The shares of Nvidia Corp.’s (NVDA) surged higher by over 7% on February 14 following blowout fiscal fourth quarter 2020 results. The company saw blistering growth out of its data center and gaming units. The better than expected quarter has caused analysts to boost their growth estimates for the first quarter and the full-year 2021.
The shares gapped higher following the results, reaching their highest price since October 2018, while closing in on its all-time highs. The age-old question for Nvidia is where the shares go from here, and while the stock has soared back from the abyss, the road forward is likely to be more challenging, as valuation and profit-taking come in to focus.
Data Center and Gaming
Data compiled from Nvidia’s quarterly results
Nvidia’s gaming unit had a growth rate of 56% in the fourth quarter, with revenue rising to around $1.49 billion. However, that is still more than 17% off the unit’s high-water mark of approximately $1.81 billion in the second quarter of 2019. Meanwhile, data center revenue rose by 43% to a record high of around $968 million, surpassing the previous record of $792 million in the third quarter of 2019.
The healthy growth helped the company to deliver better than expected revenue of about $3.1 billion, which was around 4.2% higher than analysts’ estimates. Meanwhile, earnings topped estimates by almost 13% at $1.89 per share. The company also issued revenue guidance of $3.0 billion at the mid-point of the range for the fiscal first quarter of 2021, higher than forecasts of about $2.85 billion.
Revenue vs. Estimates
As a result, analysts are now looking for full-year 2021 revenue to rise by more than 22% to approximately $13.4 billion, which is higher than previous estimates for a growth rate of around 17.8%. Additionally, earnings are now forecast to rise by about 35% to $7.82 per share, up from prior estimates for a growth rate of 24.8%.
However, 2021 is a rebound year for Nvidia, and the fast growth rate reflects what was a disappointing fiscal 2020, with earnings dropping by nearly 18% to $5.58 per share, and revenue falling by almost 7% to around $10.9 billion.
The Shares Are Not Cheap
It is critical because as earnings normalize for the company, growth is expected to slow in fiscal 2022 to 18.5% and 15.4% in 2023. Meanwhile, revenue growth is forecast to slow to 14.6% in 2022 and to 13.1% in 2023. It likely means that Nvidia’s stock which is currently trading with a one-year forward PE ratio of 31.2, is not cheap when adjusting for growth.
The current 3-year compounded annual earnings growth rate for Nvidia is around 22.7%, which includes the significant rebound in 2021. It means the stock trades with a growth adjusted PEG ratio of about 1.4, which comes on the higher side of the fairly valued range between 1 and 1.5. However, take out that 2021 earnings growth rate and the average rate of growth slows to 17% for 2022 and 2023, and suddenly the PEG ratio gets pricey at nearly 1.9.
A Wall Of Sellers
The stock gapped higher on February 14 and is likely to face a tremendous amount of technical resistance at the $293 region, which was the previous highs. Volume was substantial at more than three times its 90-day moving average, and it would suggest that plenty of sellers still likely reside at these higher prices. Should the stock drop, it would fall to a region of technical support around $273, filling the gap created following the results.
However, should the stock rise, a projection of its advance from February 3 through February 13 indicate it could climb to around $315.
There are still plenty of questions for Nvidia left unanswered, such as when the company will close its acquisition of Mellanox Technologies Ltd. (MLNX) and its potential impact on revenue and earnings. If one thing is for sure, Nvidia’s path higher this year is likely to be more challenging then the path last year.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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