Saul and I have been discussing NVDA off-board. Saul, sold much of his position, I think mainly because he sees better opportunities. I can’t argue with that because there are some pretty great opportunities out there. One concern was that revenue growth had slowed from the 50+% last year to around 33% from the past 2 quarters. I was not concerned about it because the midpoint of guidance showed a rebound to 50% growth for Q1 2019. I also thought that the past 2 quarters were light in large part to a lack of inventory for NVDA to meet all the gaming demand. The pent up demand that Huang was always taking about. Gaming still makes up the lion’s share of NVDA’s business. And did it rebound, showing 68% growth last quarter. Total revenue was not up 50%. It was up 66%. This kind of growth for such a huge company is enormous. Y/Y EPS growth was up 141% and full year EPS growth was up 77%. The guidance is for 39% Y/Y revenue growth next quarter. I’d guess that they will beat that. So let’s not look at just one quarter because there was a bump in Q1 due to inventory issues in the quarter prior. It looks like NVDA is still growing revenue at around 50-55% on average. Q1 + Q2 is expected to bring in $6.3B and the second half tends to be stronger than the first half. Management said that they expect that again in FY2019. So at guidance H1 grows revenue at 51% over the prior H1. At 50% growth in H2 we can expect total FY2019 revenue of $14.6B. Yeah, it should be a great year again.
Now I haven’t listened to the entire call yet, but I suspect that the stock is trading down after hours because so many people are in NVDA because they link it to cryptocurrency. Q1 crypto-related revenue was $289M. And the CFO says that NVDA expects Q2 cryptocurrency revenue to be about 1/3 of Q1 which would be $96M. This is no doubt highly disappointing to people who bought NVDA because they think they will get rich from the crypto mania. My opinion is that they are wrong that NVDA is tied to crypto, only 9% of total (next quarter crypto revenue will be 3% of total if the guidance is right). Management has said many times that this is not the case. Even Cramer makes the argument. Seems obvious. The P/E is about 41 but as Tinker has pointed out, and I agree with him, the P/E after this year is done will be substantially lower assuming the stock price doesn’t move. $10 adjusted EPS is probably a good guess. The P/E that the company deserves will depend on what NVDA can deliver in FY2020. Can they keep growing at the 50% revenue growth rate? Hmmm. Let’s see what growth opportunities are ahead:
Gaming still strong. I think it can remain strong. There will be cool games that will have more advanced graphics and will require faster GPUs for the gamers to realize the benefits. Real-time rendering! Could VR in games require even faster GPUs? Gaming growth could be very strong for several years.
Datacenter. The AI revolution is still in early innings. Data center revenue grew at 70% last quarter. That was down from more than 100% in the prior quarters. It seems to be slowing but, as its base is now bigger, it will contribute more to the overall growth rate. Datacenter growth is still well above the average growth.
Autonomous. Still small. Still in development. Once the cars start hitting the road in a couple of year, I think we will see very fast growth.
The edge. This is, I think, the biggest of all the opportunities. AI is happening in datacenter now. Some in private (on-prem) systems, but AI is not yet in the millions of devices that it will be in. I think this where the world is heading. There will be all kinds of small, mobile, autonomous machines and they will require a brain. I think NVDA will be the vendor of these brains. Autonomous cars are just one use case of many. This is probably the main reason why I own NVDA.
So if growth is ahead and NVDA will earn $10 in EPS in FY2019 then what multiple should it deserve? I would say at least 30, maybe 35 or even 40. Share count is not increasing due to their buybacks (BTW buybacks will probably be over $1B in FY 2019) and they even pay a small dividend. So by next January, I think the share should be worth $300-350. Maybe even $400. That would be a 20% increase at the low side and if the P/E is maintained then we are looking at 60% upside. My guess is that it will probably end up somewhere in the middle in 9 months from now (absent some large tech or market selloff).