NVIDIA Corporation stock (NASDAQ:NVDA) will continue to march higher driven by strong growth opportunities.
We have been bullish on NVIDIA Corporation (NASDAQ:NVDA) stock for the better part of the last two years. In this period, NVIDIA stock has delivered massive 685% return. The stock is up over 67% for the year. NVIDIA stock is one of the best-performing stocks in the S&P 500 index. And despite this massive rally, NVIDIA stock has still upside left. Shares of GPU maker gained over 6% during Friday's trade after an analysts report indicated that NVDA stock could go up by 40% on account of growth opportunities, especially in Artificial Intelligence segment. We have discussed NVIDIA's growth opportunity in AI in our previous articles.
NVIDIA Corporation has delivered strong profitable growth.
The rally in NVIDIA stock has been driven by both, irevenue growth and margin expansion as well as strong growth opportunities. In the second quarter, NVIDIA's revenue grew by 54% YoY. The data center segment reported 175% year-on-year growth while the gaming segment, NVIDIA's largest business segment by revenues, reported 52% YoY growth in revenues. More impressively though, the company saw its operating profits more than double from the year-ago period, as the company was able to contain SG&A expenses as well as expenditure on R&D. This has led to margin expansion. Operating margins jumped from 22.5% in the previous year to around 30% now.
In fact, company's profitability and returns have been on mend for over the last two years. Operating margins (on LTM basis) have doubled from around 15% in Jan 2015 to over 30% in the latest quarter. The net margin has expanded from 12.5% to 27.4%. This margin expansion resulted in the return on equity growing from around 15% to over 40%. This is very impressive performance. The strong growth and the improving profits have played a strong role in the stock rally. One important thing to note is that NVIDIA didn't sacrifice profitability for the sake of growth.
NVIDIA Corporation still has strong growth opportunities.
While revenue growth and profitability have been good over the past couple of years, there are still huge opportunities out there for the company ranging from automotive to gaming to AI. Gaming is NVIDIA's largest revenue segment, contributing more than half the company's revenues. While analysts have raised concerns about this segment, given the stagnation in PC sales, this segment has shown healthy growth over the past three years, with 52% growth in the recent quarter. The PC gaming market has shrugged off the broader decline in PC sales and has shown strong growth. While John Peddie Research (JPR) had initially projected the gaming market to reach $30 billion in size by 2018, the gaming market hit this milestone two years in advance. Now, JPR expects the market to grow at a CAGR of 6% over the next three years, implying a market value of $36 billion in 2019.
The company's partnership with Nintendo is also paying off. According to new sales estimates by the NPD Group, Nintendo Switch video game console outsold its rivals, Microsoft's Xbox One and Sony's PlayStation 4, becoming the top-selling console for the month of August. Nintendo uses NVIDIA's Tegra X1 GPU. VR gaming will be another growth driver. According to NVIDIA, about 81% of gamers would like to try VR gaming sometime in the future. Gaming revenues will continue to see significant growth in future.
Can AI Add $40 billion to NVIDIA Corporation's Market Cap?
Another important growth area for NVIDIA Corporation is Artificial Intelligence. GPUs are great at training artificial neural networks how to think like humans, a developing category of AI called deep learning. NVIDIA has a leading position in AI-driven data centers and driverless car applications. The AI-driven data segment has been the fastest growing segment for NVIDIA. In the second quarter, the segment reported 175% YoY growth in revenues, from $151 million last year to $416 million, becoming NVIDIA's second largest revenue segment.
The autonomous driving market is another area where NVIDIA has been making progress in leaps and bounds. With an ever-growing list of partners, NVIDIA's leadership position in the race for self-drive technology cannot be underestimated. The company has signed several partnerships with automakers like Tesla and Toyota. Toyota has "aggressive" plans to deploy Level 2 Advanced systems in mass market in the U.S. and Japan using NVIDIA's Drive PX Xavier platform over the next couple of years. Needham & Co.’s Rajvindra Gill expects Toyota deal to generate incremental $1-1.7B or $0.35-$0.65 EPS over 2.5 years. NVIDIA's management believes the self-driving market presents a $6B-$10B opportunity for the company.
Evercore ISI analyst CJ Muse believes that NVIDIA could add another $40 billion to its market cap driven by opportunities in artificial intelligence. He recently upped his price target on NVIDIA stock to $250 from $180. He believes that NVIDIA has built an industry standard for AI systems which competitors will find difficult to replicate. In a report, he wrote:
"Nvidia has created an ecosystem over the past 10+ years and a business model that leverages Nvidia’s software and algorithm expertise above and beyond its leading- edge silicon designs. NVIDIA GPUs have been the dominant choice in AI Training..... "
NVIDIA stock is gaining momentum?
The rally in NVIDIA stock had come to an abrupt halt after the second quarter earnings reports. While the company had reported beat on both top and the bottom line, NVIDIA Corporation had delivered an earnings beat of 31% and the top line exceeded the expectations by $270 million, but the stock tanked had by over 7%. With Friday's rally, the stock has recovered all of its lost ground since the earnings. Given the long-term growth drivers, NVIDIA stock still has upside potential.
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