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Why Is It Worth Paying a Premium for NVIDIA Corp. Stock?
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The thumb rule in the stock market is investing in stocks with low price-earnings (P/E) ratio, which indicates undervaluation. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings.
However, this rule isn’t applicable if the stock in question has a history of record revenues and earnings growth and belongs to a high-growth sector. Investors do not hesitate in paying a premium price for such companies despite their high P/E ratio compared to the future earnings growth rate projections.
Below we have evaluated one such technology company – NVIDIA Corporation (NVDA - Free Report) .
The stock has been clocking solid returns since the beginning of 2016 and has gained approximately 179% year to date, outperforming the Zacks Semiconductor-General industry return of just about 21%.
At yesterday’s closing price of $91.88, the stock currently trades at a trailing twelve month (TTM) P/E multiple of 45.7x and a forward P/E of 37.1x. These multiples are much higher than the Zacks Semiconductor-General industry’s averages of 17.8x and 17.2x, respectively.
Let’s look at why NVIDIA with such a high TTM and forward P/E multiples is still a favourite of investors and is a stock worth buying at its current price.
What’s Driving NVIDIA?
Widely known for its video gaming chips, NVIDIA has pioneered the art and science of visual computing. With a singular focus on this field, the company offers specialized platforms for the gaming, automotive, data center and professional visualization markets. Its products, services and software deliver amazing experiences in virtual reality, artificial intelligence and autonomous cars.
The stock has generated high returns for investors so far this year, and has the potential to exceed expectations in the days ahead. The robust performance is mainly because of the company’s phenomenal results in back-to-back quarters. This has boosted investors’ confidence in the stock significantly as many realized that the company is much larger than simply GPUs.
In the third quarter of fiscal 2017, the company posted earnings of 83 cents, much better than the Zacks Consensus Estimate of 57 cents. This was preceded by another significant beat of 18.9% in the second quarter, indicating that this stock is on fire.
NVIDIA’s overall revenues for the quarter surged over 53% year over year, mainly driven by strong growth registered at three of its four major segments – gaming, datacenter and automotive. Though the company has always performed well in its gaming business, which registered year-over-year growth of over 63% in the last quarter, we are mainly encouraged by overwhelming growth registered in datacenter and automotive businesses.
Its datacenter business revenues reached approximately $240 million in the last quarter from $82 million in the year-ago quarter, marking massive year-over-year growth of 193%. The business is now said to be the company’s fastest-growing segment.
NVIDIA’s foray into the autonomous vehicles and other automotive electronics space has also been driving this stock higher since mid-2015. It should be noted that during the last reported quarterly results, the company witnessed a 61% year-over-year jump in automotive segment revenues, mainly driven by premium infotainment and digital cockpit features in mainstream cars.
Its plan to unveil new technology for self-driving cars is also encouraging. The evolution of smart cars that can "see" for us, alert us in case of danger and even apply brakes when we're not paying attention is just the beginning of this innovative venture.
Notably, the graphic chip behemoth had unveiled a new AI supercomputer chip designed for self-driving cars called Xavier at its GPU Technology Conference (GTC) in September this year. Per the company, the processor is capable of delivering 20 trillion operations per second (TOPS) of performance, while consuming just 20 watts of power.
Apart from this, NVIDIA has entered into a partnership with TomTom – a Dutch mapping and navigation group – to develop AI in order to create a cloud-to-car mapping system for self-driving cars.
The company’s current Drive PX 2 computer chip for self-driving cars is considered to be as powerful as 150 MacBook Pros, and has the capacity to power 12 video camera inputs and sensor fusion. The chip, according to NVIDIA, can run about 24 trillion deep learning operations per second, thereby enabling driverless cars to determine the next move in a fraction of a second.
While consumers are already using cameras to stay in a single lane, which has greatly reduced accidents, this is not the main reason behind the development of this technology. It's in fact the statistics that show a dramatic rise in distracted driving and how some new auto technology like Automatic Emergency Braking (AEB) can prevent tens of thousands of rear-end collisions every year, saving countless lives. NVIDIA is also trying to revolutionize technology to make cars a safer means of getting around.
