On Thursday, shares of Nvidia (NVDA) were $67.77, and on Friday, following their Q3 results/Q4 guidance, the stock closed at $87.97, up 30%. There was no M&A, or corporate action, just the earnings report that saw earnings rise 104% year over year, and 77% sequentially on a 54% yoy sales jump (40% sequentially).
Prior to the report, the options market was implying only an 8% move in either direction, which was actually shy of the 11% average over the last four quarters.
The stock gained nearly $14 billion in market capitalization, 2x their expected f2017 sales, on single beat and raise. For those keeping track at home, even after Friday’s ramp, NVDA still trades at a discount to a handful of the largest price to sales multiples we’ve seen during the rash of M&A in the semiconductor space over the last 18 months:
INTC’s $17bn bid for ALTR last year,and ADI’s recent $15bn bid for LLTC, both about 10x trailing 12 month sales of about $1.5bn.
As the deals have gotten larger (aside from Softbank buying ARMH for a price equal to 22x sales!), multiples have tempered a bit, with Qualcomm’s (QCOM) recent $47 billion bid for NXPI at about 5.5x trailing 12 month sales. NVDA trades at a premium to some of the multiples of 2015 and early 2016 deals, but as the deals have gotten larger, and the list of likely suitors smaller, investors appear to be treating NVDA with a unique scarcity lens.
So how is that analysts and investors were caught so off-sides? Aside from a massive quarter in their core graphics chip business, NVDA “datacenter” sales (think AI & machine learning), were up 300% year over year in the quarter and their “automotive” segment (think self driving cars) was up 60% yoy.
Back in early October, when the stock was a tad lower, we tried to hone in a bit on what was causing the parabolic move in NVDA off of the 2016 lows (Graphic Novel) and the $200 billion in semiconductor deals since the start of 2015 that had been increasingly focused on machine learning, AI, virtual/augmented automotive and Internet of Things:
Back in July, on his firm a16z’s July 10th podcast (Software Programs the World), famed VC Marc Andreessen suggested that NVDA has “seemingly overnight become the leader in chips for AI”, going on to say that “every sharp AI entrepreneur that comes in (to their VC firm) is now building programs on NVDA chips”.
The stock has a $36bn market cap ($3.3 billion in net cash), about 6x its expected f2017 sales . Oddly, consensus estimates only have eps growing 12% in f2018 (next year) on a 7% yoy sales increase. Either consensus is very wrong, and Andreessen’s observations are yet to be fully factored in for growth in AI chips, or the market is way over paying for takeout potential.
I guess Andreessen nailed it (again), when a publicly traded company “seemingly overnight” finds itself at the forefront of a massive secular shift in computing, and there is a scarcity value in the public markets, you just need to get on board and ride the wave. I would have said this last week when the stock was up only 175% from its 2016 lows (now up 250%), that the stock just might be discounting a bit of good news 😉