Over the last several years, NVIDIA (NASDAQ:NVDA) has been on a tear, fueled by higher demand for its industry-leading graphics processing units (GPUs). The ranks of casual gamers have been growing, and wider adoption of the company's processors for artificial intelligence (AI) systems has opened up a whole new area of growth for the company. The stock has soared, up nearly 1,000% over the past three years and up 65% so far in 2018.
With those results as a backdrop, investors will be keeping a close eye on the proceedings when NVIDIA releases its fiscal 2019 second-quarter financial report after the market closes on Thursday, Aug. 16. Let's review the company's recent results and take a look at a few areas that will be of particular interest to investors.
Slowing data center growth or greater heights?
In its most recent quarter, NVIDIA reported revenue of $3.2 billion, up 66% year over year and solidly ahead of both analysts' consensus estimates and the high end of the company's own forecast. NVIDIA saw solid growth across each of its business lines, but the continued growth in the company's data center segment was the focus of attention, up 66% compared to the prior-year quarter but far lower than the seven consecutive quarters of triple-digit growth investors had come to expect.
For the second quarter, NVIDIA expects revenue of $3.10 billion (plus or minus 2%), which would represent year-over-year growth of 39% at the midpoint of guidance. The company is also forecasting gross margins of 63.3% (plus or minus 50 basis points) and operating expenses of approximately $810 million on a GAAP basis.
Analysts are also expecting solid growth, with consensus estimates calling for revenue of $3.11 billion -- in line with the company's forecast -- along with earnings per share of $1.66, an increase of 80% over the prior-year quarter.
Not all fun and games
While the gaming segment still pays the bills, much of the excitement surrounding NVIDIA is the potential growth represented by its foray into AI and cloud computing. Its GPUs are currently the gold standard for the data processing and number crunching required by AI systems. The company has also benefited from the rapid adoption of cloud computing in recent years, both of which have spurred gains.
Last quarter's slowing growth in the data center segment could have been a harbinger of things to come or a lull before another surge forward. While investors will be watching all the numbers carefully, they will be paying particular attention to this segment for any signs of slowing demand.
Another area that has significant potential is the company's auto segment, which has been transitioning from infotainment systems to a greater focus on self-driving cars. Results in the unit have been lumpy, but greater adoption of autonomous vehicles beginning in late 2019 and beyond is expected to spur demand for NVIDIA's self-driving car platform. Watch to see if there's any indication that the beginning of this trend is materializing.
The potential for significant volatility
One unintended consequence of the company's phenomenal growth is the rising assumption of its continued success. If NVIDIA merely exceeds these lofty expectations, it may not be enough to keep the stock moving higher.
Much is already baked into the stock price, hence the sky-high valuation. From a price-to-earnings perspective, the stock currently trades at 43 times trailing earnings -- significantly higher than the 24 times of the S&P 500. The price even appears frothy looking ahead, with a forward valuation of 33. I typically don't make calls based on valuation, but I mention it here because it could result in significant volatility for investors.
The market has continued to drive up NVIDIA's price on the expectation that the good times will continue to roll. Any indication of slowing growth could result in a swift -- and potentially brutal -- revaluation.