Notably, the company already provides various technologies such as digital instrument clusters, navigation, advanced driver-assistance systems and infotainment under its partnership agreement with several automakers including Honda (HMC - Free Report) , Tesla Motors (TSLA - Free Report) Audi, Volvo, Mercedes-Benz and BMW.
Bottom Line
Many would argue that NVIDIA with its hefty forward P/E valuation of 37.1x compared with the Semiconductor-General industry average of 17.2x is a risky bet. We beg to differ as hefty valuations and increasing share prices do not necessarily imply that the stock does not have much upside potential left.
Given the accelerated momentum in gaming, datacenter and automotive technology, we believe that this stock with a long-term EPS growth estimate of 10.3% and Zacks Rank #1 (Strong Buy) will continue to rally. You can see the complete list of today’s Zacks #1 Rank stocks here.
For fiscal 2017 and 2018, NVIDIA’s estimated EPS growth rate is 98.1% and 11.9%, respectively, significantly higher than the Semiconductor-General industry's growth projections of a respective 17.2% and 8.7%. Furthermore, the stock has Zacks Momentum and Growth Style Score of “A” and “B”, respectively, which signifies strong upside potential.
The stock has grabbed the spotlight with striking performances on the back of solid earnings results and strong growth projections. Keeping this in mind, we believe investing in this stock would yield strong returns for your portfolio in the short term.
Furthermore, with its sustained efforts toward attaining robust position in several emerging industries such as Artificial Intelligence (AI), deep learning and driverless cars industry, NVIDIA has outpaced other competitors in the Semiconductor-General space such as Intel Corp. (INTC - Free Report) and STMicroelectronics in terms of growth.
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Why Is It Worth Paying a Premium for NVIDIA Corp. Stock?
The thumb rule in the stock market is investing in stocks with low price-earnings (P/E) ratio, which indicates undervaluation. The ratio, which is obtained by dividing a stock’s current market price with its historical or estimated earnings, measures how much an investor needs to shell out per dollar of earnings.
However, this rule isn’t applicable if the stock in question has a history of record revenues and earnings growth and belongs to a high-growth sector. Investors do not hesitate in paying a premium price for such companies despite their high P/E ratio compared to the future earnings growth rate projections.
Below we have evaluated one such technology company – NVIDIA Corporation (NVDA - Free Report) .
The stock has been clocking solid returns since the beginning of 2016 and has gained approximately 179% year to date, outperforming the Zacks Semiconductor-General industry return of just about 21%.
At yesterday’s closing price of $91.88, the stock currently trades at a trailing twelve month (TTM) P/E multiple of 45.7x and a forward P/E of 37.1x. These multiples are much higher than the Zacks Semiconductor-General industry’s averages of 17.8x and 17.2x, respectively.
Let’s look at why NVIDIA with such a high TTM and forward P/E multiples is still a favourite of investors and is a stock worth buying at its current price.
What’s Driving NVIDIA?
Widely known for its video gaming chips, NVIDIA has pioneered the art and science of visual computing. With a singular focus on this field, the company offers specialized platforms for the gaming, automotive, data center and professional visualization markets. Its products, services and software deliver amazing experiences in virtual reality, artificial intelligence and autonomous cars.
The stock has generated high returns for investors so far this year, and has the potential to exceed expectations in the days ahead. The robust performance is mainly because of the company’s phenomenal results in back-to-back quarters. This has boosted investors’ confidence in the stock significantly as many realized that the company is much larger than simply GPUs.
In the third quarter of fiscal 2017, the company posted earnings of 83 cents, much better than the Zacks Consensus Estimate of 57 cents. This was preceded by another significant beat of 18.9% in the second quarter, indicating that this stock is on fire.
NVIDIA CORP Price, Consensus and EPS Surprise
NVIDIA CORP Price, Consensus and EPS Surprise | NVIDIA CORP Quote
NVIDIA’s overall revenues for the quarter surged over 53% year over year, mainly driven by strong growth registered at three of its four major segments – gaming, datacenter and automotive. Though the company has always performed well in its gaming business, which registered year-over-year growth of over 63% in the last quarter, we are mainly encouraged by overwhelming growth registered in datacenter and automotive businesses.
