NVIDIA Corporation: Will the Stock Bounce Back?

NVIDIA Corporation (NASDAQ: NVDA) was one of the biggest losers in 2018. The stock is down 35% in the past year as investors were over-optimistic of the company’s growth.

The company released its fourth-quarter and full-year FY 2019 results on February 14, 2019. 4Q revenue was down 24% year-on-year to $2.21 billion. Full-year revenue was up 21% to $11.72 billion. However, growth was lower compared to 38% growth in FY 2017 and 41% in FY 2018.

The gaming segment revenue was down 45% year-on-year to $954 million, mainly due to inventory adjustment as demand for graphics processing units from Crypto miners has been falling. The company expects channel inventory to stabilize in the next couple of quarters. Slowing demand in China also contributed to lower sales and consumers are delaying the purchase of high-end RTX GPUs as they await lower price points and want to see the actual technological gains from the advanced GPUs.

Data center revenue for the fourth quarter was up 12% to $679 million and for the full year it rose 52% to $2.93 billion. The revenue growth has been slowing but the growth is still in decent double digits. This segment would be a growth driver in the future as the company has expertise in high-performance computing. There is still room for the company to grow in the artificial intelligence segment.

Pro visualization revenue rose 15% to $293 million and for the full year, it was up 21% to $1.13 billion. The company was also able to win new contracts from Boeing, Google, and Toyota for the applications in AI and robotics technology.

Automotive segment revenue was up 23% to $163 million and for the full-year revenue it grew 15% to $641 million. Autonomous vehicle and next-generation AI cockpit solutions will be the growth driver in this segment.

The stock is currently trading at a P/E ratio of 25.45 when compared to a P/E ratio of around 50 during the beginning of 2018. The tech sell-off also affected NVIDIA stock. Investors got over carried with the company’s growth rate. However, reality stuck as chip stocks were punished badly due to the trade wars and also the slowing global growth. Another reason for the sell-off was the fear of rising interest rates.

Nvidia Corporation’s management expects its revenue to fall 31% to $2.20 billion in the first quarter of FY 2020 because of inventory pileup of GPU inventory.

The company returned $1.95 billion to shareholders in FY 2019 and plans to return $3.0 billion in FY 2020. The company’s cash flows have been stable.

Risks: If the Chinese economy slows down it would have an impact on the company’s revenue. Trade wars are another concern.

Conclusion: The Company’s growth is expected to slow down. However, the valuations are reasonable for long-term investors who are ready to take lower profits than the last rally.  Some of the fears like interest rate hike and trade wars which led to the sell-off are now waning.

In the words of NYU Professor Aswath Damodaran, “I’m still waiting to get back to $145. I might never get there, but I like the company,” he said on “Fast Money.” “I mean, I think that there is a real chance growth can drop off next year, but I think long term I would still buy the growth in that stock at the prices that you get them for today.”

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