NVIDIA stock was down nearly 1.9% in after-hours trade after the company reported its Q4 FY 2017 earnings. Time to sell NVDA stock or an opportunity to buy on the dip?
Santa Clara, California-based NVIDIA Corporation (NASDAQ:NVDA) reported its Q4 2017 earnings after the bell yesterday (Feb 9). The company soared past analyst estimates, as per expectations outlined in our NVIDIA earnings preview, delivering non-GAAP EPS of $1.13, a 30 cent beat over analyst expectations. However, Nvidia stock was down by 1.88% in after-hours trade, following the earnings announcement. Is it time to sell NVIDIA stock or an opportunity to accumulate the stock on the cheap?
NVIDIA reports a solid quarter on all fronts.
NVIDIA reported a solid quarter on all fronts. The company reported 55% YOY top line growth, with total revenue soaring to $2.17B. The earnings number was even more impressive, posting an 182% YoY gain in GAAP earnings and an equally impressive 117% YoY growth in non-GAAP EPS. The more than proportionate jump in the bottom line was facilitated by a 300bps YoY increase in gross profit margins to 60.2%, which came in above the high end of the management's guidance of 59.5% gross margin.
Slicing and dicing the data by segments, NVIDIA's 2 biggest segments registered accelerating growth. The gaming segment, with revenue of $1.5B, contributed 62% of total revenue. More impressively, the gaming segment registered a 66% YoY growth, up from 63.5% growth in Q3 2017. Datacenter, the second largest revenue segment was up by a stunning 205% YoY with the segment revenue coming in at $296M. The Auto segment posted topline growth of 37%, down from the previous quarter growth of 60% while the professional visualization segment posted a modest 10% YoY growth. All the segments registered an acceleration in growth from Q3 to Q4, with the exception of the auto segment. However, as NVIDIA CFO Colette Kress mentioned on the con call, "With a growing list of industry players adopting our AI car platform," the growth story in the auto segment remains intact.
The broad-based growth across all operating segments was complemented by a rise in profit margins. The company saw a 300bps YoY improvement in gross profit margins as the latest quarter margins came in at record levels, driven by strong demand for GeForce gaming GPUs and the company's deep learning platform. Quoting the Colette Kress from the NVIDIA Q4 2017 earnings Con call, "Gross margins were at record levels with GAAP gross margins at 60%, and non-GAAP at 60.2%. These reflect the success of our platform approach, as well as strong demand for GeForce gaming GPUs and deep learning."
NVIDIA Q1 FY2018 Guidance Spooks the market.
Considering the fact NVIDIA reported a strong quarter across metrics, the drop in the NVDA stock price comes across as surprising. The strong performance in the concluded quarter indicates that it was probably the guidance which spooked investors. However, the management guided for Q1 FY 2018 revenue of $1.9B (range of $1.86B-$1.94B) in-line with Wall Street's Q1 revenue consensus of $1.88B. The management's guidance implies a 48% YoY growth at the higher end and 46% growth at its midpoint. Considering the fact that the company has beaten the high-end of its revenue guidance in each of the last 5 quarters, we should be focussing on the higher end of the guidance. Were investors expecting the company to guide even higher? Well, if that's the case, the drop in NVDA stock price is more a case of unrealistic investor expectations, rather than a fault with the company's performance. A 48% YoY growth is nothing to be bearish about.
NVDIA Stock Is Still An Attractive Buy
NVIDIA Corporation reported a strong earnings report, in our opinion. The solid revenue growth across multiple segments in combination with a guidance ahead of expectations indicates that the post earnings drop in the NVDA stock price is more a result of unreasonable investor expectations rather than issues with the company fundamentals. The company trades at a PE of 45.5X TTM (Trailing twelve months) earnings, which isn't too steep for a company which grew its earnings at 137% YoY over the same period. Hence, NVDA stock continues to remain an attractive long-term bet. NVIDIA is also a safe way to play the rapidly growing AI/machine learnings markets. Long-term investors should, therefore, use the post-earnings dip in NVIDIA stock price to accumulate shares on the cheap.
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