When people think of stocks gaining hundreds of percent in one year, most envision a newfangled small-cap tech firm pushing the latest social media extravagance. But there is one company that has gained over 200% year-to-date and was just chosen as the Yahoo Finance Company of the Year, and it makes good old fashioned hardware. It's been around since 1993, went public at the height of the 90s Tech Bubble at an IPO price of $12 per share (equivalent to split-adjust price of $1.64). By the end of 2014, shares had climbed to a price of $20.05, and by the end of 2015 they were $32.96, an increase of nearly 64% year-over-year. Apparently, 2015, was just a prelude to 2016, because as of December 20th, 2016, shares closed at a price of $105.17, an increase of 219%. If you guessed we were talking about NVIDIA (NVDA), you got it right.

NVDA had a bumpy start to 2016, like the rest of the market, and shares had fallen to about $25 by mid-Febraury. After that, the stock bolted higher and never looked back. This is a great example of a growth stock that piled on quarter after quarter of estimate-crushing performance. As a result, the share price just kept rising until it hit today's lofty valuation of nearly 40x fiscal 2018 EPS estimates of $2.71. Yes, not cheap on a foward P/E basis, but sometimes there are other things to consider than just P/E. According to Nasdaq data, in fiscal 2014 NVDA earned EPS of $0.74, followed by $1.12 in 2015 and $1.08 in 2016. In the first three quarters of fiscal 2017, the company reported EPS of $1.59. According to the website Estimize, the analyst consensus for fiscal Q4 of 2017 is $0.85. If NVDA hits estimates, the company could have EPS of $2.44. That would be earnings growth of nearly 125%!

The market has always asked "what have you done for me lately?" So here's the question: is NVDA worth 40x's fiscal 2018 EPS? Well, I'd have to say No. Not if the current analyst are correct, which by the way they haven't been. The consensus thus far as been way too low. Analysts expect the company to earn $2.71 in 2018, as I mentioned earlier. That would be growth of only $0.29 in EPS, or 11%. If we used a PEG ratio, it would be at nearly 3.6, which is very high. For the company to justify a 40 forward P/E it would need to be growing earnings almost 40% if we use a PEG model, that would put EPS closer to $3.40 rather than the consensus figure of $2.44.  

Goldman Sachs and Mizuho Securities both reiterated their buy ratings on NVDA on December 20th. Goldman sees shares climbing to $129 and Mizuho see shares going to $115. According to the website Tipranks, the average analyst price target on NVDA is about $98. Goldman Sachs has the highest price target at $129, and Barclays has the lowest price target at $72.

The problem with success is that the market starts to expect it every time, and not all revenue and EPS beats are created equal. Unfortunately, NVDA's success could get in its way. Investors might not be satisfied with merely beating the consensus; now only monster beats might please Wall Street. What's a monster beat? Take NVDA's Q3 results: analysts were expecting revenue of $1.68 billion and EPS of $0.57, according to Estimize. NVDA delivered revenue of $2.00 billion and EPS of $0.94, and that is the very definition of a monster beat. Lofty valuations demand incredible beats and the more successful the company becomes, the harder it becomes to satisfy needy investors.

Another word of caution: short interest, which as of November 30th was nearly 71 million shares out of a float of approximately 515 million shares, or 14%. The one thing I have learned about people who short stocks when they have infinite losses at stake, they know the story very well because the losses can be devastating. Go back to 2008 and ask the people who were short shares of Volkswagen, one the legendary short squeezes. Remember, when a trader wants to short sell a stock they have to borrow shares, which means they are paying a long investor a stock loan fee. Indeed, shorting is not for the faint of heart.

The moral of the story is that when you get into the best-performing stock from a one year to the next, a lot can change. If a valuation seems high, often it is high. And in my opinion, it isn't different this time. NVDA had a strong 2016 because the business significantly picked up and that trend must continue in order for NVDA's share price to rise further in 2017. Then there's managing the Street's expectations, which can be impossible to predict. Just remember, when emotions get involved, all logic goes out the window.

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.