Admittedly, it took a while, but I came around to the bull case for Nvidia Corporation (NASDAQ:NVDA) last year. The issue over the past few years hasn’t been Nvidia’s performance or its market opportunities. Rather, the concern has been the price of Nvidia stock.
After all, as I pointed out in December, semiconductor stocks very rarely trade at the multiples assigned to NVDA stock. Historically, the chip sector traded at a discount to the overall market. Semiconductors tend to be cyclical, and pricing steadily declines over time. Consistent earnings growth can be difficult to drive.
But the reason Nvidia stock is priced like an outlier in the sector is that the company itself is an outlier. And fourth-quarter earnings on Thursday afternoon further proved that point. Nvidia posted a record-breaking quarter, smashing consensus estimates.
And yet the gains in NVDA stock have moderated considerably: NVDA stock has waffled between barely eeking out a gain and the 6% it’s currently trading at, after rising as much as 14% in after-hours trading. The stock still sits almost 10% below an all-time high reached in January, before market-wide jitters led to a pullback.
There should be little doubt that NVDA will return to — and surpass — those highs, and I’d expect that to happen relatively quickly. Both Q4 earnings and Q1 guidance were hugely impressive. Valuation still is high, but it’s not as high as it’s been in past quarters.
And after Q4, investors still should be willing to pay a premium for Nvidia stock, considering the growth opportunities that still lay ahead for the company.
A Blowout Quarter
Nvidia has been making a mockery of Street estimates for over two years now. But even past beats pale in comparison to the numbers the company put up on Thursday.
Revenue of $2.91 billion rose 34% year-over-year — a full ten points better than consensus. Adjusted EPS of $1.72 rose 52%; analysts had been looking for an increase under 20%. As far as Q1 guidance goes, it’s much the same. Nvidia expects revenue of $2.9 billion, plus or minus 2%; the Street was looking for just $2.48 billion.
Essentially, analysts thought heading into the quarter that growth would decelerate. And that wasn’t an illogical prediction. Comparisons are getting tougher and gaming demand should be moderating. Meanwhile, the cryptocurrency craze that benefited Nvidia and Advanced Micro Devices, Inc. (NASDAQ:AMD) petered out toward the end of the quarter.
Yet Nvidia continues to post almost unprecedented growth with strength across the board. Gross margin rose 330 basis points. GPU sales rose 33%; revenue from the smaller Tegra business increased 75% YoY. The gaming category rose 29%, professional visualization 13%, and the OEM and IP business grew 2% despite the end of licensing revenue from Intel Corporation (NASDAQ:INTC) in the first quarter.
Most notably, Datacenter sales more than doubled, as Nvidia continues to take share from Intel in that key market. Datacenter now drives over 20% of revenue, adding a second growth driver for Nvidia going forward. And with Q1 guidance strong, Nvidia looks set up for a strong fiscal 2019.
Why Nvidia Stock Has Pulled Back, And Why It Shouldn’t Have
And yet NVDA stock has given back most of its post-earnings gains, despite selling off heading into the quarter. It’s tough to see what has tempered investors’ enthusiasm for the quarter. The Automotive category could be seen as a disappointment, as revenue grew just 3% year-over-year and actually declined 8% from Q3.
One analyst on the Q4 call referenced the recent production ramp at customer Tesla Inc (NASDAQ:TSLA) in asking when that category would inflect. But that remains a late calendar year 2019 event at the earliest, as CEO Jen-Hsun Huang replied. Sales now are largely relegated to infotainment where cost pressures are mounting, and where Nvidia lost its spot at Tesla to Intel. One quarter’s results in that space simply don’t affect the long-term case for Nvidia’s role in autonomous driving.
And elsewhere, the long-term case for NVDA seems nothing but strengthened. Guidance for the first quarter appears to suggest earnings will nearly double year-over-year. Backing out the company’s $8 per share in cash, and assuming non-GAAP EPS of $6-plus next year (an easy target: $7 is in play based on Q1 guidance), NVDA suddenly is trading closer to 30-35x EPS, and an even lower multiple to free cash flow.
That’s an attractive multiple for the type of growth Nvidia is posting.
Even analysts have come along with a series of upgrades and price target hikes. Yet, the market seems to be dragging its feet.
Whether that’s just the sign of a nervous market or investors are seeing something in the results that I’m not, that seems like a mistake. Q4 was a blowout quarter. Growth isn’t ending any time soon. Valuation isn’t prohibitive.
This isn’t Micron Technology, Inc. (NASDAQ:MU), obviously, from a valuation standpoint, but a 30x-plus multiple is easily sustainable if Nvidia keeps performing.
Nothing in the quarter suggests it won’t. And so, when confidence returns, NVDA stock should be moving back toward $250 and beyond.
As of this writing, Vince Martin has no positions in any securities mentioned.