- NVIDIA has three strong growth engines, with one showing triple-digit growth.
- The company believes the growth is sustainable, and industry trends concur.
- Is this a good investment for all investor types, or just a few?
As expected, NVIDIA (NASDAQ:NVDA), the latest hyper growth company on the block, came out with another stellar quarter, blowing past analyst expectations. NVIDIA’s revenue during the fourth quarter grew in mid double digits to hit $2 billion, while EPS grew by 89% to $0.83, much better than the market’s expectation of 57 cents per share earnings and $1.67 billion in revenues.
Incredible Growth On Multiple Fronts
NVIDIA’s quarterly revenues have been on fire, and the growth pace has considerably accelerated in the last one year. Last year, during the same quarter, NVIDIA posted a 6.53% revenue growth to reach sales of $1.305 billion. Now that has grown by a whopping 54% to hit $2 billion. The major difference between NVIDIA in FY 2016 and FY 2017 is how their two new growth segments - Auto and Data Center - have grown during the period.
In the first two-quarters of the current fiscal, Gaming grew at double-digit rates, while growth in Data Center and Auto segments accelerated to above 50% levels. As NVIDIA still earns a bulk of its revenues from the gaming segment, overall sales growth hovered near the growth rate the gaming segment was able to show.
During the third quarter, apart from solid growth in Auto, which grew by 60.7%, and Datacenter, which tripled its revenues compared to last year, Gaming also posted a growth of 63.4%, thanks to NVIDIA’s newly launched Pascal-based GPUs that fueled their above average performance in the segment.
“Demand was strong in every geographic region across desktop and notebook, and across the full gaming audience, from GTX 1050 to the TITAN X. GeForce gaming PC notebooks recorded significant gains. Our continued growth in the GTX gaming GPUs reflects the unprecedented performance and efficiency gains in the Pascal architecture. It delivers seamless play on games and richly immersive VR experiences.” - NVIDIA Q3 Earnings Call
Key Growth Drivers for Emerging Segments
More than the growth in Gaming, which was set on fire by new product launches and will therefore, return to normal levels sooner or later, the really impressive part of their Q3 earnings report is the near 59% sequential growth of Data Center revenues. Compared to last year’s third quarter’s $72 million, NVIDIA nearly tripled that number to $240 million.
NVIDIA is clearly cementing its leadership position in the hyperscale supercomputing segment. With nearly all the major tech companies aggressively pursuing their opportunities in the cloud and AI market, this segment can only grow from here, fueling further growth for NVIDIA. If things go well, NVIDIA’s data center segment should catch up with Gaming revenues in the next two years.
“GPU deep learning is revolutionizing AI, and is poised to impact every industry worldwide. Hyperscale companies like Facebook, Microsoft and Baidu are using it to solve problems for their billions of consumers.
Cloud GPU computing has shown explosive growth. Amazon Web Services, Microsoft Azure and AliCloud are deploying NVIDIA GPUs for AI, data analytics and HPC. AWS has recently announced its new EC2 P2 instance, which scales up to 16 GPUs to accelerate a wide range of AI applications, including image and video recognition, unstructured data analytics and video transcoding.” 3Q - Earnings call
So, it’s clear that there are several demand drivers for hyperscale computing, and NVIDIA has positioned itself at the bleeding edge of this market.
The Good and Bad of Investing in NVIDIA
The great short-term news for NVIDIA’s investor is that the company is expecting the high double-digit growth to continue for a while. NVIDIA has guided its fourth quarter revenues to hit $2.10 billion, plus or minus two percent. NVIDIA’s revenue during Q4 2016 was $1.401 billion, which means NVIDIA is expecting to hit a quarterly year over year growth rate of 48% to 52%.
But that’s not necessarily good news for investors. If you already hold NVDA, then you better hold on tight to the stock. But with the stock up more than 124% since the start of the year and now trading at nearly 6 times sales, it leaves new investors with no cover.
That’s typical with hyper growth companies. Even a small bit of bad news will inevitably exert a downward pressure on the stock. As such, significantly increasing your position now would put your investment at unnecessary risk. But there is a way.
Instead of chasing the momentum and buying into a company that has proven time and again that it can continuously innovate and keep launching products that are in demand, your best bet would be to add small amounts over a long period of time. In addition, add whenever there’s bad news that causes dips in price.
At the current valuation, even a small shock will have a negative effect on stock price. And as the stock moves higher, that volatility will only increase with respect to news. So use that to your advantage instead of letting it dictate your investment strategy.
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