No surprise here. Hyper-growth tech darling Nvidia Corporation (NASDAQ:NVDA) reported yet another beat-and-raise quarter. Revenues easily topped expectations and earnings absolutely smashed expectations. The fourth-quarter guide called for more than 10% upside to current Street estimates. All in all, the quarter has NVDA stock up about 6% in mid-day trading on Friday.
I’ve been saying for a while that I’m comfortable with NVDA stock below $220. Its getting awfully close to that level. Does that mean its time to sell?
I don’t think so.
The third-quarter numbers were good enough to force me (and whole bunch of other analysts and investors) to revise their growth numbers higher. The reality is that everyone right now is underestimating just how much momentum this growth narrative has.
At the end of the day, I’m comfortable with NVDA stock below $230. Here’s how I get there.
The Story Behind NVDA
By now, we are all well aware of Nvidia’s growth narrative. The company provides the hardware that other companies are using to build tomorrow’s robot-heavy and AI-heavy world.
On one end, the company provides parts for hyper-scale data centers. Nvidia’s Volta GPUs are being used by all the big players in this space, including Facebook Inc (NASDAQ:FB), Amazon.com, Inc. (NASDAQ:AMZN), Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), Microsoft Corporation (NASDAQ:MSFT) and several others.
Revenue growth here is slowing, but it remains robust (revenues are still doubling year-over-year). As more data migrates to the cloud, Nvidia’s data center business will continue to roar higher.
On the other end, the company provides the technology that powers self-driving cars. Growth here is also slowing (up 13% versus an increase of 38% three quarters ago), but new product launches like the Nvidia Drive PX Pegasus coupled with growing demand for driver-less vehicles will keep growth strong in this segment.
NVDA also provides the technology behind gaming. As the gaming industry graduates into the “next-gen” category and it becomes more virtual/augmented reality heavy, demand for Nvidia products will ramp. Growth in this business will likewise remain strong in the foreseeable future (revenues were up 25% last quarter).
Video capture and data visualization is also a big and growing thing. NVDA is behind that, too. Same with autonomous machines and other automated technology.
In short, because Nvidia is essentially an all-things-AI company, the growth trajectory over the next several years look exceptionally promising.
The Numbers Behind NVDA
But as those who have followed my writing know, I’m all about the numbers.
The company’s numbers are quite good and imply further upside for NVDA stock.
Fourth-quarter revenues are expected to be $2.65 billion. That is 12% higher than where the Street was sitting. At $2.65 billion in Q4, full-year revenues would be about $9.5 billion. That is up 37% from a year ago, when revenues grew 38%.
Clearly, growth isn’t slowing all that much.
Growth will slow over the next several years, but the top-line should be able to grow around 20-25%. Gross margin expansion plus operating expense leverage should turn that 20-25% revenue growth into something like 30% earnings growth.
Given that growth will remain high for quite a long time, NVDA stock easily deserves a 60x multiple for that 30% growth.
Earnings estimates will move significantly higher given the strong Q4 guide. Earnings estimates for 2017 will likely trend from $3.60 to $3.80, while 2018 estimates will trend from $4 to $4.20. A 60x multiple on fiscal 2018 earnings of $4.20 implies a one-year forward price target of about $252.
Discount that back by 10%, and you get a present value of roughly $230.
Bottom Line on NVDA Stock
Its a growth stock with a lot of momentum right now. The numbers also imply that the valuation is reasonable and that there is more upside in the stock.
I like a reasonable valuation on a big growth name.
All else equal, I think NVDA stock continues to grind higher.
As of this writing, Luke Lango was long NVDA, FB, AMZN and GOOG.
