How Risky Is NVIDIA Corp. Stock Now?

With its shares flying high, it could be argued that the graphics processing unit king is overvalued.

Tim Brugger
Tim Brugger
Jun 19, 2017 at 5:23PM
Technology and Telecom

It's been a stellar 2017 so far for NVIDIA (NASDAQ:NVDA) shareholders. With the semiconductor maker's stock up 45% year-to-date, and trading at lofty valuations by most measures, it could be argued that NVIDIA is a fairly risky investment. After all, just how long can this bullishness last?

For some perspective, NVIDIA is trading at 50 times trailing earnings -- more than twice the industry average  price-earnings ratio of 24. Looking ahead, its forward P/E is a whopping 44. The same sky-high valuation concerns apply to NVIDIA's price-to-sales ratio, which sits at 13, more than three times the average among its industry brethren.

Considering those financial measures, NVIDIA would appear to have limited upside and considerable downside potential. But a look ahead into NVIDIA's forays into cutting-edge markets most pundits expect to explode in the coming years tells a slightly different story, particularly for growth investors.

Firing on all cylinders

NVIDIA's first quarter was nothing short of spectacular, and its stock has skyrocketed 47% since it shared  the good news on May 9. Revenue jumped 48% to $1.94 billion, up from $1.3 billion a year ago. That impressive top-line growth was matched by its relatively stringent spending, which in turn boosted earnings per share (EPS) an astounding 85% to $0.85 from last year's $0.46 a share.

Operating expenses rose last quarter, not surprisingly given NVIDIA's push into burgeoning markets, but only 18%, which was tame considering its phenomenal top-line results. The rapid sales growth combined with tepid spending also had a positive impact on gross margins, which climbed nearly 2 percentage points to 59.4% versus last year's 57.5%.

The future is now

Though it may have been lost among all the good tidings NVIDIA had to share last quarter, founder and CEO Jensen Huang alluded to the fact that a key component of future growth -- graphic processing units (GPUs) for the world's cloud data centers -- enjoyed an absolutely incredible quarter.

According to Huang, NVIDIA's data center GPU revenue nearly tripled year over year, and just as critically, much of the credit for the rapid rise was due to its industry-leading artificial intelligence (AI) efforts.

The data center market is expected  to generate an estimated $360 billion in revenue by 2023, and a primary reasons for that anticiapted growth are not only the benefits of off-premise data storage, but also that it provides customers with AI data analytics capabilities. Naturally, with so much potential upside here, NVIDIA's AI initiatives -- along with its virtual reality (VR), "smart" drones, and automotive solutions -- will meet some heavy competition.

Picture of NVIDIA's Volta graphic processing unit.

Image source: NVIDIA.

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The road ahead

NVIDIA's push into early-stage markets carries a few risks, including slower-than-expected adoption of AI, VR, and other new opportunities. There's also the not-so-small matter of competition from the likes of Intel (NASDAQ:INTC) which has gone so far as to rebrand itself as a "data center provider." Intel's data  center unit generated an impressive $4.2 billion in sales last quarter, up 6%, and that busniess continues to account for a larger piece of its total revenue with each passing quarter.

NVIDIA will also face off with Intel in AI, drones, VR, and autonomous car tech -- all areas the two industry stalwarts are banking on for growth. But for now at least, it appears NVIDIA is ahead of not only Intel, but most every other chip supplier in the market, and it doesn't appear that will change anytime soon.

At current levels, NVIDIA stock isn't for the weak of heart. But for growth investors who can set aside valuations, the impact of positive momentum, and similar near-term factors that move stock prices, and instead focus on the long term, NVIDIA is no more risky than any other high-flying stock with an eye toward the future.