You've gotta love it when the dominant industry player trounces expectations because virtually all of its businesses are operating on all cylinders -- and the stock still drops. Some stocks just can't catch a break.
Such was the case with Nvidia (NVDA -10.01%); its recent fiscal fourth-quarter results topped expectations on the top and bottom line. Its powerhouse data center and gaming sectors easily exceeded analyst forecasts, allowing the tech stock to provide strong guidance for the coming quarter. But the stock still fell.
Heres why investors should be excited by the development.
Image source: Getty Images.
Going from strength to strength
Nvidia said revenue hit a record $7.6 billion in the fourth quarter, a 56% jump year over year, generating record earnings of $1.18 per share, double what they were last year. Full year results were also record-breaking.
While the gaming segment is still Nvidia's biggest moneymaker, producing quarterly revenue of $3.42 billion, or 37% more than it did in fiscal 2021, the data center business continues to enjoy explosive growth and now stands at $3.26 billion. That's a 71% spike and an accelerated gain from the prior quarter, keeping it on track to become the largest segment Nvidia possesses.
The ongoing global computer chip shortage shows no signs of relenting anytime soon, boosting demand for Nvidia's already popular chips. Nvidia's outstanding inventory purchases and long-term supply obligations were $9 billion, a $2.54 billion year-over-year increase, and up from $6.9 billion just one quarter ago.
This is now the fourth consecutive quarter in which demand for Nvidia's chips is growing at a better than 30% rate, and it's now even surpassed the company's revenue growth guidance, giving the chipmaker substantial future tailwinds.
While a percentage of that just reflects supply chain issues, a good portion is because Nvidia hasn't rested on its laurels but continuously upgrades and improves its products. Its Orin artificial intelligence chip, for example, that will be used in autonomous vehicles, industrial automation, and robotics, is highly anticipated.
Image source: Nvidia.
The chip is in production and Nvidia says it expects to hit an "inflection point" in the second quarter, accelerate in the third, and then take off for years afterwards. It's part of the new agreement Nvidia just signed with Tata Motors (TTM) for its 2025 lineup of Jaguars and Land Rovers.
Automotive and robotics is still just a tiny component of Nvidia's business at the moment -- only $125 million in revenue in the fourth quarter -- but it's one that has the promise to comprise a far larger percentage going forward.
Next month Nvidia will be hosting an investor day conference where it will reveal a host of new products it will be bringing to market.
An opportunity to act
So why the disconnect between Nvidia's performance and guidance and how its stock reacted?
Shares of the chipmaker dropped 7.5% the day after its earnings release and finished out the week nearly 11% below where it had traded just before the financial report. Some analysts attributed it to concern over Nvidia's margin guidance for the next quarter not being more, others to the announcement it had withdrawn from its $40 billion acquisition of Arm Holdings, though there was mounting belief the deal would not go through because of regulator opposition.
Still others said reduced demand for Nvidia's cryptocurrency mining chips weighed on the stock. It's also a small percentage of the chipmaker's business, some 2.5% of the total, but the $192 million in segment sales (it's lumped in with other small components as well) was down from $225 million last quarter, though up 25% year over year.
Image source: Getty Images.
It's only going to get better
For investors, although any decline in sales is disappointing, the operations that matter are the ones that are important to Nvidia's growth -- and they are on fire and will likely be for years to come.
Nvidia's stock is not cheap by traditional metrics, even with the pullback in its shares' value, as it trades north of 61 times trailing earnings and nearly 100 times the free cash flow it generates. Yet considering that Wall Street expects Nvidia's revenue to more than triple over the next five years to $70 billion and per-share profits to quadruple, the semiconductor stock is worth the premium the market is charging and the stock dip should be seen as a buying opportunity.
