Investors might think that it's tough to find tech stocks that can double within a year. But over the past year, Nvidia (NASDAQ:NVDA), AMD (NASDAQ:AMD), and Silicon Motion Technology (NASDAQ:SIMO) all accomplished that feat, and could keep rallying. Let's see how these three companies delivered such big returns in such a short time.
Nvidia stock has soared more than 150% over the past 12 months for three reasons. First, it dominates the PC gaming market with its GeForce cards, and demand within that niche market is rising as more graphically intensive games hit the market. That market is also well insulated from the global slowdown in PC shipments.
Second, its GPUs are being installed in an increasing number of data centers for machine learning purposes, since they can process certain science applications at a faster rate than Intel's industry-standard Xeon processors. Lastly, Nvidia pivoted its Tegra mobile chips toward connected cars, which gave it a firm foothold in infotainment systems and onboard computers for autonomous vehicles.
These strategies all boosted Nvidia's sales growth from single-digit to double-digit levels over the past few quarters as its non-GAAP gross margins expanded. Looking ahead, analysts expect Nvidia's growth to continue with 12% sales growth and 46% earnings growth this fiscal year.
Shares of AMD have surged 210% over the past 12 months, which is surprising because its CPU and GPU businesses were marginalized by Intel and Nvidia, respectively. AMD sold cheaper chips than both rivals, but they usually lagged behind both in terms of chip architecture and power efficiency.
But over the past few years, AMD made a comeback by investing heavily in EESC (Enterprise, Embedded, and Semi-Custom) chips for non-PC platforms. The unit's semi-custom SoCs now power the PS4 and Xbox One, and its GPU powers the Wii U. The unit has also been expanding into data centers with ARM-based 64-bit chips.
That strategic shift paid off, and AMD posted 9% year-over-year sales growth during the second quarter of this year, marking its first quarter of annual sales growth since the second quarter of 2014. It also expects that growth to continue with 18% sales growth for the current quarter. While AMD still faces tough battles ahead in the GPU and CPU markets, that positive growth was enough to propel the stock to four-year highs.
Silicon Motion Technology
Silicon Motion is a Taiwanese chipmaker that produces flash controller ICs (integrated circuits) for storage products and RF (radio frequency) ICs for mobile devices. In the storage market, its ICs are installed in solid state drives, flash memory cards, USB drives, embedded multimedia cards, and connected cars. In the mobile market, its ICs are used in smartphones, tablets, and PCs.
Since Silicon Motion only provides the controller for the flash storage devices, it isn't exposed to the decline in memory prices which has hurt flash storage companies like Micron. Growth across that larger unit has offset declines at its smaller RF business.
Silicon Motion's revenue and non-GAAP earnings grew at their fastest rate in the company's history last quarter. Revenue rose 61% year-over-year, up from 40% growth in the previous quarter and 26% growth a year ago. Non-GAAP net earnings improved 26% sequentially and 69% annually. Analysts expect that impressive growth to continue with 45% sales growth and 55% earnings growth this year. Those explosive figures explain why the stock has rallied 120% over the past 12 months.
But should you chase these high-flying stocks?
But before investors go chasing Nvidia, AMD, and Silicon Motion Technology, they should check their valuations to see if they're overpriced.
Nvidia currently trades at 50 times earnings, which is notably lower than the average P/E of 75 for the specialized semiconductor industry. Its forward P/E of 36 is also lower than its projected earnings growth rate for the year. This means that if Nvidia beats analysts estimates over the next few quarters, its stock could still be undervalued at today's prices.
AMD isn't profitable, but its P/S ratio of 1.3 still looks low. Nvidia and Intel respectively trade at 1.7 and 2.9 times sales, so AMD could be undervalued if it keeps posting year-over-year sales growth. Silicon Motion trades at 24 times earnings, which is much higher than the industry average of 15 for diversified electronics companies. But its forward P/E of 14 is much lower than its projected earnings growth rate, so Silicon Motion could still have room to run.
The bottom line
Investors shouldn't avoid stocks just because they've doubled or tripled over the past year. But they should do their homework to see if the positive sentiment which fueled those rallies is sustainable, and if their valuations are still supported by their long-term growth potential.