Will 2017 be NVIDIA's (NVDA 1.11%) worst year yet? I strongly doubt it.
In case you missed it, the graphics chip specialist's stock soared in 2016 to the tune of a 223% gain on the year. Unlike other top performers last year, though, whose triple-digit gains mostly served as a recovery after a dismal 2015, NVIDIA's stock has been fueled by its place at the heart of large tech growth markets like self-driving cars and artificial intelligence software.
Let's look at NVIDIA through two important lenses -- financial performance and valuation -- to get a sense of what, if anything, could derail it in 2017.
NVIDIA's growth expectation in 2017
With the long-term outlook for its business largely favorable, an unforeseen hiccup in its quarter-to-quarter execution strikes me as one of the few plausible events that could spook investors. As such, anyone interested in owning NVIDIA stock needs to understand what kind of growth analysts expect from the company in 2017. Here's a quick snapshot of Wall Street's average expectations for NVIDIA's revenue and earnings-per-share growth for this year.
| Metric | Fiscal Year 2017 | Fiscal Year 2018 Estimates | Estimated % Change |
|---|---|---|---|
| Revenue | $6.91 billion | $8.03 billion | 16.2% |
| EPS | $2.57 | $2.78 | 8.1% |
Data source: Yahoo! Finance.
As a point of reference, NVIDIA's fiscal year reporting schedule runs an entire year ahead of the current calendar year. That being said, it seems Wall Street expectations for NVIDIA's performance this year are relatively muted, especially in light of the company's clear earnings momentum.
Earlier this month, NVIDIA reported its Q4 and full fiscal year 2017 earnings, which revealed a business expanding far faster than the above current-year estimates would suggest. Turning to the numbers, its full-year top line grew 38% year over year and sales growth accelerated in the fourth quarter, increasing 55% in the final three months of the year. More impressive still, its full-year GAAP net income rose 171%. Like revenue, its Q4 GAAP profit growth surpassed its full-year levels, jumping an astounding 216%.
The company has beaten analysts' estimates in at least the last four quarters. And given the clear tailwinds that are fueling its growth and the company has recently grown much faster than its current estimates, there's a pretty clear-cut argument to be made that analysts are underestimating NVIDIA's growth potential in the year ahead
. So, as to whether it will be able to meet or exceed this year's consensus estimates, NVIDIA seems to be well positioned to achieve this important aim.
Image source: NVIDIA.
NVIDIA's valuation
As a result of its multiple long-term tailwinds, NVIDIA shares currently trade at a lofty valuation. For context, here's a sampling of some of the most commonly used valuation metrics for NVIDIA.
| P/E | Forward P/E | EV/EBITDA | |
|---|---|---|---|
| NVIDIA | 41.7 | 32.5 | 25.9 |
P/E = price-to-earnings ratio. EV = enterprise value. EBITDA = earnings before interest, taxes, depreciation, and amortization. Data source: Yahoo! Finance.
So what does this tell us? I recently wrote about the implications of NVIDIA's sky-high stock price, so I won't delve into the matter further here. The point is that NVIDIA's shares remain priced for perfection, so an unforeseen operational mishap of some kind could, in theory, convince investors that it might not be able to live up to its lofty valuation. We even saw some of that behavior manifest itself in the wake of its recent earnings release.
As you saw above, NVIDIA smashed its own records in its recently concluded fiscal year, displaying impressive business momentum in the process. Yet, NVIDIA stock actually fell 2.3% during trading on the day after it reported its record-setting earnings. This certainly implies NVIDIA's operational margin for error is quite limited, a risk anyone considering purchasing shares near its all-time highs should understand.
Looking beyond its stock price specifically, the general outlook for the company remains undeniably bright. NVIDIA's leading suite of graphics chips caters to long-term growth markets including artificial intelligence software, self-driving cars, competitive PC gaming, and more. This favorable positioning will undoubtedly allow the company to continue to grow for years to come. So while it's certainly an interesting question to consider, there seems little evidence to suggest that 2017 will somehow become NVIDIA's worst year yet.
