The shares of Nvidia Corp. (NVDA) are drifting lower in after-hours trading on May 21, following powerful quarterly results, and healthy forward fiscal guidance. The stock has had a tremendous move higher off the lows, with the shares nearly doubling since the middle of March. However, with expectations sky-high based on the stocks recent rally, it seemed the bar would be impossible for the company to beat.
It makes the mild after-hours pullback not all that surprising. It may even lead to a further decline for the near-term, which should not be too steep.
The company’s results were dazzling, reporting revenue of $3.08 billion, which was better than analysts’ consensus estimates of $2.98 billion. Meanwhile, earnings beat by a wider margin coming in at a non-GAAP $1.80 per share, versus estimates of $1.68 per share. Second-quarter revenue guidance was better than expected as well, coming in at $3.65 billion at the mid-point versus forecasts for $3.15 billion.
The company’s results were driven by a massive 80% jump in data center revenue, which climbed to $1.141 billion versus last year. The business also saw growth of 18% on a sequential basis. The gaming unit was strong, too, rising by 27% year-over-year to $1.339 billion. However, revenue for the unit was down 10% sequentially.
The stock has risen off the March lows in anticipation of the strong data center results as many companies had to sink more resources to giving workers the ability to do their jobs remotely. This trend is likely only to continue into the foreseeable future, and that could help to push the data center business to even higher levels in future quarters. It is one of the key reasons why the stock has risen so sharply in recent weeks.
The question remains if the stock can continue to rise. That may simply depend on one’s time frame, as the short-term outlook doesn’t appear to be as bright as the longer-term. The stock is trading at 38 times one-year forward earnings estimates, which is Nvidia’s highest one-year forward PE ratio since early 2018. It could suggest that the stock’s valuation is slightly ahead of itself at the moment.
Additionally, the technical chart does show the shares have hit overbought levels based on the relative strength index, which is currently around 70. Should the stock pullback, there is a healthy level of support around $317.
As long as the company can continue to provide strong results and have it’s gaming and data center units deliver the results needed to support its earnings multiple, then the shares should benefit longer-term.
Michael Kramer is a financial market strategist and the portfolio manager of the Mott Capital Thematic Growth Portfolio.
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