Why Investors Have to Watch NVIDIA Earnings So Closely

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When it comes to investing in momentum stocks full of growth, NVIDIA Corp. (NASDAQ: NVDA) takes the cake for where investors want to be. After all, the graphics and processing company has seen its shares rise roughly 200% over the past year. And its shares have effectively doubled so far in 2017 alone. Now investors are bracing for NVIDIA earnings on Thursday after the close. What matters here is that NVIDIA is now the poster-child for the bull market, and any earnings disappointment here might take away at least some of the post-earnings pops seen in other technology giants in recent weeks.

24/7 Wall St. previews many earnings reports during each earnings season. This growth stock has continued to surge above and beyond analyst price targets and expectations for more than a year now.

NVIDIA has been enjoying growth from just about all aspects. The GeForce graphics unit has been strong, as has its data center business. What has been driving the stock above and beyond analyst expectations week after week is the excitement of future tech, where NVIDIA is set to clean up autonomous driving systems, artificial intelligence, machine learning, virtual reality and augmented reality. NVIDIA has even been winning from bitcoin and the cryptocurrency mining market.

Thomson Reuters is calling for NVIDIA to report earnings of $0.94 per share on revenues of $2.364 billion for its third quarter. Both figures would represent double-digit growth rates from a year ago. Consensus estimates for the fourth quarter are $0.98 EPS on revenue of $2.436 billion. For 2018 (January year-end), NVIDIA has consensus estimates of $3.63 EPS and $8.967 billion in revenues. Those estimates are expected to be $4.04 EPS and $10.125 billion in revenues if you jump forward a year.

Now where investors and analysts have some serious decisions to make is just how high they are willing to value NVIDIA. The stock was down over $3.00 late on Wednesday, versus a 52-week and all-time high of $212.90. Its $208.75 share price and $125 billion market cap versus next year’s consensus estimates give NVIDIA a value of about 12 times expected revenues and a value of almost 52 times next year’s earnings.

As noted earlier, NVIDIA’s stock analysts have stepped all over each other trying to raise their price targets, and the stock keeps going even higher than that. NVIDIA’s $208.75 share price is against a consensus analyst target price of $174.44, but this was roughly $165 a month ago and $145 just 90 days ago.

It is no secret that NVIDIA is priced for perfection. That doesn’t mean that NVIDIA shares cannot keep rising of course, as it has made mince-meat out of short sellers. Compared with peers, NVIDIA is valued at about three times the forward price-to-earnings (P/E) ratio of Intel and is valued at about six times the valuation of AMD, if you were to use a price-to-sales ratio.

NVIDIA had a short interest of 14.7 million shares as of the October 13 settlement date. That sounds high on a nominal basis, but it is just 1.1 days to cover, and the short interest has fallen by 80% from last November.

As far as analysts raising their targets, here are some fresh calls:

  • Deutsche Bank raised its target to $190 from $145 on November 8.
  • Morgan Stanley raised its target to $210 from $168 on November 6.
  • RBC raised its target to $230 from $220 on October 27, after raising it from $205 on October 12.
  • Jefferies raised its target to $230 from $180 on October 23.
  • Mizuho raised its target to $220 from $180 on October 16.
  • Needham raised its target to $250 from $200 on October 13.

Even on October 2, 2017, Moody’s raised NVIDIA’s senior unsecured rating to A3 with an outlook “positive” view.  On September 20, S&P raised NVIDIA’s credit rating to BBB+ from BBB- and maintained its outlook “positive” as well.