NVIDIA Corporation's (NASDAQ:NVDA) stock price skyrocketed 229% in 2016 and has left investors wondering if there's more room for the company to grow this year.
NVIDIA has built out a dominant position in the graphics processing unit (GPU) market for desktop and laptop computers, but investors are also looking to new growth areas like automotive and virtual reality for NVIDIA's future.
This may never measure up to NVIDIA's stellar performance last year, but there are two things that the company will need to prove in 2017 in order to keep momentum going: continue to grow revenues at a solid clip, and show that investments in new market segments are paying off.
Keep the revenue growth going
Every investor likes a good earnings beat, and NVIDIA delivered on that multiple last year. NVIDIA doesn't necessarily need to beat estimates in order to continue performing well in 2017, though. Investors should look instead for the company to deliver on its quarterly guidance and grow its core GPU gaming business.
NVIDIA's management expects revenue of $2.1 billion (plus or minus 2%) in fiscal Q4 2017, which is in line with analysts' consensus. NVIDIA has managed to beat analysts estimates for at least the past four quarters, and it could do the same in Q4, but investors should be more focused on how the company performs in the lucrative gaming segment.
NVIDIA dominates the desktop GPU market, with more than 70.9% market share right now, and it should be able to use that position to sustainably grow revenue and earnings through 2017.
NVIDIA brought in 62% of its top-line revenue from its gaming segment in fiscal Q3 2017, marking a 35% year-over-year increase. The company needs to prove that it can keep growing its all-important gaming segment revenue -- overall earnings -- in order to justify its increasingly high price-to-earnings ratio of 71 (compared to the tech industry average of around 25).
Tap into new markets
While the company's gaming revenues are the most important for investors to watch, NVIDIA will also need to prove that its investments in virtual reality (VR) and the automotive market are paying off.
VR is expected to reach a market size of $70 billion by 2020 and have 171 million active users worldwide by next year. NVIDIA's GPU market share position means it should have no problem benefiting from this growing tech segment. But investors will need to see the company's graphics cards earning more spots in VR-ready computers.
Additionally, NVIDIA has to prove that it can continue expanding its automotive ambitions. Investors got excited last year about the possibilities NVIDIA's semi-autonomous driving technologies will bring, and they should expect to see more partnerships and revenue coming from that in 2017.
In fiscal Q3 2017, the company grew automotive revenue by more than 60% year over year, and a new partnership with Tesla should help the company expand its position even further this year this year.
Good times are likely still ahead
NVIDIA likely has more room to grow in 2017, particularly with the company's core gaming business chugging along so well right now. But investors' expectations are already sky high after NVIDIA's run-up in 2016. If the company doesn't show that it can grow revenues at the same pace (or close to it) and continue expanding into new segments, some investors may lose confidence.
If that happens, remember to look to NVIDIA's core gaming business. As long as everything appears in tact there, NVIDIA should continue to grow over the long term. The company's stock run-up won't last forever, but that doesn't mean this company won't be a solid long-term investment if it continues to prove it can dominate the graphics card market and enter new markets at the same time.