Its datacenter business revenues reached approximately $240 million in the last quarter from $82 million in the year-ago quarter, marking massive year-over-year growth of 193%. The business is now said to be the company’s fastest-growing segment.
NVIDIA’s foray into the autonomous vehicles and other automotive electronics space has also been driving this stock higher since mid-2015. It should be noted that during the last reported quarterly results, the company witnessed a 61% year-over-year jump in automotive segment revenues, mainly driven by premium infotainment and digital cockpit features in mainstream cars.
Its plan to unveil new technology for self-driving cars is also encouraging. The evolution of smart cars that can "see" for us, alert us in case of danger and even apply brakes when we're not paying attention is just the beginning of this innovative venture.
Notably, the graphic chip behemoth had unveiled a new AI supercomputer chip designed for self-driving cars called Xavier at its GPU Technology Conference (GTC) in September this year. Per the company, the processor is capable of delivering 20 trillion operations per second (TOPS) of performance, while consuming just 20 watts of power.
Apart from this, NVIDIA has entered into a partnership with TomTom – a Dutch mapping and navigation group – to develop AI in order to create a cloud-to-car mapping system for self-driving cars.
The company’s current Drive PX 2 computer chip for self-driving cars is considered to be as powerful as 150 MacBook Pros, and has the capacity to power 12 video camera inputs and sensor fusion. The chip, according to NVIDIA, can run about 24 trillion deep learning operations per second, thereby enabling driverless cars to determine the next move in a fraction of a second.
While consumers are already using cameras to stay in a single lane, which has greatly reduced accidents, this is not the main reason behind the development of this technology. It's in fact the statistics that show a dramatic rise in distracted driving and how some new auto technology like Automatic Emergency Braking (AEB) can prevent tens of thousands of rear-end collisions every year, saving countless lives. NVIDIA is also trying to revolutionize technology to make cars a safer means of getting around.
Notably, the company already provides various technologies such as digital instrument clusters, navigation, advanced driver-assistance systems and infotainment under its partnership agreement with several automakers including Honda (HMC - Free Report) , Tesla Motors (TSLA - Free Report) Audi, Volvo, Mercedes-Benz and BMW.
Bottom Line
Many would argue that NVIDIA with its hefty forward P/E valuation of 37.1x compared with the Semiconductor-General industry average of 17.2x is a risky bet. We beg to differ as hefty valuations and increasing share prices do not necessarily imply that the stock does not have much upside potential left.
Given the accelerated momentum in gaming, datacenter and automotive technology, we believe that this stock with a long-term EPS growth estimate of 10.3% and Zacks Rank #1 (Strong Buy) will continue to rally. You can see the complete list of today’s Zacks #1 Rank stocks here.
For fiscal 2017 and 2018, NVIDIA’s estimated EPS growth rate is 98.1% and 11.9%, respectively, significantly higher than the Semiconductor-General industry's growth projections of a respective 17.2% and 8.7%. Furthermore, the stock has Zacks Momentum and Growth Style Score of “A” and “B”, respectively, which signifies strong upside potential.
The stock has grabbed the spotlight with striking performances on the back of solid earnings results and strong growth projections. Keeping this in mind, we believe investing in this stock would yield strong returns for your portfolio in the short term.
Furthermore, with its sustained efforts toward attaining robust position in several emerging industries such as Artificial Intelligence (AI), deep learning and driverless cars industry, NVIDIA has outpaced other competitors in the Semiconductor-General space such as Intel Corp. (INTC - Free Report) and STMicroelectronics in terms of growth.
Zacks' Top Investment Ideas for Long-Term Profit
How would you like to see our best recommendations to help you find today’s most promising long-term stocks? Starting now, you can look inside our portfolios featuring stocks under $10, income stocks, value investments and more. These picks, which have double and triple-digit profit potential, are rarely available to the public. But you can see them now. Click here >>