It wasn’t that long ago that Nvidia Corporation (NASDAQ:NVDA) looked like a disappointing investment. In 2013, NVDA stock spent April hovering in the $12-$13 range. It traded at barely half of an early 2011 peak. In fact, NVDA had only doubled off financial crisis lows, at a time when most tech stocks, in particular, had rebounded much more sharply. Trading volume in Nvidia stock was declining as well, as investors looked to more exciting, more promising opportunities.
Four years later, the story surrounding NVDA stock is very different. It is up about 700% from those 2013 levels. It’s one of the more-covered tech stocks, with volume to match.
Growth opportunities in gaming, automotive and data centers have given Nvidia stock the promise, and excitement, it lacked earlier in the decade. In response, its earnings multiple has expanded steadily, as investors price in future increases in sales and earnings.
But as I continue to have grave concerns about NVDA stock from a valuation standpoint, it’s worth looking at what exactly has changed for Nvidia as a business over those four years. And, looking backward, my core concern remains.
Growth Everywhere — But Mostly in Gaming
With NVDA coming off a fiscal year 2017 (ending Jan. 29) where revenue increased 38% — including 55% in Q4 — it’s easy to forget that sales were declining not that long ago. But Nvidia’s FY 2014 revenue did decline year-over-year, falling 3.5%.
Since then, the trajectory has changed — and notably so. Over the past three years, according to SEC filings, Nvidia has grown revenue 67%, or $2.78 billion. Data center and automotive end markets have grown sharply. Datacenter revenue has more than quadrupled, to $830 million. Automotive market sales have nearly quintupled, jumping from just $99 million in FY 2014 to $487 million last year.
But, perhaps unsurprisingly, most of the growth has coming from the gaming business. Gaming-related GPU revenue has increased 169%, and some $2.58 billion on an absolute basis. In contrast, automotive and data center market sales have added just over $1 billion to Nvidia’s total revenue.
Those gains have been offset by declines in OEM & IP segment revenue. That business represents sales to PC manufacturers like HP Inc (NYSE:HPQ) and Dell Technologies Inc (NYSE:DVMT). Those sales have been declining steadily; per figures from the most recent 10-K, PC OEM revenues have fallen 41% in just the last two years.
Meanwhile, IP revenue is set to tumble, as the cross-licensing agreement with Intel Corporation (NASDAQ:INTC) has expired. That agreement contributed $264 million in revenue in each of the last two fiscal years; after a $44 million recognition in Q1, it will fall off of Nvidia’s P&L.