Why Nvidia Corporation (NVDA) Stock Is Heading to $200

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Nvidia Corporation (NASDAQ: NVDA ) stockholders are understandably shaking their heads, watching NVDA stock fall as much as 7% Friday even though the semiconductor giant not only delivered a top- and bottom-line beat in its second-quarter earnings report, but also issued stronger-than-expected guidance.

Nvidia Corporation (NVDA) Is Returning to Its Winning Ways

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Ahead of the quarter, the market was looking for confirmation that Nvidia, which some argue deserves to be in the FANG category, could assert itself to that level even more after posting more than 50% stock gains so far this year.

Despite increased competitive pressures from Intel Corporation (NASDAQ: INTC ) and Advanced Micro Devices, Inc. (NASDAQ: AMD ), NVDA did its job, crushing Q2 profit estimates by 31 cents. The company, nonetheless, fell victim to profit-taking, caused (in part) by geopolitical uncertainty.

Where Nvidia Stock Stands Today

From my vantage point, however, now's a good time jump in, particularly for investors who have waited on the sidelines patiently for a better entry point. Indeed, while the forward price-to-earnings ratio at 42 might suggest NVDA is no bargain, the Q2 earnings-per-share beat by 31 cents (reported $1.01 vs. estimates of 70 cents) underscores the degree to which the company is being underestimated.

And with gross margins still rising, combined with growth in datacenter, automotive and gaming segments, Nvidia stock should reach $200 by year's end, making this pullback a solid buying opportunity.

The Good With NVDA Earnings

Having defeated the FactSet consensus for earnings over the past eight quarters, Nvidia has clearly become a victim of its own success. How else can you explain that year-over-year revenue growth of 56% and EPS growth of a whopping 124% weren't enough to send the shares higher? In the three months that ended June, second-quarter revenue came to $2.23 billion, 56% YOY, beating the consensus estimate of $1.96 billion.

The company continues to enjoy breathtaking success in its gaming business, which accounts for more than 50% of total revenue. Gaming revenue surged 52% YOY during the quarter, reaching $1.19 billion. Revenues in the data center business were also strong, surging 175% YOY to $416 million. Elsewhere, the company saw OEM & IP revenues rise 54% to $251 million.

All told, second-quarter revenue total marked a growth acceleration from what Nvidia reported in the first quarter. And the company, which boosted its Q3 revenue guidance, sees no signs of slowing down. For the third quarter, NVDA expects revenue of $2.35 billion, which is well above Street estimates of $2.14 billion.

Assuming the company, which is driven by growth in virtually all key segments (especially gaming), maintains its current rate of growth, it can easily reach $9 billion revenue in a much quicker time than Wall Street expects.

The Reason for NVDA Stock Selloff

Aside from the normal "sell the news" situation, it's possible that investors believe that the second quarter was as good as things are going to get for Nvidia. Indeed, the company boosted both EPS and revenue guidance for the Q3 and the full years. At the same time, there are concerns that margin expansion might have reached its peak. For example, while Q2 gross margins did climb 50 basis points YOY to 58.4%, it marked the decline of one full point from the first quarter.

Was that enough to justify the selloff in NVDA stock? I don't believe it was. Did I mention the company crushed EPS estimates by 31 cents? This, to me, suggests that Nvidia still has strong operating leverage even with what you might consider "margin pressure." This was evidenced by the fact that operating expenses were up just 21% YOY, while revenue grew 56%. That combination, which I will take all day long, allowed the company to more than double its operating earnings.

Bottom Line for NVDA Stock

When factoring the company's continued growth in data center combined with opportunities in the automotive market, where Nvidia chips are at the center of autonomous driving technology, not to mention the impact AI, the company's addressable market is massive. As such, I see a scenario where Nvidia can triple its revenue in the next three to five years, while more than doubling its profits.

Investors who have long-term horizons, say twelve to eighteen months, have been given a solid buying opportunity to own NVDA stock, which is poised to reach $200 - if not by the end of the year, certainly sometime in the first quarter of the 2018.

As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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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