Nvidia is the world's biggest maker of high-end gaming GPUs. Dominating this market insulated Nvidia from the global slowdown in PC sales, since high-end gamers are generally more keen on upgrading their GPUs than business or casual users. Gaming GPUs still generate the lion's share of Nvidia's revenue, but it's also been expanding into adjacent markets like connected cars and data centers.
In connected cars, Nvidia's mobile Tegra CPUs power infotainment and navigation systems. It also offers a "driverless supercomputer," the Drive PX platform, which helps automakers produce autonomous vehicles. In data centers, major partners like IBM are installing its high-end Tesla GPUs alongside their CPUs to boost machine learning and AI-related tasks. That's because GPUs, with their rapid floating-point calculations, often process those tasks faster than comparable data center CPUs like Intel's (NASDAQ:INTC) industry standard Xeon chips.
Nvidia's strength across all three businesses fueled its double-digit annual sales growth over the past three quarters. Analysts expect Nvidia's revenue to rise 22% this year, compared to just 7% growth last year. Earnings are expected to soar 71% this year, compared to a 4% decline last year. Those near-term numbers look solid, but Nvidia's sales and earnings are only expected to respectively rise 7% and 4% in fiscal 2018. That's mainly because the chipmaker's cross licensing deal with Intel, which feeds it $66 million per quarter in "free revenue", is set to expire in early 2017.
Nvidia trades at 44.5 trailing earnings, 35 times forward earnings, and about 6 times its enterprise value of $32.8 billion. Nvidia's P/E multiples might not look cheap, but they're actually much lower than the industry average of 75 for specialized semiconductor companies, and compare favorably to its aforementioned growth rates.
Looking ahead, analysts expect Sierra's annual earnings to grow at an average rate of 16.5% over the next five years. This gives the stock a 5-year PEG (price-to-earnings growth) ratio of 1.7. Since a PEG ratio under 1 is considered "undervalued", Sierra doesn't look cheap relative to its earnings growth potential yet. Nvidia's annual earnings are expected to rise 23.7% during that same period, which gives it a slightly cheaper (albeit not undervalued) PEG ratio of 1.6.
It might be tempting to buy Sierra Wireless as a turnaround play on the Internet of Things, but the stock could remain under pressure if headwinds persist. Meanwhile, Nvidia has already had a great run over the past year, but its valuations suggest that it could still have room to run. However, investors should be mindful of the expiration of the Intel cross-licensing agreement, which could result in unfavorable year-over-year comparisons next year.