I can see why some investors might fret about Nvidia (NASDAQ:NVDA) at this point. As markets have rallied from March lows, NVDA stock has doubled. Surely, some investors might think, the gains are at or near an end.
To be sure, simple math suggests that some of the easy money has been made. NVDA stock isn’t going to gain another 100% in less than three months. Though I pounded the table for the stock in March, even I hardly predicted the rebound would be quite this steep.
But the advice I gave in March still holds in May: take the long view.
I still believe that as we return to normalcy, this decade will eventually be known as the “Roaring 2020s.” And Nvidia is set to benefit from several of the major trends that will drive growth for years to come.
Taking that long view, Nvidia stock still has a lot of upside left. Fiscal first quarter earnings last week help show why.
Another Blowout Earnings Report
I predicted ahead of earnings that Nvidia was set for a big report, and that prediction came true. Nvidia’s fiscal first quarter earnings were sizzling.
Both revenue and profits handily beat analyst estimates. But, as always, there’s more to a quarter than Wall Street expectations and headline numbers.
Those headline numbers were impressive, however. Revenue rose 39% year-over-year. Profits more than doubled. But what’s more important to the bull case for NVDA stock is what they mean.
They mean two things most importantly. First, Nvidia is fully back on track. Sharply lower demand for cryptocurrency mining hit Nvidia’s results about eighteen months ago. Chief executive officer Jensen Huang himself admitted to a “crypto hangover.” But revenue and profits are returning to past levels — and from there will move to new records.
Second, Nvidia is powering right through the current crisis. In fact, looking closer at the report, we can see that the company is better-positioned than most going forward.
Gaming remains Nvidia’s biggest category, driving 43% of revenue in the first quarter. Performance in Q1 was strong. Sales rose 27% year-over-year. A 10% decline quarter-over-quarter is due in part to seasonality, as holiday gifts drive demand in Q4.
On its face, that growth is impressive. But after listening to the company’s first-quarter conference call, it’s even more impressive. After all, Nvidia posted that growth despite pressures from the coronavirus.
So-called “iCafes” in China closed toward the beginning of the quarter; those outlets provide relatively steady demand for Nvidia chips. The Chinese market is important for Nvidia: that country, including Hong Kong, drove over one-quarter of sales in fiscal 2020. Yet Nvidia managed that headwind beautifully, and should benefit from some pent-up demand in Q2.
Of course, that wasn’t the only source of pressure. In many countries, and even the U.S., many Nvidia chips are sold in-store. Yet, as Chief Financial Officer Colette Kress noted on the call, demand simply shifted online.
There are not a lot of companies that can see such a seamless transition. It requires impressive execution, a flexible supply chain and intense customer loyalty. Put another way, Nvidia doesn’t have to go to where the customers are; the customers find Nvidia products wherever they have to. Sales in Q1 prove that fact.
There was another piece of trivia in the Q1 release that highlighted Nvidia’s brand strength. The company noted that Huang’s keynote videos at Nvidia’s recent conference had been viewed 3.8 million times in the first three days.
Those videos are not short snippets: there are nine, averaging over 10 minutes each. Gamers are so invested in Nvidia that hundreds of thousands viewed those videos. That’s a huge sign of the power of the Nvidia brand.
Data Center Drives NVDA Stock
The news was positive in the other key category, data center. For the first time, Nvidia drove over $1 billion in revenue in a single quarter. Sales grew 80% year-over-year.
And this business is only getting started. Cloud adoption is going to accelerate as a result of this crisis. That is a key reason why Amazon (NASDAQ:AMZN) has gained, in addition to optimism toward its e-commerce business.
Nvidia closed its acquisition of Mellanox Technologies on Apr. 27, which, as Huang noted, gives the company “a much larger footprint” in the market.
It also augments the company’s position in artificial intelligence and high-performing computing. Those trends, too, are accelerating. Nvidia is even powering some of the work being done to understand, simulate and treat the coronavirus.
NVDA Stock Isn’t Cheap
To be fair, an investor might argue that this story isn’t all that different than it was two and a half months ago, when NVDA stock traded below $200. It’s somewhat the same story it was a year ago, and Nvidia stock has gained 145% over that stretch.
And, no, NVDA isn’t cheap. The stock now trades at 48x next year’s consensus earnings per share estimate.
But in the bull market, and even now, valuation is not a reason to sell. There were skeptics calling Shopify (NYSE:SHOP) too expensive at $150 and Tesla (NASDAQ:TSLA) overvalued at $230. Particularly in tech, savvier investors took the long view and owned quality businesses with enormous, expanding markets. And they profited handsomely as a result.
That kind of strategy is exactly what I advise investors do in any market. (Indeed, I’ve repeatedly recommended both SHOP and TSLA over the years.) NVDA stock fits that strategy perfectly. And Q1 shows why.
The company is executing. Its largest category has an enormous base of committed customers. Its other key category is going to grow for years, and likely decades, to come, while Nvidia has a massive opportunity to take market share. And the company has barely scratched the surface in artificial intelligence and automotive.
In that context, I’m not worried about valuation. NVDA stock isn’t cheap because it shouldn’t be. Investors waiting for it to get cheap are going to be waiting a very long time — and will miss out on gains in the process.
Matthew McCall left Wall Street to actually help investors — by getting them into the world’s biggest, most revolutionary trends BEFORE anyone else. The power of being “first” gave Matt’s readers the chance to bank +2,438% in Stamps.com (STMP), +1,523% in Ulta Beauty (ULTA) and +1,044% in Tesla (TSLA), just to name a few. Click here to see what Matt has up his sleeve now. Matt does not directly own the aforementioned securities.