Nvidia Stock Analysis: Deep Dive

Nvidia is the largest GPU player in the world. Is it a buy/hold/sell? Lets dive in!

About

Nvidia is the leading Graphics Processing Unit GPU maker in the world. Nvidia is known for making the best high-performance GPUs for gamers, 3D artists, creative designers, developers, IT professionals, and researchers. The company was established in 1993 and currently has approximately 22 500 employees. 

Key financials:

• Market cap: 465B USD
• P/E ratio: 50.7
• Dividend yield: 0.08%
• Share price: $188.93
• 1-year return: -6.81%
• 5-year return: +351.94%

Before we dive in, lets get all the tech lingo out of the way:

GPU, short for Graphics Processing Unit, is a specialized processor originally designed to accelerate graphics rendering. GPUs can process many pieces of data simultaneously, making them useful for gaming, video editing, and machine learning applications.

Nvidia operates as a fabless semiconductor company. Fabless manufacturing is the design and sale of hardware devices and semiconductor chips while outsourcing their fabrication (or fab) to a specialized manufacturer called a semiconductor foundry. Fabless companies, like Nvidia, can benefit from lower capital costs while concentrating their research and development resources on the end market. 

A semiconductor is an essential component of computers and electronic devices. It is typically a solid chemical element or compound that conducts electricity under certain conditions. Semi-conductors enable advances in communications, computing, healthcare, military systems, transportation, clean energy, and countless other applications.

Business

Nvidia operates in four market platforms: Gaming, data center, professional visualization, and automotive markets. 

Gaming: GeForce GPUs for PC Gamers

Data Center: DGX/HGX/EGX for HPC/AI Compute Nvidia networking

Professional Visualisation: Quadro / Nvidia RTX for workstations

Automotive: DRIVE for Autonomous vehicles

Revenue drivers

NVIDIA Corporation sells its products to original equipment manufacturers, original device manufacturers, system builders, add-in board manufacturers, retailers/distributors, independent software vendors, Internet and cloud service providers, and automotive manufacturers. 

Segment revenue contribution is as follows: 

• Data Center: 45% (2021: 36%)
• Gaming: 44% (2021: 49%)
• Professional Visualisation: 8% (2021: 7%)
• Automotive: 1% (2021: 3%)
• Other: 2% (2021: 5%).

Financials

• Revenue USD 26,914B in 2021 (2021: 16,675B), representing a staggering 61.4% yearly growth rate. 
• Gross profit improved from 62.3% to 64.9%. 
• Net income increased by 125.1% from $4,332B in 2021 to $9,752B in 2022. 

The Gaming and Data Center segments drive revenues (89% of total revenue), so lets focus on those two segments:

Gaming revenue was up 61% from a year ago reflecting higher sales of GeForce GPUs. The increase resulted from a combination of factors, including: 

• the ramp of new RTX 30 Series GPUs
• the release of new games supporting ray tracing
• the rising popularity of gaming
• esports
• content creation and streaming
• Increase in remote work
• Cryptocurrency mining. 

Data Center revenue was up 58%, primarily driven by:

• sales across both training and inference for cloud computing
• AI workloads such as natural language processing and deep recommender models. 

*Reporting revenue: Though Nvidia operates in four main segments, revenue is reported in two categories: Graphics, and Compute & Networking. The Graphics category includes mainly Gaming and Professional Visualisation, whereas the Compute & Networking segment mainly consists of the Data Centre revenues.

Operating expenses: Due to Nvidia being a fabless tech company, research and development will always be a core focus. 

• R&D costs increased by 34% for the year to a total of $2,268B, representing roughly 19.6% of the revenue.
• Sales, general, and admin expenses amounted to $2,166B, which amounts to 8% of revenue generated.

Nvidia also has a very healthy balance sheet. The latest ended the quarter with $19.7 billion in gross cash and $10.9B in debt, which means $8.8B in net cash. This means Nvidia can, in theory, pay off all its debt and still have $8.8B in net cash left.

Nvidia has very consistent operating cash flow and free cash flow growth each year. The high free cash flow is due to capital expenditure (CAPEX) being much smaller than its operating cash flow. The biggest reason is that Nvidia is a fabless semiconductor company. 

As discussed before, Nvidia does not have its own manufacturing plants for chip making. Instead, Nvidia designs its chips and outsources its production to TSMC and Samsung Foundry, the two largest semiconductor foundries in the world. 

Growth catalysts:

• Gaming: Increasing demand for high-performance GPUs for consumers and professionals. 

As you may already know, there is an enormous demand for PC gaming, eSports competitive gaming, game streaming, and console gaming.

The audience for global esports will soon approach 0.5 billion people, while the number of those who live stream games is expected to reach over 700 million. The number of PC gamers on Steam is up almost 20% over the past year.

Because of the Pandemic that started in 2020, more people are playing video games and buying gaming PCs (that need high-end CPUs and GPUs). 

As of now, the GPU market is a duopoly.  There are only two companies that make high-performance GPUs for gamers and professionals: Nvidia and AMD.

• Crypto mining

Mining is still very popular even if it is not as profitable as before. Crypto mining increases the demand for Nvidia GPUs because most crypto mining requires high-performance GPUs that have higher hash rates.

• Increasing demand for data center GPUs. 

Most data centres need GPUs to accelerate workloads such as data analytics, cloud computing, cloud gaming, AI training and research, machine learning, deep learning, high-performance computing, Edge computing, networking and virtualization.

Many of the largest cloud providers use Nvidia GPUs, including Amazon AWS, Google Cloud, Microsoft Azure, and IBM Cloud. 

RISKS:

• Competition with AMD and Intel:

In the discrete GPU market, its currently a duopoly between Nvidia and AMD. Nvidia is the market leader in GPU with a market share of 81% compared with AMDs 19%. Intel has been out of the discrete GPU market for many years.

Discrete graphics is a GPU that is separate from the processor. Discrete graphics have their own dedicated memory that is not shared with the CPU. Since discrete graphics is separate from the processor chip, it consumes more power and generates a significant amount of heat

• Current global chip shortage:

The shortage is affecting all companies, especially fabless semiconductor companies such as Nvidia. Nvidia is supply-constrained in its gaming business in both desktops and notebooks. If the global chip shortage continues, Nvidias revenue growth would be impacted.

• Volatility in the cryptocurrency market

Changes in the prices of cryptocurrencies or methods of verifying transactions, such as proof of work or proof of stake, can impact demand for products. 

VALUATION

Long-term growth

CAGR (Compound Annual Growth Rate) is the average growth rate over a set period. Nvidia is growing revenues at a very solid rate:

• Revenue CAGR: 10-years 21.02%, 5-years 31.25%, 1-year 61.4%. 
• Net income CAGR: 10-years 32.5%, 5-years 42.3%, 1-year 125.1%

Macro-economic outlook

If you have a 10-year time horizon, few companies have a brighter future. AI, deep learning, gaming, self-driving cars, robots and virtual reality - if you envision a future where these technologies are ingrained in our everyday life, we can guarantee that many of them will be powered by Nvidia. 

Valuation metrics

Valuation metrics look expensive, yet solid across the board. It is an expensive company? Yes. BUT, this is not a short-term play. Nvidia is one of those companies that you can hold forever. 

Nvidia stock price had a strong pullback since November 2021, from $340 per share to $140 in July 2022. The price has recovered since then, with four consecutive strong weeks to a current price of $190 per share. Still trading at a PE multiple of 50, but $190 is of course a much more attractive price than $340.

***Disclaimer: Just a friendly reminder - This is not financial advice. Always do your own research before taking a position. Content is for informational and educational purposes only***