The big earnings beat from Nvidia Corporation (NVDA) on Thursday sent the stock soaring more than 6.5 percent. But perhaps more importantly than the short-term gain, Nvidia once again proved to skeptics that long-term investors can rely on the company’s secular growth trends even during one of the shakiest weeks the market has had in years.
Nvidia’s fourth-quarter earnings per share of $1.78 and revenue of $2.91 billion easily topped analyst expectations of $1.17 and $2.69 billion, respectively. It’s a pattern Nvidia shareholders have become accustomed to, and Bank of America analyst Vivek Arya says investors can count on that trend lasting for a while.
Historically, semiconductor stocks have been particularly vulnerable during market downturns and prone to cyclical demand and pricing patterns. Nvidia, however, is relatively insulated from that risk thanks to its exposure to secular growth trends, including gaming, artificial intelligence and autonomous vehicles, Arya says, adding that Nvidia skeptics have a narrow view of the company as a standard chip maker.
“We see it as a platform company with a highly unique and leveragable architecture for some of the fastest growth markets in semis/technology, including gaming, AI [and] autonomous cars,” Arya says.
Bank of America projects at least 25 percent annual revenue growth for Nvidia, more than four times the growth rates it expects from its semiconductor peers. Arya says Nvidia has accomplished its impressive growth while maintaining a healthy balance sheet as well. The company currently has about $5 billion in net cash and expects free cash flow to grow 50 percent this year.
“NVDA’s execution has been ‘off the charts’ with average sales beats of 5 percent and EPS beats of 25 percent over the last few years,” Arya says.
Arya has named Nvidia his top sector stock pick but also recommends Skyworks Solutions (SWKS) and Marvell Technology Group Ltd. (MRVL).
Despite the huge quarter from Nvidia, some analysts remain hesitant to recommend the stock at its current price. Oppenheimer analyst Rich Schafer says Nvidia consistently clears a high bar, but there is limited upside for investors.
“We continue to marvel at NVDA’s 41 percent fiscal 2018 revenue growth, but believe risk-reward remains balanced with shares trading over 30 times our [2019 earnings estimates],” Schafer says.
