Everything an investor needs to know about Nvidia (NASDAQ:NVDA) stock can be summed up in the first three bullet points of the company’s earnings release last week.
Nvidia highlighted record total revenue, record total revenue in gaming, and record total revenue in data center. Even during a pandemic, Nvidia blew the doors off the quarter and crushed analyst expectations.
Obviously, I’m being a bit facetious here. An investor can’t own a stock based on one earnings report. The good news is that investors don’t have to.
Even looking closer, this was a spectacular quarter. And with NVDA stock somehow pulling back a bit after earnings, there’s an opportunity to buy one of the market’s best stocks before it once again takes off.
Another Blowout Quarter
It bears repeating: this was a blowout quarter.
Revenue increased 57% year-over-year. That’s one of the best growth rates in the entire market this earnings season.
Of course, most companies posting 50%-plus growth are much smaller than Nvidia. Nvidia generated $3 billion in sales in the year-prior quarter (the third quarter of fiscal 2020). Increasing $3 billion in revenue by 57% in one year is a feat that few companies ever manage.
It’s how Nvidia drove that growth which is worth noting as well. It’s not as if Nvidia discounted its products. Adjusted gross margin actually increased 140 basis points year-over-year. At 65.5%, those margins are among the highest in the semiconductor industry.
Operating margins also expanded. Adjusted earnings per share increased 63%.
Nvidia did see some softness in its smaller businesses. In both automotive and professional visualization, sales declined year-over-year. But in each category, market factors are at play. And in each category, the long-term opportunity (particularly in automotive, where autonomous driving promises a significant tailwind) remains intact.
There’s simply a lot to like in Q3. This is one of the world’s best companies that, as its own chief executive officer put it, is “firing on all cylinders.”
The Long-Term Case Remains
As impressive as I believe Nvidia to be, the company can’t generate growth on its own. It needs some help from end markets.
Obviously, the two biggest markets are cooperating (for now). Gaming sales grew 37%, off a base off nearly $2 billion. Data center sales rose a staggering 162%.
There aren’t too many mature companies capable of posting that kind of growth. That’s largely because those companies don’t have end markets with that kind of long-term potential.
Gaming demand, after all, is rising steadily — and that’s not going to change. Meanwhile, the ongoing shift to cloud really is in the early innings. Yet Nvidia’s data center business should be a direct beneficiary.
To be fair, short-term factors definitely are influencing the growth rates in both segments. Gaming demand spiked as consumers spent money in their house that in more normal times they spent outside of the house.
The huge rallies in software stocks, meanwhile, have been driven by expectations for an accelerated shift to cloud/SaaS (software-as-a-service) demand. That in turn has led to a race to build out data center capacity, boosting Nvidia’s results. A soft comparison (data center revenue actually declined 8% in the year-prior quarter, amid a brief pause in spending) helped as well.
But we’re not talking about a company posting 18% growth when the normalized rate is closer to 12%. Again, Gaming revenue rose 37%, and that type of performance is not an outlier. Data center sales had a soft comp, but still those sales still have risen 140% over just two years.
At some point, automotive and professional visualization will come around to. And so it’s clear that this is an already-huge business with massive growth ahead.
Is NVDA Stock Too Expensive?
There’s a simple retort to this case: it’s all priced in. NVDA stock has rallied 122% so far this year. It’s roughly quadrupled from late 2018 lows.
Certainly, trading after the earnings release suggest some investors believe Nvidia stock has gone far enough. NVDA barely budged on Thursday, then fell 2.6% on Friday.
But as I wrote before earnings, investors should be willing, even happy, to pay a premium for a stock like this. No, NVDA stock isn’t cheap. Why should it be? It’s one of the best businesses, and best stories, in the market.
That’s what really matters here — not how far the stock has run over the past 11 or 23 months.
That story only looks stronger after the Q3 report. Eventually, the market will figure that out, and NVDA stock will resume its upward march. In the meantime, long-term investors are gifted yet another short-term opportunity.
On the date of publication, neither Matt McCall nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in the article.
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