Nvidia's (NVDA) - Get Report July-quarter results were better than expected and its share price rallied more than TK% since it reported earnings on Thursday. The bigger picture, though, is that Nvidia will continue to grow rapidly and its shares are not reflecting that opportunity.
Q2 2020 Results: Improvements
Given how Nvidia's share price has fared the past twelve months, any hint of negative news would have been a reason for bearish investors to once again take control of the stock. But Nvidia didn't disappoint its shareholders, with beats on both the top and bottom lines.
Looking further ahead, it seems that Nvidia's guidance for Q3 2019, is now once again picking up steam, with its midpoint revenue guidance of $2.90 billion just slightly lighter than consensus of $2.98 billion.
Digging Into The Long-Term
The message from Nvidia was an echo of what investors have become used to hearing from the management team, particularly about how going forward, Nvidia will be about more than just gaming. Looking back, around this time last year, investors had been passionate about Nvidia's AI opportunities. But given how badly its share price had sold off, it is perhaps understandable that investors had lost interest in Nvidia's long-term goals, opting to focus on the near term instead.
However, as we can see above, Nvidia's non-GAAP gross margins are indeed looking attractive again. Thus, with Nvidia's near-term looking stable and somewhat rosy, investors are willing to appreciate Nvidia's slightly further out goals once more.
One avenue that Nvidia has been consistently working on is developing its automotive portfolio. For now, its auto business remains too small for any shareholder to put substantial weight on, even if it's up 30% year-over-year.
Having said that, it is not inconceivable to imagine that over the coming 12 to 18 months, Nvidia's auto revenue stream could be generating somewhere in the ballpark of $1.8 billion to $2.0 billion, at which point the dynamics start to become compelling. Particularly when we consider that Nvidia's present market cap is still a nudge below $100 billion.
Valuation - Margin Of Safety
The table above shows a mixed message regarding Nvidia's valuation. It shows that Nvidia's P/Sales ratio actually trades at a premium to its five-year historical average. It also shows that Nvidia's overall valuation is more expensive than that of its peers. However, both of these can be explained with ease.
First, the reason why Nvidia's current P/Sales trades higher than normal is due to the substantial loss of revenue Nvidia has had to endure the past twelve months. However, going forward this should normalize.
Second, the reason why Nvidia trades at an overall premium to its peers is simply that Nvidia is a higher quality company, with strong returns on invested capital. For example, for the past three years, Nvidia's unleveraged returns on invested capital have been meaningfully higher than 20%, which is close to double that of its peers (on average).
Given the stock's meaningful insider ownership, shareholders can rest assured that Nvidia's CEO Jen-Hsun Huang and the rest of his team are working hard to ensure that the company is doing all it can to release shareholder value.
The Bottom Line
For now, Nvidia represents a rare opportunity in which investors can get a high quality, strong growth company without having to overpay for its stock.
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