NVIDIA Tegra K-1. Source: NVIDIA.
What: Shares of NVIDIA (NVDA +1.67%), a developer of graphics solutions for PCs and gaming, and processors for smartphones, tablets, and other interconnected devices, roared higher by $1.49, or 7.2%, in Thursday's trading session to close at $22.30 after briefly touching a fresh 52-week high of $22.50. While earnings played a big role in the move, NVIDIA was also supported by six price target increases.
So what: On Thursday NVIDIA saw its price target (the level at which research firms believe a company to be fairly valued) increased by:
- Topeka Capital Markets: from $21 to $23.
- Needham: from $25 to $27.
- RBC Capital Markets: from $26 to $27.
- Canaccord Genuity: from $22 to $23.
- B. Riley & Co.: from $25 to $27.
- FBR & Co.: from $22 to $23.
While I could go into the logistics behind each price target bump, the main focus among these six firms was NVIDIA's ongoing transformation that's moving sales away from slower-growth PCs and toward cloud-based video games and automobiles.
As noted by some covering analysts, however, challenges remain despite a solid quarter. Specifically, some firms honed in on NVIDIA's sequential quarterly weakness in its Tegra processing chips and wondered if NVIDIA was making the most of its opportunity in smartphones and tablets.
As a refresher, NVIDIA's fourth-quarter earnings results, released after the market close on Wednesday, delivered 9% revenue growth to $1.25 billion, and a market-topping $0.35 in GAAP earnings per diluted share, up 40% from Q4 2013. As Fool.com technology specialist Ashraf Eassa points out, the company's primary profit driver, its graphics processing unit, delivered 13% year-over-year growth, while Tegra year-over-year sales tumbled 15% in Q4 as the product reached the end of its life cycle.
Source: NVIDIA.
Now what: The question investors have to ask here is whether NVIDIA is deserving of six price target increases. In other words, can NVIDIA really rise another 3% to 21%?
On one hand it's hard to argue against NVIDIA's improved revenue distribution. The move into the gaming cloud and automobiles is clearly adding to NVIDIA's top and bottom lines and pushing the company away from its previously static growth trajectory.
On the other side of the coin we have Tegra, which has been only modestly successful (and I think I might be stretching it) in smartphones and tablets. It's tough breaking into the processor business in smartphones considering that just a few players with deep pockets dominate. However, it means NVIDIA is going to need to really step up its designs if it ever has any shot at significant smartphone or tablet processing market share.
At close to 18 times forward earnings and with a PEG ratio nearing two I'm about ready to call NVIDIA fairly valued here. It's possible gaming and autos could carry NVIDIA modestly higher, but I'd personally like to see some additional traction from the next-generation Tegra processors before buying into this story.
