Over the long term, folks who have invested in graphics-chip maker Nvidia (NASDAQ:NVDA) have done quite well. Believe it or not, NVDA stock was just $5 a decade ago — and of course, it’s much more expensive now.
Some folks might even say that it’s too expensive to buy now, after the 40.6% run up in the share price over the past three months. Or, they may choose to take profits, lest they cough up the gains that they’ve already made.
However, I feel that it would be hasty to divest your NVDA stock stake now. If anything, the company’s recently reported fiscal results suggest that the best gains may be yet to come.
And if you don’t have a position in the stock, I invite you to see how well Nvidia’s doing and consider a small investment. You might be surprised to find that, under the right conditions, a seemingly high share price can be fully justified.
A Closer Look at NVDA Stock
So far, 2021 has been a terrific year for NVDA stock investors. The share price has appreciated greatly since early January, when the stock was trading in the low $130’s.
Much of this year’s 68% gains occurred in recent months. In fact, the Nvidia share price first broke above the crucial $200 barrier in late June of this year.
That $200 level proved to be a resistance point in July and August as the bulls were rejected there.
It broke through the $200 a share invisible ceiling on Aug. 19 and it shouldn’t be too long before the buyers push the NVDA share price up to $250.
Now, let’s talk about whether the stock is actually “expensive.” I’ll grant that Nvidia has a trailing 12-month price-to-earnings ratio of around 90.
So, judging by that traditional metric, one might conclude that NVDA stock is pricey. But then, maybe we can dig deeper and uncover financial data to justify Nvidia’s P/E ratio.
Exceeding the Expectations
Social media posters had high expectations in the lead-up to Nvidia releasing its its fiscal second-quarter results.
Wall Street analysts had lofty expectations, as well. Sometimes, this can lead to disappointment when the actual results are revealed.
However, Nvidia passed the test with flying colors.
According to FactSet, the analysts were bracing for Nvidia to post $6.33 billion in sales for the second fiscal quarter. Moreover, they were preparing for the company to report earnings of $1.02 per share.
As it turned out, Nvidia exceeded both of those numbers. Specifically, the company recorded quarterly sales of $6.51 billion, marking a year-over-year improvement of 68%.
On top of that, Nvidia reported adjusted sales of $1.04 per share. That’s an eye-popping 89% increase on a YoY basis.
The Big News
Drilling down to the finer details, we can identify particular areas in which Nvidia excelled during Q2.
According to Yahoo Finance‘s Dan Howley, it’s obvious that the “big news” concerns the quarterly performance of Nvidia’s data center and gaming businesses.
As Howley reported, Nvidia exceeded Wall Street’s expectations on both fronts:
“We had data center at $2.37 billion in revenue. That beat expectations of $2.28 billion in revenue. And then gaming was up 3.06 billion versus 2.96 billion in revenue.”
If Nvidia’s recent fiscal performance is driven by the data center and gaming segments, that’s not a bad thing at all. These are essential revenue drivers for the company, after all.
CFO Colette Kress specifically cited Nvidia’s gaming segment while acknowledging friction between product supply and demand.
“Gaming demand is continuing to exceed supply as we expect channel inventories to remain below target levels as we exit Q3,” Kress posited.
The Bottom Line
Admittedly, some value-focused investors might not like Nvidia’s P/E ratio.
That’s understandable, but there’s another angle we could take. Sometimes, high stock prices are warranted if a company is doing well on the financial front.
And as Nvidia provides “big news” concerning its data center and gaming businesses, investors can make better sense of the NVDA stock price, high as it may seem to be.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.
