Nvidia (NVDA) is set to report third quarter fiscal 2020 earnings results after Wednesday’s closing bell. With its shares rising 130% year to date, while surging 72% in six months, the graphic chip powerhouse has been one of the better performers not only among the chip stocks, but also in the entire tech sector.
All told, you would be hard-pressed to find a hotter company. But can the run continue? Now the third-most valued chip stock on the PHLX Semiconductor Index, sporting a market cap of $333 billion, Nvidia is three times larger than rival AMD (AMD) and $100 billion more than Intel (INTC). Six straight quarters of earnings beats have gotten investors less concerned about valuation and more in-tuned with Nvidia’s growth capabilities in key markets for graphics cards, particularly those that are used in video games.
What’s more, the company has taken the lead in chip productions for high-growth areas such as network data-center, autonomous driving, artificial intelligence, among others. As such, the market is already pricing in another beat. As it stands, 80% the analysts who cover the company rates it the equivalent of Buy rating, while six have assigned it a Hold rating, with only one analyst with a Sell rating. Nonetheless, Nvidia’s guidance on Wednesday will be the key factor in whether the stock continues its march higher or succumbs to profit taking.
For the three months that ended September, Wall Street expects the Santa Clara, Calif.-based company to earn $2.56 per share on revenue of $4.41 billion. This compares to the year-ago quarter when earnings came to $1.78 per share on revenue of $3.01 billion. For the full year, ending in December, earnings of $9.11 per share would rise 57% year over year, while full-year revenue of $15.8 billion would rise 44.7% year over year.
In the second quarter, not only did the company beat on both the top and bottom lines, Nvidia raised both revenue and gross margin forecasts. Given the environment surrounding the pandemic, it will be understandable if the management opted to suspend guidance. But analyst Christopher Rolland of Susquehanna isn't worried. Citing increased market share for Nvidia’s GPU (graphing processing unit) and ASPs (average selling prices, Rolland recently raising Nvidia's price target from $560 to $610.
As noted, the company is on a streak of six straight top- and bottom-line beats. Nvidia’s winning streak has been due in part to strong GPU (graphic processing units) sales that powers the cloud, namely its datacenter business. The analysts encourages to look towards the long-term growth story of Nvidia that can play out in early 2021 and advises investors to “look past the near-term supply disruption.” In the second quarter, gaming revenue surged 24% sequentially to $1.65 billion, well above consensus of $1.41 billion.
Q2 datacenter revenue, with contributions from Mellanox, skyrocketed 167% year over year was also strong reached $1.75 billion, above consensus for $1.71 billion. In other words, while Nvidia’s GPU expertise had made it synonymous with video games, the company has fully transitioned to the enterprise evidenced by the accelerated growth on the datacenter business. And this is something Nvidia CEO Jensen Huang had previously targeted. Investors will want to see if these trends can continue on Wednesday.
All told, while the valuation concerns are understandable, the company is executing in a manner that suggests the valuation is warranted and the stock may yet have room to run.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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