year-over-year. Gross profit expanded 50 bps year-over-year, and the company guided for a 60% non-GAAP figure in Q4, which simply is a huge number for a chipmaker.
And this isn’t a case where the headline numbers are masking weakness within the business. A closer look shows strength across the board. Gaming revenue rose 25% year-over-year. Cryptocurrency demand has helped, but per the Q3 conference call sales actually fell quarter-over-quarter. Still, Nvidia’s strong growth in the category continued. In that area, NVDA news looks much better than that of AMD, whose cryptocurrency reliance was flagged by analysts coming out of its Q3 report.
More broadly, the combination of revenue growth and gross margin strength suggests that AMD’s Vega isn’t taking much, if anything, in the way of share from Nvidia and that AMD isn’t able to undercut the company on pricing.
Datacenter growth continued to be torrid, rising 109% year-over-year after 180% growth in the first half. That category now is on pace to generate over $2 billion in sales. The Volta GPU is seeing huge and quick adoption from all of the major cloud providers, including Amazon.com, Inc. (NASDAQ:AMZN), Microsoft Corporation (NASDAQ:MSFT) and even Alibaba Group Holding Ltd (NASDAQ:BABA).
On the Q3 call, CEO Jen-Hsun Huang called Volta “definitely the most successful product line in the history of our company.” In the context of the company’s huge growth and $130 billion market cap, that’s saying a lot.
The one weak spot was in automotive but even that could be considered good news. Automotive revenue rose just 13% year-over-year. But the opportunity there is in autonomous driving and that still is a long-term play. As long as Nvidia is as well-positioned in that space as it appears to be, automotive simply could serve as a growth driver next decade, once near-term strength in datacenter and gaming starts to decelerate.
How High Can NVDA Stock Go?
From a business standpoint, Nvidia appears to be firing on all cylinders. But there’s still the question of valuation.
Q4 guidance appears to suggest adjusted EPS of $1.37, which in turn would put FY18 adjusted EPS at $4.57. Even backing out $10+ per share in cash, NVDA still is trading at about 45x earnings, a big number in any space but particularly in the generally cyclical and lower-multiple chipmaker sector.
But that EPS also is likely to grow 75-80% year-over-year, an almost unheard of number for a chipmaker Nvidia’s size. FY19 EPS estimates have to move well past $5 and probably closer to $6. And it’s not as if growth is coming to an end any time soon. The datacenter and AI opportunities are enormous. Automotive hasn’t even kicked in yet: the category drove just 5.5% of Q3 revenue. That will change at some point.
The fact is that Nvidia looks positioned to be possibly the dominant chipmaker in a future where chips should become more important, not less. It’s perfectly positioned for major trends like autonomous driving, ‘big data’, and Internet of Things.
And that type of profile might allow NVDA stock to trade at a huge valuation for some time to come. It’s not as if NVDA didn’t look somewhat expensive earlier this year, or even for a good chunk of 2016. But the earnings growth has been so impressive that it’s overwhelmed any fundamental concerns.
At a certain point, it’s just unwise to bet against a company like Nvidia. Q3 cemented the argument that we’ve reached that point. There will be concerns, but as long as Nvidia keeps executing like it has, those concerns will be overrun by performance, just as they’ve been for the past several years.
As of this writing, Vince Martin has no positions in any securities mentioned.
