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Bull of the Day: NVIDIA (NVDA)

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I last wrote about NVIDIA (NVDA - Free Report) as the Bull of the Day on January 2 as I gave Zacks Ultimate members an update on my fundamental case for "Why You Buy NVDA Between 40 and 50 Times Forward Earnings."

With analysts raising NVDA's EPS estimates for the coming year from a consensus $3.95 to $4.67 after their November quarterly report -- and several high end projections near $5.00 -- NVDA shares around $200 were trading about 40 times the most optimistic forward estimates.

So we saw every dip as an excuse to add more NVDA shares in my TAZR Trader portfolio. Here's what I told my members on December 27 about a potentially fading opportunity to still buy NVDA near $190...

As I've written numerous times, this is the one to own for AI engines and advanced HPC (high-performance computing) applications. NVIDIA builds systems-on-a-chip (SoC) that are fueling so many different bleeding edge industries from autonomous driving, robotics and big-data mining to cancer/genomic research, medical diagnosis and cyber-security that all require massively parallel architecture (MPA).

To explain the long tail of NVIDIA's growth and dominance within and connected to several technology industries, let's review what I wrote in mid-November...

Is NVDA Too Expensive at 50X?

Many investors wonder if the stock is still a buy as it now trades over 50 times trailing 12-month earnings.

As an NVDA investor, I have a bias that says "Yes, I would still be a buyer up to 50X forward EPS."

And, after this most recent quarterly report, as I go over the growth profile in all its different business segments and customers, I find multiple reasons to reinforce this view.

In sum, as long as the leading provider of gaming processors, High Performance Computing in data centers, and emerging AI technologies keeps delivering solid double-digit sales and earnings growth, along with upside surprises each quarter, then paying 48 times the current projection for next year's profits isn't a bad proposition.

So, two important questions follow...

1) Will the market demand for HPC/AI solutions in data center, gaming, and automotive segments continue to grow at high double-digits?

2) Can NVIDIA maintain their dominant position, even as Intel buys Mobileye for a foothold in driverless cars and forges a renewed alliance with old arch enemy Advanced Micro Devices to establish a front in GPU processor markets?

The Q4 Report Answered "YES!" to Both Questions

Headed into February's volatility, we sold some NVDA shares up near $245. And I couldn't resist buying them back near $220.

That conviction paid off during the market's "flash correction" as NVDA reported its fourth-quarter of fiscal year 2018 (ended January 31) on February 8.

With another round of top and bottom line beats and raised guidance -- the coveted "earnings trifecta" -- NVDA bounced back hard.

Here were the metrics that explain why...
 

  • Record quarterly revenue of $2.91 billion, up 34% y-o-y, vs the Zacks consensus of $2.67B for a 9% beat
  • Record quarterly net income of $1.08 billion, up 54% y-o-y, for GAAP EPS of $1.72 vs consensus of $1.16 and a 48% beat  
  • Record full-year revenue of $9.71 billion, up 41 percent from a year ago
  • Record quarterly GAAP gross margin of 61.9 percent, non-GAAP gross margin of 62.1 percent
  • Record full-year GAAP EPS of $4.82, up 88 percent from a year ago

 
And here were the AI commander-in-chief's remarks...
 
“We achieved another record quarter, capping an excellent year,” said Jensen Huang, founder and chief executive officer of NVIDIA. “In a powerful sign of our progress, attendees at NVIDIA’s GPU Technology Conferences reached 22,000, up tenfold in five years, as software developers working in AI, self-driving cars, and a broad range of other fields continued to discover the acceleration and money-saving benefits of our GPU computing platform.
 
“Industries around the world are racing to incorporate AI. Virtually every internet and cloud service provider has embraced our Volta GPUs. Hundreds of transportation companies are using our NVIDIA DRIVE platform. From manufacturing and healthcare to smart cities, innovators are using our platform to invent the future,” he said.

Growth Unseen

Zacks Ultimate and TAZR members have heard me talk about the GPU Tech Conferences ad nauseam for the past year because that's where NVDA takes the show on the road around the globe and shows corporations and developers what is possible.
 
To be honest, when I read only 22K attendees at a half-dozen GTCs, I thought it sounded low in terms of actual impact.
 
Recall that NVIDIA rolled out its ambitious Deep Learning Institute and plans to train 100K developers last May.
 
They know that the key to their long-term success is getting more skilled, knowledgeable and passionate hands on their GPU drivers to accelerate CUDA as the go-to platform for AI development globally... and for decades to come!
 
Now, let's talk about the guidance...
 
For the first quarter FY2019 (began Feb 1), NVIDIA projects revenue of $2.84 to $2.96 billion, vs analysts expectations of $ 2.45 billion.
 
This clearly exemplifies what I said January 8 when I made NVDA my Top Stock Pick and explained why you can pay 50X for this company: the analysts are behind on modeling the growth because they cannot fully grasp all the innovation and impacts from the leader in AI-enhanced technologies.
 
To give you an idea of what homework analysts would have to catch up on after that earnings report, all you had to do was read the press release with the quarter's highlights from the major growth segments of Datacenter, Gaming, and Automotive.

But the earnings estimate revisions tell the hard-numbers story quite well...

The current fiscal year EPS consensus went from $4.78 to $6.34, a monster 33% jump in the analyst outlook. Even next year's profit projection jumped a "tame" 24% from $5.72 to $7.10.

If that doesn't tell you how far behind most analysts are on the "growth unseen" I don't know what does.

Prior to the report, Bank of America analysts held the high Street price target on NVDA shares at $275. They quickly moved to $300.

But not to be outdone again, SunTrust analysts moved their PT from $253 to $305 to take the high mark.

Now that NVDA shares are trading under 40X again, I expect the stock -- and a lot more price targets -- to move higher.

Disclosure: I own NVDA shares for the Zacks TAZR Trader portfolio.

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