To start off 2017, there were very few that could have predicted the year to come for NVIDIA Corporation (NVDA -1.75%). The company had produced a monster year in 2016, reporting record revenue, record margins, and record earnings in its fiscal 2017 third quarter (which ended Nov 10, 2016). Revenue crossed $2 billion, up 54% year over year, while GAAP earnings per share jumped 89% over the prior-year quarter. The stock price followed NVIDIA's financial performance, soaring 224% for 2016.
Following that type of blistering performance, it is very rare that a company could continue that pace, and many believed NVIDIA's stock would take a breather in 2017.
They were wrong.
AI-driven rally continues
During the four quarters it reported in calendar 2017, NVIDIA's revenue increased 55%, 48%, 56%, and 32%. What drove these stunning gains? The gaming segment, which generates the lion's share of NVIDIA's sales, produced 48% year-over-year gains, on average, in each of those four quarters.
The other significant driver was deep learning, a specific technique within the area of artificial intelligence (AI). NVIDIA's graphics processing units (GPUs) have been key to advances in the nascent science, as researchers found that the parallel processing capability that worked so well for rendering images also was perfect for training these AI systems.
NVIDIA's data center segment, where AI-related sales are shown, grew an average of 168% in each of those same four quarters. Revenue from AI now represents 19% of the company's total sales.
Its head is in the clouds
Another key contributor to NVIDIA's success was a significant trend toward cloud computing. Many companies have been moving to the cloud due to "increased demand from increasingly compute-intensive workloads (such as artificial intelligence [AI], analytics and Internet of Things [IoT])," according to market research company Gartner. NVIDIA has made the most of this opportunity, stating, "Our Volta GPU has been embraced by every major internet and cloud service provider and computer maker."
The migration to cloud computing is expected to continue, nearly doubling between 2016 and 2020. NVIDIA is positioned to continue to reap the rewards of this trend.
Autonomous vehicles may drive additional growth
NVIDIA has also developed a self-driving car platform, the DRIVE PX, which combines sensor fusion, deep learning, and surround vision to provide real-time data for autonomous driving. The system takes input from the light detection and ranging system (LiDAR), radar, ultrasonic sensors, and cameras and fuses the data into a 360-degree digital recreation of the driving environment. This allows the self-driving car to navigate, avoid obstacles, and obey traffic laws.
The company has partnered with 320 automakers, tier-1 parts suppliers, sensor companies, HD mapping providers, and research institutions around the globe to help autonomous driving technology achieve mass adoption. These developments haven't yet translated to revenue growth, but NVIDIA is well positioned to benefit from the technology, which it believes will begin to ramp up significantly sometime between 2021 and 2022.
Show me the money
NVIDIA has positioned itself to reap the rewards from futuristic technology like AI and self-driving cars while continuing to expand the offerings of its lucrative gaming segment. That strategy is paying off. In its fiscal third-quarter 2018 (which ended Nov. 9, 2017), NVIDIA reported record revenue of $2.64 billion, which grew 32% year over year, and record GAAP earnings per share of $1.33, up 60% over the prior-year quarter.
These results are reflected in its stock price, which increased 81% during 2017, more than four times the gains of the broader market. Its valuation is similarly high, trading at 48 times its trailing-12-month earnings, and a forward multiple of 43 times earnings.
Investors should know that a stock trading at that high a valuation will likely be subject to big moves, and it could fall precipitously given any real or perceived failure to deliver the goods.
That said, an investor with a longer horizon may want to establish an appropriately sized position, as I believe NVIDIA stands at the intersection of several booming technology trends that could produce monster results in years to come, much like it did in 2017.