NVIDIA Corporation NVDA yesterday became the most valuable U.S. chip maker after surpassing Intel Corp. INTC. The stock gained 3.5% on Wednesday to $408.64, lifting its market capitalization to $251.3 billion. In comparison, Intel’s market capitalization works out at $248.2 billion, at yesterday’s closing price of $58.61.
The NVIDIA stock has been one of the best performers in the U.S. stock market for the last few years. It has demonstrated scintillating share-price performance over the last five years. The stock, which was around $20 at the beginning of 2015, now currently trades at $408.64, representing a more than twenty-fold jump.
Year to date, NVIDIA’s shares have rallied 73.7%, way higher than the Nasdaq Composite’s gain of 16.9%. The stock has also outperformed the Dow Jones and the S&P 500, which are down 8.7% and 1.9%, respectively, year to date.
NVIDIA Corporation Price and Consensus
NVIDIA Corporation price-consensus-chart | NVIDIA Corporation Quote
What’s Driving This Rally?
This remarkable run can be primarily attributed to the company’s stellar financial performance, wherein its annual revenues have more than doubled, while earnings have quadrupled in the last five fiscal years.
Amid the pandemic-led business disruptions, NVIDIA registered robust year-over-year revenue and earnings growth in the first quarter of fiscal 2021. The company’s adjusted revenues of $3.08 billion beat the Zacks Consensus Estimate by 2.8% and surged 38.7% year over year. Moreover, its non-GAAP earnings of $1.80 per share beat the consensus mark by 6.5% and surged a whopping 104.5% year on year.
NVIDIA’s graphic processing units (GPUs) are rapidly penetrating different verticals, particularly in the gaming and datacenter markets, which is driving top-line growth.
Better visualization and speed is needed for a thrilling gaming experience, which NVIDIA successfully provides through its portfolio of Pascal architecture-based GPUs. Furthermore, with the emergence of massively multi-player online games (MMOG) and Gaming-as-a-Service (GaaS) concepts, the demand for GPUs has been surging exponentially.
Notably, the gaming segment revenues reached $5.52 billion in fiscal 2020 from the $2.06 billion witnessed in fiscal 2015, marking significant growth of more than two-fold.
Moreover, data center presents solid growth opportunity for the company. As more and more businesses are shifting to cloud, need for data centers are increasing considerably. To cater to this huge demand, data-center operators like Amazon AMZN, Microsoft MSFT and Alphabet GOOGL are expanding their operations across the world, which is driving demand for GPUs. This bodes well for NVIDIA. The company’s revenue from this segment increased to approximately $3 billion in fiscal 2020 from mere $317 million in fiscal 2015.
AI Proliferation Provides Solid Growth Opportunities
NVIDIA GPUs are gaining rapid traction with the proliferation of AI. The increasing usage of AI tools in data-center, automotive, healthcare and manufacturing industries is expected to fuel demand for GPUs over the long haul.
Notably, NVIDIA is already a dominant player in the data-center market. The company also enjoys a first-mover advantage in the AI field and its expanding product portfolio is capable enough to leverage the growing adoption of AI in various industries.
Efficient Cost Management Boosts Margins
NVIDIA’s operating expenses, as a percentage of revenues, have declined in the last four fiscal years. The company’s platform model has helped reduce overall costs, while enhancing its operational efficiency. NVIDIA’s non-GAAP operating expenses as a percentage of revenues decreased to 28% in fiscal 2020 from 39% in fiscal 2015.
Furthermore, NVIDIA’s strategy of developing a single GPU architecture like Pascal and Tegra at a time has been helping it expand gross margin. The company’s non-GAAP gross margin expanded 570 basis points to 62.5% in fiscal 2020 from 55.5% in fiscal 2015.
Moreover, NVIDIA has partnered with Taiwan Semiconductor Manufacturing Company TSM and Samsung to develop 7nm process node-based GPUs. We believe the 7nm-based GPUs will reduce the company’s production costs, while enhancing performance.
Improving gross margin and lower operating expenses are expected to keep aiding NVIDIA’s bottom-line growth. The graphic chip-maker’s non-GAAP operating margin increased to 26.1% in fiscal 2020 from 16.2% in fiscal 2015.
Strong Cash Flow
The company’s solid revenue growth along with improving operating efficiency is bringing in higher cash flows. NVIDIA’s operating cash flow in fiscal 2020 reached $4.8 billion from $906 million in fiscal 2015. Furthermore, the company ended fiscal 2020 with cash and cash equivalents, and marketable securities of worth $10.9 billion.
Strong cash flows provide NVIDIA the flexibility to invest in long-term growth opportunities as well as return cash to shareholders in the form of share repurchases and dividend payments. Notably, NVIDIA returned approximately $6 billion to shareholders through dividend payments and share buybacks in the last five fiscal years.
Many would argue that NVIDIA is a risky bet given its hefty forward P/E valuation of 51.7x compared with the industry average of 22.1x. However, we beg to differ due to its consistent performance and strong growth opportunities in various untapped markets like automotive, healthcare and manufacturing over long term.
Keeping all these in mind, we believe investing in NVIDIA would yield strong returns for investors.
Currently, NVIDIA carries a Zacks Rank #2 (Buy) and the expected long-term (3-5 years) earnings growth rate for the stock is pegged at 16.9%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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