Shares of Nvidia (NASDAQ:NVDA) stock have been in a downward spiral over the past several months, with NVDA stock falling as much as 50% off 2018 highs amid slowing growth trends and inventory issues. Against that backdrop, Nvidia’s 2019 Investor Day — which happened on March 19 — was of critical importance. Either it was going to reaffirm the recent bear thesis, and cause Nvidia stock to fall further, or it was going to confirm that secular growth drivers remain healthy despite recent turbulence and pave a path for further upside in Nvidia stock.
Long story short, Nvidia’s 2019 Investor Day ended up being the latter. It was really good. The company’s underlying growth drivers were broadly confirmed as healthy. Management said that late-2018 inventory headwinds were essentially in the rearview mirror. Analysts walked away bullish. Investors, too. NVDA stock rose in response.
In the big picture, Nvidia’s 2019 Investor Day broadly confirmed that NVDA stock is a long-term winner, powered by healthy secular growth drivers in the auto, data-center and gaming markets. Confirmation of this thesis means that recent weakness in NVDA stock was just a really big road-bump.
Now the stock is past that big road-bump. What comes next is steady gains. As such, now seems like a good time to buy into the NVDA stock rally. This stock is just getting back to its winning ways.
Investor Day Confirms Long Term Bull Thesis in Nvidia
Broadly speaking, Nvidia’s 2019 Investor Day checked off all the right boxes. It confirmed that the company’s underlying secular growth drivers remain healthy, while maintaining that late 20018 headwinds are essentially over.
First, and foremost, Nvidia’s underlying secular growth drivers remain healthy. In particular, the gaming market projects to keep growing at a healthy rate for a lot longer, bolstered by next-gen gaming innovation, the global mainstream emergence of eSports and the increasingly diverse and complex needs of pro gamers. The data-center market likewise projects as a continued big grower, thanks to the increasing importance of data, the proliferation of data science processes, and the secular shift to cloud-hosted services. Meanwhile, the auto market is just scratching the surface of its enormous potential, which is supported by continued advancements and investments in the autonomous driving sector.
Between the those three secular growth markets, Nvidia has an enormous $100 billion-plus opportunity in front of it. Revenues this year are projected at just over $11 billion. Thus, the runway for potential growth over the next several years is very long and promising.
Second, Nvidia’s Investor Day confirmed that the late 2018 headwinds which plagued the stock are in the rear-view mirror. Namely, Nvidia was hit hard in late 2018 by a cryptocurrency mining slowdown which created too much supply in the company’s GPU inventory channel. Cutting down that inventory was expected to hit first quarter revenues and margins hard, and then largely phase out thereafter. Management confirmed that this is happening, saying that excess channel inventory is on track to clear in Q1.
Overall, it appears that Nvidia’s long-term growth drivers remain healthy, while near-term headwinds are phasing out. That combination should ultimately supported continued gains in NVDA stock.
Valuation Leaves Room For Upside in NVDA Stock
There was a point in time when most everyone thought that Nvidia stock was invincible. Back then, this was the AI-everything company, and a must own stock if you wanted exposure to all of tomorrow’s most important markets. At that point in time, Nvidia was a 20%-plus grower with big margin expansion drivers, and NVDA stock was trading at 40- to 50-times forward earnings.
Now, NVDA stock trades at just 25-times forward earnings. To be sure, the drop in valuation is warranted given the sudden and dramatic reversal in top- and bottom-line growth rates. But this growth reversal is a temporary phenomena. Once inventory issues pass, top-line growth will come back into the picture, driven by growth in auto, gaming and data. As revenue growth comes back into the picture, margin expansion should come back, too.
All together, the Nvidia by the end of 2019 could look very much like the Nvidia of mid-2018. That is, a 20%-plus revenue grower with healthy margin expansion drivers.
That version of Nvidia traded at 40-plus forward earnings. As such, with NVDA stock at 25 forward earnings today, the valuation leaves room for upside, assuming Nvidia returns to its normal AI-focused self by the end of the year.
Bottom Line
Nvidia remains an AI-everything company creating the building blocks for all of tomorrow’s most important markets. The market forgot about this long term growth narrative in late 2018 amid unusual inventory issues. Now, those inventory issues are passing, and the long term growth narrative is coming back into the spotlight. As it does, NVDA stock will return to its winning ways.
As of this writing, Luke Lango was long NVDA.
