NVIDIA's (NVDA 0.33%) graphic cards have long been favorites among hardcore gamers, but who would've thought the chipmaker's stock would explode the way it has in recent times? The share price has more than tripled in just the past year, turning NVIDIA into a near eight-bagger in just five years. Of course, there's more to its run than just graphics processors. It's more an artificial intelligence computing company today, having made huge headway in two of the hottest technology fields of our times: AI and self-driving cars.
For investors looking to find the "next NVIDIA," the trick is to find a company that is sitting on a big growth opportunity, or is already tapping into a soon-to-heat-up trend, but that is still flying under Wall Street's radar. These are stocks with the potential to soar.
If you're already drooling at the thought, check out why our contributors think Electronic Arts (EA -1.56%), International Business Machines (IBM -1.04%), and A.O. Smith Corp. (AOS -2.38%) have NVIDIA-like growth potential.
Rich Smith (Electronic Arts): NVIDIA stock has gained roughly 500% in price over the past three years. Finding a stock that can match that growth rate over the next three won't be easy -- but I know a good place to start.
According to the venerable Warren Buffett, patron saint of value investors, "In the short term, the market is a popularity contest. In the long term, the market is a weighing machine."
What that tells me is that NVIDIA's strong price performance was more than likely a function of its strong business performance -- and indeed, checking the history on S&P Global Market Intelligence, we find that at the same time NVIDIA enjoyed its growth spurt, it was also growing its profits -- up 23% annually, on average, over the past five years.
So how do I find stocks with similar potential for their prices to soar? By screening for businesses that have grown their earnings as fast as -- or faster than -- NVIDIA has. When I ran one such screen recently, the name that really jumped out at me was Electronic Arts, a company that, like NVIDIA, has its roots in the gaming industry.
Over the past five years, Electronic Arts has grown its earnings 17-fold -- even faster than NVIDIA's three-fold increase over the same time period. As a result, Electronic Arts now sports a market capitalization only 22 times its booming earnings. That's actually half the P/E of NVIDIA, despite the fact that Electronic Arts has grown at a faster clip.
What's more, analysts who follow these stocks project that Electronic Arts will keep growing earnings at 15% annually over the next five years -- versus only a 10% growth rate for NVIDIA. If that's how things play out, Electronic Arts stock could very well soar more in the next few years than NVIDIA has in the past few.
Slow and steady, and in the right place
Reuben Gregg Brewer (International Business Machines): I'm a "slow and steady wins the race" kind of guy, so NVIDIA is way too "racy" for me. Especially when you notice that the big gains it has racked up are mostly compressed into 2016. International Business Machines is more my speed; its "soaring" could be spread over a longer period of time.
While IBM's legacy businesses have been shrinking, it has been using its ample cash flow to pay dividends, buy back shares, and, most important, invest in reinventing itself. It's done this several times over its more than 100-year life. Today, that means building up areas like cloud and cognitive computing while getting rid of older businesses. The result is falling revenue, but hidden underneath that overall decline is significant growth in the businesses that will drive IBM's future. Revenue from its "strategic imperatives" grew 13% in 2016, and now provide 41% of total revenue. There's plenty of room for them to keep growing.
What everyone is waiting for, meanwhile, is the day when the strategic imperatives start to drive total revenue higher. That moment looks increasingly close at hand and, I believe, will push the stock price higher. Sure, with a 14 price-to-earnings ratio and a 3.1% dividend yield, IBM looks more like a value stock than a growth stock. And because of its size, it will probably never see percentage revenue gains like NVIDIA did in the third and fourth quarters of its just-completed fiscal year. But I believe it's only a matter of time before IBM starts growing again, with slow and steady gains spread over many years, not compressed into one.
A rapidly growing, underappreciated company
Neha Chamaria (A.O. Smith Corp.): Don't we all love hot showers in the winter? Thank water heaters. But you wouldn't expect a water heater and boiler manufacturer's business to be too lucrative, would you? Well, A.O. Smith Corp. proves otherwise. Double-digit percentage growth in earnings and free cash flow in the past five years? Check. Double-digit return on equity and return on investment? Check. Low leverage? Check.
OK, let's stop here, because these kinds of statistics are almost all we need to spot a stock than can meet or beat NVIDIA's crazy run.
A.O. Smith dominates the North American water-heater industry, with market-leading shares in both the residential and commercial markets. The company's popular brands, including Lochinvar, Aquasana, and its namesake brand, have made it far and wide thanks to its wide distribution network, and tie-ups with retail chains like Lowe's.
While replacement demand drives A.O. Smith's North American sales, China's booming middle class is proving to be its biggest growth card. China now accounts for nearly one-third of its revenue, with sales from the region growing at a compounded rate of 22% over the past decade. A recent industry analysis report by Global Market Insights forecasts that the electric-water-heater market in the Asia-Pacific region will grow at a compounded rate of 10.7% through 2024. A.O. Smith should be among the top beneficiaries, given its presence in China and recent entry into India.
Analysts expect A.O. Smith's EPS will grow roughly 12% annually in the next five years, but the company could easily crush those estimates given its torrid pace of growth in China. Add in its dividends -- A.O. Smith has increased its dividend for 12consecutive years -- and the stock could very well be a multibagger in the long run.