Year to date, shares of Nvidia (NVDA) are up an astounding 180% -- and up 37% in the last month alone. Is this stock too hot to handle?
I have been bullish on Nvidia for a while. Back in August, I thought the stock could reach $65. But after an incredible third-quarter earnings report, it seems Nvidia is too hot to handle right now. I would wait for a pullback.
Two weeks ago, Nvidia reported third-quarter fiscal 2017 earnings of 94 cents per share, 26 cents better than the consensus estimate. Earnings per share rose 104%. Revenue jumped 53.6% to $2 billion, vs. the $1.69 billion consensus figure. Revenue rose 40% sequentially!
Gross margin was 59%, up 270 basis points year over year, and up 110 basis points sequentially. Operating income jumped 161% to $639 million.
PC gaming was up 63% to $1.24 billion, driven by the release of its new Pascal-based gaming products. The Pascal products replace the older Maxwell platform. The company claims to have over 100 million gamers using one of its platforms. At its most recent investors' day, management said 70% of the market needs to upgrade. It's taken gamers about three years to move to Maxwell, so the Pascal platform could be a hit for a long time to come.
Data center revenue rose 193% to $240 million. Nvidia's new Tesla/GRID graphics processors are increasingly taking over artificial intelligence, deep learning and supercomputing markets.
Professional visualization revenue rose 9% to $207 million. Engineering, architecture and the entertainment industries are all rapidly adopting the company's solutions for real-time rendering.
Automotive revenue jumped 61% to $127 million. Nvidia's embedded processors are providing artificial intelligence processing for autonomous vehicles. The Xavier platform and the Drive PX2 autopilot system allow carmakers to collect and process tremendous amounts of sensor data while the car is moving. The platform also allows carmakers to display high-definition mapping and navigation systems within the automobile.
The Drive PX2 platform will power a new autopilot system in Tesla Motors' (TSLA) entire roster of factory-produced vehicles -- the Model S, the Model X and the upcoming Model 3.
The OEM and intellectual property segment fell 6% to $120 million.
Nvidia announced it would raise the quarterly dividend from 12 cents to 14 cents per share and would launch a $1 billion stock buyback plan. In fiscal 2018, the company plans to return $1.25 billion to shareholders.
Besides revenue growth, Nvidia is a gross margin expansion story. The company has a tremendous opportunity to increase its margins. The company's Pascal graphic processors are some of the most difficult semiconductors in the world to manufacture. Gross margins should drift up over time as the company's manufacturing partner, Taiwan Semiconductor (TSM) , gets better yields through their fabs. I can imagine non-GAAP gross margins going from 55.8% in fiscal 2015 to over 60% by fiscal 2019. Likewise, operating margins should expand from 20.4% to 35% by 2019.
I remain bullish on Nvidia, but I would look for a pullback to add shares.
Gaming is 62% of the company's revenue, so despite the Wall Street spin of artificial intelligence, the company is still a gaming upgrade story.
Earnings are growing so fast, so it's hard to pin a valuation on the shares. Momentum investors are in control. This stock is too hot to handle right now. Wait for a pullback.