What happened (and is happening)
Shares of graphics-chips specialist, NVIDIA Corporation (NASDAQ: NVDA), have returned a whopping 99% in 2017 through Tuesday, versus the broader market's 17.6% return.
This torrid stock performance means the artificial intelligence (AI) player has a lot to prove when it reports third-quarter results for fiscal 2018 on Thursday after the market closes.
Shares have run-up largely because the company has been delivering fantastic results both on the top and bottom lines. Last quarter, NVIDIA's revenue and adjusted earnings per share (EPS) surged 56% and 91%, respectively, while they jumped 48% and 85% in the first quarter. Scorching growth in the company's AI-driven data center business and robust growth in its core computer gaming business have been powering overall results. Chips for self-driving cars aren't contributing meaningfully to results yet, but this business is poised to take off given a host of auto companies are slated to begin using NVIDIA's DRIVE PX 2 AI computing platform in their production vehicles within the next several years.
Wall Street expects NVIDIA to post adjusted EPS of $0.94 on revenue of $2.36 billion, equating to growth of 13.3% and 18%, respectively, over the year-ago quarter. Expectations are modest because NVIDIA is now facing a very high comparables bar, as it was in the year-ago quarter that its graphics processing units (GPUs) based on its Pascal architecture became fully ramped across its business.
Investors should keep in mind that the market has essentially been pricing in that NVIDIA will surpass earnings expectations and that continued superb news will keep on coming. With a lofty price-to-earnings ratio of 60 and forward P/E of 53, the stock is priced for perfection-plus.
This means that the stock could drop on Friday if the earnings beat isn't by a big margin or there is some other perceived flaw in the report or outlook. Long-term investors shouldn't pay much attention to the post-earnings stock movement, which has been senseless at times in past quarters. As long as the key metrics continue to move in the right direction and the outlook remains favorable, particularly for the AI-driven businesses, the stock price will take care of itself over the long term.
You can read my in-depth earnings preview here.