NVIDIA’s (NVDA, Financial) growth has accelerated so much that the company kept beating estimates and its own guidances on a regular basis.
The company guided second-quarter revenue to be near $1.35 billion while the actual result was $1.43 billion; third-quarter guidance was for $1.68 billion while the actual result was a record $2.00 billion, which also beat Wall Street estimates by a huge margin.
Clearly, even NVIDIA itself is not able to make accurate predictions about its own growth numbers. The soaring results were the direct result of NVIDIA finding extra wings due to the growth of the Auto segment and Data Center segment, both of which are poised to grow tremendously in the next few years. The company bagged the leadership position in these two markets even before its competitors were able to realize that they would be huge revenue spinners of the next decade.
Before this year, NVIDIA’s quarterly revenues were growing at an under-15% range while in the first three quarters of the current fiscal revenue growth was 13%, 24% and 54%. And if the company reaches its guidance of around $2.10 billion in the fourth quarter, that will put it steadily in the 50% range. The surge in growth rate has meant a surge in stock price, which has nearly tripled in the last 12 months, moving from the $32 range in November last year to the current above-$90 levels.
The stock is now trading at eight times sales, which is much more than some well-known hyper-growth companies command. Netflix (NFLX, Financial), for example, is trading at 6.2 times sales while Salesforce (CRM, Financial) is trading at 6.09 times – both of which are companies that have shown steady growth rates over the years as market leaders in their own segments. Facebook (FB, Financial) is trading at above the 13 times sales range, but there is WhatsApp, which is yet to be monetized, and Instagram, which has only just begun its trajectory. From a comparative viewpoint NVIDIA has gotten a little ahead of its own hyper-growth companions.
There is no question about the company's ability to keep hitting double-digit growth rates as its leadership position in the Gaming, Data Center and Auto segments will keep delivering results for the next few years. The growth of cloud, self-driving technologies and the need for hyperscale computing driven, in part, by machine learning will make sure that NVIDIA’s new segments keep delivering top-line numbers for the company. But how long will that growth last? And when you pay eight times sales, most of that growth will be already priced into that stock, leaving nothing for you to count in terms of returns for the next several years.
NVIDIA is a great company that has proven time and again that it has the ability to constantly innovate and beat its competition by years instead of months. It also has a highly effective and action-oriented management team, but at the current price point it is just not an attractive investment.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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