- Although year-to-date, NVDA stock is already up 108.6%, it still has room to rise further.
- The new Nintendo Switch could attract high demand, which would aid NVIDIA's revenues and profits.
- The revelation that all new Tesla models would be capable of self-driving could open a great market for NVIDIA.
NVIDIA (NSDQ:NVDA) has been by far the best performer among all S&P 500 companies in the last 52 weeks. In this period, NVDA stock has soared 145.3%, while the second best performer Newmont Mining (NYSE:NEM) has gained 95.6%, and the third-ranked stock, Applied Materials (NSDQ:AMAT) has risen by 69.5%. After such an impressive rally, investors might wonder if the stock has any steam left. Is it time to take profits and sell NVDA shares? Definitely not. Two recent developments make me believe that NVDA shares still have room to move higher.
On October 20, Nintendo officially revealed its new home gaming system Nintendo Switch. The new gaming platform is powered by the performance of NVIDIA's custom Tegra processor. On its website, NVIDIA clarified:
"The high-efficiency scalable processor includes an NVIDIA GPU based on the same architecture as the world’s top-performing GeForce gaming graphics cards. The Nintendo Switch’s gaming experience is also supported by fully custom software, including a revamped physics engine, new libraries, advanced game tools and libraries."
As I see it, the new Nintendo Switch, which is expected to be released in March 2017, could attract high demand, which would benefit NVIDIA in the form of higher revenues and profits.
In another development, on October 19, Tesla (NSDQ:TSLA) CEO Elon Musk revealed that all new Tesla models would come with hardware to enable them to be fully self-driven. That could open a great market for NVIDIA, as Tesla will, without a doubt, use some of its chips in the self-driving hardware based on Tesla’s current type of chipsets in use. NVIDIA has already shown strong growth in its automotive business, and the revenue from this segment increased by 75% between fiscal year 2015 and fiscal year 2016. What's more, the three-year compounded annual growth rate (CAGR) was impressive at 80%, as shown in the company chart below.
Back in January, NVIDIA announced its new DRIVE PX platform. According to the company, its DRIVE PX platform was an approach to autonomous driving that was essentially very similar to its approach to data centers. NVIDIA is using deep learning frameworks, with a centralized supercomputer focus to write the overall algorithms that will be necessary for self-driving cars going forward.
What To Expect From NVIDIA's Third Quarter Earnings Report
NVIDIA is scheduled to report its third quarter fiscal 2017 financial results on Thursday, November 10, after market close. According to 21 analysts' average estimate, NVIDIA is expected to post a profit of $0.57 a share, a 29.5% increase from the year-ago quarter. The highest estimate is for a profit of $0.66 a share while the lowest is for a profit of $0.53 a share. Revenue for the third quarter is expected to grow 29.3% year over year to $1.69 billion, according to 27 analysts' average estimate. There were two up earnings per share revisions during the last 30 days. Since NVIDIA has delivered significant earnings per share surprises in its most recent four quarters, as shown in the table below, there is a good chance that the company will beat estimates in Q3 as well.
NVIDIA Stock Performance
Year-to-date, NVDA stock is already up 108.6% while the S&P 500 index has increased 2.6%, and the Nasdaq Composite Index has risen 2.0%. Moreover, since the beginning of 2012, NVDA's stock has gained an astounding 396%. In this period, the S&P 500 Index increased by 66.8%, and the Nasdaq Composite Index gained 96%. According to TipRanks, the average target price of the top analysts is at $68.53, representing a downside of 0.3% from its November 2 close price of $68.76. However, two five stars analysts Craig Ellis from B. Riley and Mark Lipacis from Jefferies, which were the latest to analyze the stock, have given it a target price of $85 and $80, indicating an upside of 23.6% and 16.3%, which appears reasonable, in my opinion.
Growth and Valuation
NVIDIA has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was 7.2%, and the average EPS growth was very high at 20.2%. The average annual estimated EPS growth for the next five years is also high at 23.7%.
According to its valuation metrics, NVDA stock is not cheap. The trailing P/E is high at 45.18, and the forward P/E is also pretty high at 35.81. Furthermore, NVIDIA's other valuation multiples are relatively high; the price to sales ratio is 6.76, the price to book value is 8.21, the price to free cash flow ratio is 40.62, the Enterprise Value/EBITDA ratio is 24.48, and the PEG ratio is 1.61. However, considering its high growth prospects, in my opinion, NVDA's stock is still attractive.
Although year-to-date, NVDA stock is already up 108.6%; two recent developments make me believe that NVIDIA shares still have room to move higher. The new Nintendo Switch could attract high demand, which would benefit NVIDIA's top and bottom line numbers. Also, the revelation that all new Tesla models would come with hardware to enable full self-driving, could open a great market for NVIDIA. NVIDIA shares are still attractive right now. Looking for great technology stocks? Amigobulls' top technology stock picks have beaten the NASDAQ by over 110%.