Nvidia Is Crushing Records. So Why Is Its Stock Down?

The fact that Nvidia (NVDA 3.46%) did so well over the past year, it's possible that investors are thinking there's going to be tough comps for next year among other concerns. In this Fool Live segment from "Semiconductor Revolution," recorded on Feb. 17, Motley Fool contributors Danny Vena, Jose Najarro, and Nicholas Rossolillo agree that there is a lot of optimism baked into Nvidia's share price even after the recent pullback, but for very good reason.

Danny Vena: For those who aren't that familiar with Nvidia, the company is the leader in the discrete desktop GPU market. It's also a leading provider of the processors that are used in data centers and in self-driving cars. This is also a company that there are a number of other growth opportunities. It has a professional visualization segment, a self-driving car segment. All of these segments have significant growth opportunities. Now the highlights for the quarter, and you're going to hear the word record here and you're going to hear it repeatedly. Overall revenue hit a record $7.64 billion, that was up 53 percent year-over-year, which is impressive on its own. But additionally, it was up eight percent quarter-over-quarter as well.

Now this was driven by gaming revenue that hit a record 3.4 billion, up about 37 percent. That was a little bit slower growth than in the previous quarter, but that's not surprising because that's also a little bit cyclical. Data center revenue, now this is revenue that comes from cloud computing, from data centers, from artificial intelligence. That also hit a record 3.3 billion, up 71 percent. That growth was up faster than in the previous quarter. Then professional visualization, which has to do with Hollywood studios, for instance, using Nvidia chips to create computer-generated images on screen, that segment hit a record 643 million in revenue and that was up 109 percent. All of these numbers are essentially fabulous, so there's not anything that I can see wrong with those.

If you were looking for something to complain about, the gross margin, it only ticked up a little bit, but it was still higher than normal. Now, I do want to say that operating expenses, if you look at the fact that even its lowest growth segment, which was gaming revenue, was up 37 percent and overall revenue was up 53 percent, operating expenses were up just 23 percent. That illustrates the fact that Nvidia has a huge amount of leverage for when their chips get used. This is really good news for investors going forward. This means that the more revenue the company generates, a larger percentage of that drops to the bottom line. That's why net income of three billion was up 106 percent.

Now, I talked earlier about potential reasons why Nvidia could have sold off on the news. There's deal to buy the rumor, sell the news phenomenon. The stock does a little bit of a run-up before earnings, and then when the earnings actually come out, sells off. The fact that the company did so well over the past year, investors might be thinking there's going to be tough comps for next year. There's also the fact that the company, when it gave its forecast, it said that gross margins could be flat over the next year plus or minus. Maybe investors were hoping for a little bit higher gross margin growth a little bit. I also wanted to mention the valuation because Nvidia is not cheap, nor has it ever been cheap. The company is currently selling for 17 times forward sales and 41 times forward earnings. So that's not cheap in terms of traditional metrics.

But when you're talking about a company that's growing revenue 53 percent year-over-year and growing net income 106 percent year-over-year, you get what you pay for, in my mind. In terms of its performance, the business did everything that it needed to do. Financially, it did everything it needed to do. I didn't see anything that I would complain about in this quarter. Again, I read an analyst comment that said, "What else were investors looking for?" I agree with that sentiment. I don't think that there was anything they could have done differently. Even that small sell-off, I think last time I looked, it was down about eight percent. I don't think that's anything to worry about.

Jose Najarro: I agree with you, Danny. Sentiment-wise, the company did strong quarter. The guidance that they gave I think was 8.1 billion. Like you mentioned, every time you would read their spreadsheet, it would always have the world record in it, record broken. They did strong there. I really enjoyed that they mentioned that the visualization market, it was 650, grew 109 percent. One of the drivers there was the overall increase of 3D content. I'm a Unity shareholder and I love to see that kind of move of 2D to 3D because I believe it's going to be a nice tailwind for companies like that. Let me see. I did have some notes.

A few things for investors of Nvidia. They have this conference twice a year, GTC. It's going to be now on March 22nd, and they did announce that they are going to announce new products. They usually announce either new graphics cards or just new solutions overall. If anybody is interested of any of their new products, make sure to tune in March 22nd. It's a free conference that you can sign up. You can go to their website and get the link there. The other thing that I saw is they did mention that they're right now, Nvidia is big on this GPU market. But later this year, Grace will be coming out, and Grace is their Arm CPU. That should be coming out later this year. I'm pretty excited overall as a shareholder and happy. Nick, any thoughts on Nvidia?

Nicholas Rossolillo: I think I would encourage investors, especially if you've owned Nvidia for a while, there's a pretty good chance I've noticed a lot of the Fools investors mentioning Nvidia is now a top stock in their portfolio. Do get acquainted with what the business is doing. There is a lot of optimism baked into share prices even after the pullback. But for really good reason, I've also seen a lot of people cite comments from Beth Kindig, a technologist, analysts saying that Nvidia will be bigger than Apple in five years. That's a really big prediction. Probably not by sales, not in terms of sales, but by market cap. Potentially get acquainted with what Nvidia is actually doing and test out how you feel about that. Because there's going to be some ups and downs along the way.

Personally, I think with all of us here, we like the trajectory the company is taking. They're dominating the AI industry. Like if you want to implement AI in your business, you have to go to Nvidia at this point to help get it done. They are building software on top of that, I think that is a massive opportunity. Jensen Huang had mentioned possibly 40 billion a year in sales just from one software product that they recently announced. Get acquainted with the company because you're going to need that knowledge on what they do to ride out the ups and downs that are coming because of the high valuation on the stock. Personally, I own it and have no intention of ever selling it at this point. But just know that as we've talked about before with this company, it is priced really, really high for good reason. But as a result, there's going to be some really, really wild turbulence that we're going to have to endure.