Nvidia (Nasdaq: NVDA) has been one of the leading stocks of the tech-fueled bull market over the last decade. It builds the chips that power some of the most innovative and fastest-growing parts of our economy including cloud computing, video games, AI, autonomous driving, and crypto.
The coronavirus has led to an acceleration in cloud and IT spending which has led to additional demand for Nvidia. This quarter was also noteworthy in that Nvidia's data-center business surpassed gaming as its largest source of revenue.
Inside the Numbers
In the second quarter, Nvidia reported $2.18 per share in earnings which were above consensus of $1.97 per share. It was 13% above the previous year. Revenue was $3.87 billion which was above consensus of $3.65 billion and 50% above last year's Q2. This marks an acceleration in revenue growth as revenue growth was 39% in the last quarter.
Its gaming unit produced $1.65 billion in revenue which was 26% higher, and data center revenue reached $1.75 billion which represented 176% growth. The company's main customers for its graphic processors that power data centers are the leaders in cloud, who are also growing between 30% and 60%, like Google (Nasdaq: GOOG), Microsoft (Nasdaq: MSFT), Amazon (Nasdaq: AMZN), and Alibaba (NYSE: BABA).
Its results were also helped by its recently completed deal to purchase Mellanox which makes ethernet switches and other networking equipment. Mellanox accounted for 14% of Nvidia's revenue in the quarter. The company is also reportedly in discussions with ARMS about an acquisition.
The company also issued guidance above expectations for the second half of the year on strong gaming demand. For the third quarter, Nvidia expects $4.4 billion in revenue which is above expectations of $3.97 billion. Additionally, Nvidia is planning to release GeForce, its next generation of gaming graphic chips.
Stock Price Impact
Nvidia's stock is 5,700% higher over the last decade and 182% higher since its March low. It has all the makings of a leading stock in this bull market like Tesla and Alibaba given strong gains, exposure to the most innovative and rapidly growing industries, and a consistent track record of increasing sales and earnings.
In terms of valuation, the stock has very high multiples but given these positive trends, it will grow into these numbers. Many of the best gainers of all-time started with high multiples and ended their bull runs with attractive multiples. Currently, NVDA has a forward P/E of 50 and expected earnings growth of 22% over the next 12 months.
Of course, the challenge is that stocks with high multiples can have steeper declines when they fail to meet these lofty expectations. In the short-term, it's hard to imagine what could alter Nvidia's trajectory. The biggest risk to the economy is the coronavirus but that turned out to be a net positive for Nvidia. It's possible the economy could slow which would affect demand from businesses but it's survived this situation as the economy has been decelerating over the last 2 and a half years.
It actually led to increased investment and higher multiples for Nvidia, since it was one of the few growth opportunities in the market during a period of abundant liquidity. So, the biggest, short-term risk to Nvidia and the other growth stocks is probably an acceleration in overall economic growth which would lead to a rotation from high-multiple, tech stocks into cheaper, cyclical stocks.