Semiconductor manufacturer Nvidia (NVDA - Free Report) is scheduled to report earnings on Thursday after the bell and expectations are high. The Zacks Consensus Estimates call for revenues of $3.1B and net earnings of $1.83/share, increases of 40% and 81%, respectively, over the same quarter in 2017.
In Q1, NVDA reported $2.05/share in earnings, a 24% positive surprise over expectations. It was the 13th significant beat in the past 14 quarters – a period that has seen shares rally a whopping 1100% from $20.40/share to $260/share since the beginning of 2015.
Since its inception in the early 1990’s, NVDA’s founders correctly surmised that the future direction of computing would be graphics based, as video games at the time were among the most computationally challenging problems being solved by then-current systems. Since then, NVDA has been at the forefront of hardware solutions, releasing a series of increasingly advanced chips and hardware used to process data, some for gaming and entertainment, but also for analyzing huge and complex sets of data.
NVDA has been the beneficiary of a computing “arms race” in which competing organizations have a need to continue implementing the most advanced technology to avoid falling behind. Quite often, NVDA has been the only source of the newest hardware. NVDA customers include Amazon (AMZN - Free Report) , Alphabet , Baidu (BIDU - Free Report) and Alibaba (BABA - Free Report) who all use the company’s chips in their vast and growing data centers.
NVDA also got a big boost in 2016-2017 as the historic rise in the price of Bitcoin and interest in mining cryptocurrencies created huge demand for the company’s chips - which are an important piece of the preferred architecture for advanced crypto-mining rigs. Though the price of Bitcoin – and subsequently mining activity – have declined precipitously in 2018, significant demand remains for the company’s other products which are used in the construction of huge data centers, Artificial Intelligence, Virtual Reality, Autonomous Driving and gaming and entertainment applications.
Though the company does not specifically break out these results by application, analysts estimate that 6-8% of NVDA’s earnings in 2017 were the result of crypto activities. That’s not an insignificant percentage, but also shows that more than 90% of NVDA’s business is not dependent on crypto activity – which, although it has slowed somewhat is not disappearing entirely.
One valid criticism of the NVDA investment thesis is that the stock is currently valued for continued growth, trading at a forward P/E ratio of 36X, twice the multiple of the S&P 500 at 18X and three times the semiconductor industry at just 12X. In fact, some semi manufacturers, like Micron Technology (MU - Free Report) trade at single digit forward P/E ratios because the commoditization of their products is seen as a limiting factor in future earnings growth.
Throughout its history, NVDA has been the beneficiary of its unique intellectual property to maintain pricing power, gross margins and earnings growth. These efforts will have to continue for the shares to deserve their lofty valuation, but there is recent evidence that they have no intention of slowing down. On Monday, the company introduced its next generation of graphics technology with the unveiling of its new “Turing” line of hardware which includes real-time ray-tracing and which according to the company is the “holy grail of our industry.” NVDA estimates that the Turing chips can render graphics six times faster than the previous generation Pascal chip sets. They plan to offer three versions of Turing graphics cards later in 2018 with list prices ranging from $2,300 to $10,000.
Thursday’s Q2 report will not include sales of the new Turing equipment, but will still offer some insight into the company’s continued ability to deliver outstanding results. The options markets are predicting a move of $16 – or about 6% - this week on the earnings news.
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