As a perennial top ten finisher of the best performing stocks over the last decade, Nvidia (NASDAQ:NVDA) stock usually makes the list with ease.
There is no question the company’s growth has been impressive for quite some time. Nvidia sets itself apart with a track record that very few companies can match.
That remarkable growth is still evident today, so the only question for NVDA stock is whether that growth can continue.
One of the key origins of the name Nvidia is the word Invidia, which is Latin for envy. I would suspect almost every company today is envious of the track record of growth.
Nvidia specializes in the manufacture of graphics-processor technologies for workstations, desktop computers and mobile devices. They are a major supplier of integrated circuits used for PC motherboard chipsets, graphics processing units (GPUs), and game-consoles.
Q2 Earnings and NVDIA Stock
Total sales increased 68% as gaming remains the powerhouse of growth for the company. Operating income increased 102% year-over-year and EPS increased 89%.
Growth in cash flow from operations was also strong at 71% year-over-year and 43% sequentially.
The company paid $100 million in dividends. However, the dividend only yields a paltry 0.07% because of Nvidia’s excessively large market cap and recent share price growth. The company ended the quarter with $19.7 billion in cash (but also $12 billion in debt).
Nvidia provided detailed product updates in its latest investor presentation. This also covered the financial performance in the key segments of gaming, data center, professional visualization and automotive.
- Gaming – Revenues were 85% from the prior-year period and represented 47% of total sales for NVDA. Demand continues to outpace supply with Ampere architecture ramp now almost a year into the product cycle. OME demand as this architecture is being embedded in many gaming laptops.
- Data Center – Revenues were up 35% year over year which a deceleration from prior quarters. The still strong data center growth was driven by adoption of the A100 and CPU to GPU transition. The end markets of financial services, telecom and supercomputing were key drivers of this growth.
- Professional visualization – Revenues grew 156% compared to the prior-year period and this segment now represents 8% of total sales. Remote workplace solutions were the key driver for this segment as this is becoming the norm for many corporations. The key product in this segment is the Omniverse platform which is utilized for AI module training or to create simulation scenarios.
- Automotive – At only 2% of revenues, this is the smallest segment for NVDA but perhaps one with the largest opportunity. Self-driving applications among major auto manufactures and their suppliers will be a key growth component going forward. The company will also partner with Amazon to help with the automation and operations of 1,000 delivery vehicles.
Valuation Is Too High
No story on NVDA stock can be complete without discussing valuation. All valuation metrics for NVDA are high and have been high for a long time. All business growth rates slow down eventually. NVDA is no exception.
The stock currently trades at 56x current year EPS estimates and 51x next FY EPS estimates. The EV/EBITDA is astronomical at 36x.
These valuations seem to be looking at past growth and not what’s ahead of them. Consensus EPS growth in the next few years seems to be in the 20%-25% range. These valuation metrics are far more likely to decline rather than accelerate.
There used to be a company in the 1990s that, like Nvidia, could do no wrong. It could only grow forever because the internet was in its infancy. That company was of course Cisco (NASDAQ:CSCO). Let’s look at the five-year CSCO chart from January 1995 to February 2000.
Now let’s compare that to the recent past five-year chart for NVDA:
It’s an uncanny similar comparison. History doesn’t repeat itself exactly but it does rhyme quite often. And we all know what happened to Cisco after February 2000.
I suspect NVDA stock will follow that same path in the not too distant future.
On the date of publication, Tom Kerr did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tom Kerr has worked in the financial services industry for over 25 years. Currently he is a Senior Portfolio Manager at Rocky Peak Capital Management. Prior to that he was Chief Investment Officer and Director of Research of SGL Investment Advisors, and has served in a number of positions at other investment related organizations. Mr. Kerr has also been a contributing writer to TheStreet.com, RagingBull.com and InvestorPlace.com. He’s a CFA charterholder and obtained a B.B.A in Finance from Texas Tech University. He also created the 406dad.com kids adventure blog.
