Summary
NVDA delivered strong returns over the past half decade mainly attributable to Bitcoin and other cryptos.
Growth in gaming also contributed and remains strong growth driver.
GPUs and image processing remains key growth sector in tech due to AI and NLP development.
Past share price growth is justified and we see robust growth potential ahead.
Nvidia (NVDA) has been popular with PC gaming enthusiasts over the past years, with me myself acknowledging the merits of dedicated graphics cards NVDA had produced for PCs and laptops.Th However, NVDA has successfully expanded its original business from producing personal computing graphics cards (GeForce GPU series) towards different personal and commercial markets, namely in autonomous cars, artificial intelligence (NYSE:AI) and cloud computing.
Looking at the business model of NVDA, personal computing remains as the largest revenue segment for NVDA, contributing 59.21% as of Q3 FY2018. GeForce remains as the top choice for gamers and high-end personal computing users, with about 70% market share in the discrete GPU market, well ahead of rival AMD (AMD). The growth in this segment over the past years can be mainly attributed to the rise of the gaming industry, with higher demands of graphics and image processing, as well as the appearance of cryptocurrencies, which rely on the extra computing memory and speed generated by graphics cards. This segment will still see robust growth as demands for personal computing power remains strong, while the PC gaming industry is still experiencing high growth, with the total value of the industry expected to reach about $34 billion in 2019, up from $25 billion in 2015 (Source: Capcom, International Development Group). Obviously the volatility of cryptocurrencies as well as the speculative bubble of the market might pose as a major downside to the personal GPU market and for NVDA, but as NVDA becomes more diversified in their business portfolio, this downside risk will also become more detached from NVDA's share price performance.
What we believe that lies ahead for NVDA is the potential growth in the AI-related market, which NVDA has the technology and the strong competitive advantage around it. Different areas within AI development, such as machine learning and deep neural learning, as well as the different processes of AI development, such as data management, training and inference, will become key revenue growth drivers for NVDA as they already possess the relevant infrastructure. NVDA's Tesla series are popular among many cloud computing giants, including Alibaba (BABA), Baidu (BIDU) and Tencent (OTCPK:TCEHY). Revenue growth has just started, with a 109% YoY increase for this segment in Q3 FY2018. The recently launched Volta HGX Partner Program further allows different tech firms to work with NVDA under NVDA's existing chip designs, integrating NVDA and the firms' R&D processes and streamlining the various commercial applications of the GPU infrastructure of NVDA.
Even though Uber faced scrutiny over a fatal crash last week, the autonomous vehicle market remains robust as R&D efforts by different technology firms and car manufacturers remain strong. NVDA has a dominant lead in this market with their DRIVE PX series. Even though revenue growth was the smallest among all business segments, the fact that NVDA has built partnerships with over 70 companies shows that NVDA has the strong competitive advantage in providing optical sensors and image processors for the revolutionary growth potential in the transportation industry. Among these 70 include BMW (OTCPK:BMWYY), Tesla (TSLA), Bosch (OTC:BSWQY) and Toyota (TM). The only significant competitor of NVDA in the autonomous cars market is Ambarella (AMBA), which had stepped up efforts in developing image processors recently with the launch of the CV1 and CV22 SoC solutions.
Obviously, the share price that has rocketed over the past years have held investors back into entering the market, but we see significant growth potential in the AI market, where NVDA is already dominant in the preliminary infrastructure.
Revenue growth has been dwarfed by share price growth, unlike its main competitors, but we reiterate the fact that NVDA has built a strong dominance within the AI infrastructure market and the partnerships it has developed can secure revenue growth potential within this market.
Looking at the returns, the share price growth seems to be warranted with strong profitability, unlike most growth tech firms. Its consistently strong earnings also reflects its strong business fundamentals, something that we have already admired in NVDA's peer, Intel (INTC).
Lastly, with strong financial health and safe amounts of cash available from operations, we see more opportunities for NVDA to continue step up capex and invest more in R&D efforts. This could unleash more growth potential in the high-growth areas outlined throughout this article.
We are forecasting NVDA to rise to $275 in the next 12 months and we are rating NVDA as a BUY. This target price is computed via a 5-year cash flow model and our keu assumptions include materialisation of AI infrastructure development, continuous testing and implementation of autonomous cars and robust gaming industry. We have gradually reduced the impact of cryptocurrency volatility towards the revenue growth of NVDA in our forecasts.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
NVDA delivered strong returns over the past half decade mainly attributable to Bitcoin and other cryptos.
Growth in gaming also contributed and remains strong growth driver.GPUs and image processing […]