11 Nov Nvidia, Disney, and Micron – The Week In Review
Nvidia, Disney, and Micron – Where To Next?
Earnings season is officially complete, with the last group of big companies reporting this week. Nvidia ($NVDA) and Disney ($DIS) finished things off on Thursday. Both stocks rallied sharply following results. Nvidia shares were boosted by its strong results, while Disney shares moved higher on perception.
Nvidia’s strong results continued to dazzle investors and helped to boost the stock, with shares now up over 100 percent on the year, and nearly 980 percent over the past 3-year. The rise in the shares has been breathtaking, and the nay-sayers, myself included, have been taken to school. How much further the stock can continue to rise over time will be the biggest question, at some point Nvidia will stop increasing. Every company goes through a transition period from hyper-growth into a more mature growth company. It is undoubtedly hard to commit new money to a stock with such significant gains, but making decision’s like that is the reason why investing is just so hard. But one could have made the same argument a year ago.
One of the most significant issues I have had with Nvidia in the past and continue to have is that the market doesn’t typically give chips companies a considerable multiple, because of the cyclical nature of the business. But to this point, the market has allowed Nvidia, to trade at an earnings multiple, multiple times more than its peers.
Nvidia is quickly catching up to Intel, in terms of market cap, with a market cap nearly $130 billion to Intel’s $214 billion. But Intel trades a one-year forward price to sales ratio of 3.3 to Nvidia’s 12, while trading at a one-year forward earnings multiple of 14 to 43, respectively.
Surely a good part of that higher multiple for Nvidia is because of earnings and revenue growth. As one can see in the chart below, Intel is not expected to grow revenue nearly as quickly as Intel. But still, Intel’s revenue is five times more than that of Nvidia’s, but yet Nvidia trades at almost 60 percent of Intel’s Market value.
Nvidia would have to grow incredibly fast over the next three to four years to get anywhere close to Intel’s revenue totals, assuming Intel doesn’t improve itself.
Is the market valuing Nvidia differently, because it perceives Nvidia as having a much more extended growth runway ahead of it? Or is the market valuing Nvidia separately because it doesn’t see Nvidia falling victim to the cyclical nature of other companies in the business?
I guess we will find out eventually.
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Suddenly the market seems to have started valuing Disney differently because otherwise, its results on Thursday should have made the stock price fall. But the market is beginning to see Disney as a direct to consumer streaming company that is cheap, trading at 16 times one-year forward earnings. Netflix, on the other hand, trades at nearly 83 times. So just how much is Disney worth? There aren’t many pure-play streaming media companies around other than Netflix. But Disney could easily trade at 20-25 times one-year forward, given its domestic and international opportunities for streaming subscribers.
At 20 times 2019 earnings estimates of $6.56 Disney stock would rise to about $130. Then add in the corporate tax cut that is expected to come, and Disney could be earning much more than $6.56 in earnings, given its effective tax rate of over 30 percent, and Disney could have a substantial earnings tailwind coming its way.
Finally let’s take a look at Micron, as its shares just continue to rise in 2017, now up over 100 percent. Most amazing is the Micron’s 6.8 one-year forward PE ratio. Talk about the market giving a discount to a business that has a very cyclical nature.
Micron shares are hitting resistance currently, that date back to July of 2001, but if its shares $45, then a move towards $50 seems very likely.
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Michael Kramer and the clients of Mott Capital own shares of DIS
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