Is NVIDIA Corporation (NASDAQ: NVDA) Currently Overpriced?

January 08, 2018, 18:17 pm ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

NVIDIA Corporation (NASDAQ: NVDA) has had a good run in 2017 with its stock price rallying by about 90% while at the same time growing its overall revenues by 36%. The tech company currently trades at a P/E ratio of 49.33, which many investors might consider quite expensive given that the S&P average is about 25.25.

Article Summary

NVidia has had a terrific 2017, but some think it is currently overpriced.

The company registered double digit revenue growth in 2017.

All of NVidia’s business units are growing, which creates value for shareholders.

Here’s the trading report on NVDA.

A deeper analysis of NVidia’s business segments indicates that its smallest business unit serving the datacenter industry delivered the largest increase in revenue by generating 100% growth in revenues. The company’s Graphics Processing Unit business segment contributes the biggest portion of its revenues clocking in at 84% of Q3 revenue, which might affect the company negatively due to slowing future GPU demand.

The company’s gaming business segment still accounts for the biggest share of revenue contributing 59% of total revenue in Q3, but growth in this segment is slowing down. This segment registered 26% growth in the latest quarter as compared to the 50% growth recorded in a similar period over the last fiscal year.

NVidia has proven to have an extremely resilient business model given that it recently fended off Advanced Micro Devices, Inc. (NASDAQ: AMD) foray into the GPU market. The company has also demonstrated its resiliency in the highly volatile cryptocurrency market to post significant revenue growth in its datacenter business.

The company currently enjoys high margins of about 44% in the gaming segment, which it is expected to maintain into the future, despite the slowing growth in gaming. The datacenter business has even higher gross margins pegged at 75% and given that this segment is expected to grow significantly in the future, the company is set to reap big from its datacenters.

The growing cloud services market is good for NVidia as this translates into growing demand for its datacenter chips, which currently constitute a small portion of the company’s overall revenues. However, given that the cloud services industry is dominated by a few large companies, this might cause some supply chain problems in future, which could affect NVidia’s margins.

The company has also invested heavily in artificial intelligence, which is used in developing chips for driverless cars in the automobile industry, and has significant growth potential.

NVidia’s future growth prospects justify the premium factored in to its current stock price, which implies that it is fairly valued.

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