I read a report on NVDA when it was around $60. This is not from famous analyst, but an experienced investor.
Nvidia’s foundation revenue stream is in its gaming-oriented PC GPU products. Despite diversification into other market segments, this product division remains the largest revenue-generator for Nvidia. Over the last six quarters, gaming-related products have accounted for more than 50% of sales revenue for the company. However, this relative share of revenue has declined as Nvidia has expanded into other product areas. Since their Q1 2016 report (4-26-2015), revenue streams from Datacenter and Automotive products have increased by 71.6% and 54.55% respectively. Nvidia also generates a significant portion of its revenues from Professional Visualization and OEM & IP products as well. Combined, these segments represent roughly 25% of Nvidia’s revenue. It is worth noting that over the last six quarters the revenue generated from OEM & IP products has declined 25.22% while the revenue from Professional Visualization products has increased by 18.2%
Regionally, Nvidia still derives most of its revenue from the Asia Pacific markets. In Q2 2017 (7-31-2016), revenue in the Asia Pacific region accounted for 66.67% of overall revenue. This is compared to 14.42% from the US, 11.69% from Europe, and 7.21% from Other Americas. There has been stable revenue growth from every region over the last six quarters, keeping in line with the growth in overall revenue. The largest regional growth can be seen in the Asia Pacific and United States regions, indicating improving consumer demand in both of these areas.
Having recognized the declines in relative revenue generation from video game segments, Nvidia has shifted their focus moving forward to larger-scale, more innovative market segments. At Nvidia’s GTC China 2017 presentation, CEO Jen-Hsun Huang highlighted the massive impact that deep learning and Artificial Intelligence (AI) will have on the world in the coming years. Nvidia seeks to push the boundaries of AI and deep learning technologies, and their first step is with their new GPU architecture, Pascal. Nvidia’s latest line of GPUs for both consumer and commercial use have been hailed as the best performing processors on the market. Furthermore, during the Q2 2017 earnings call, Huang reiterated his belief that deep learning is going to be the company’s most significant growth driver moving forward. Nvidia has very recently procured a contract with Chinese web company Baidu to develop AI platforms for their self-driving cars, adding their name to a client list which already includes industry leaders such as Tesla and BMW. A recent Bank of America forecast suggested that the deep learning and AI market could reach $153 billion by 2020, and Nvidia already has a strong position in the industry.
Nvidia has very strong fundamentals currently. Over the last seven years, Nvidia has reported positive revenue and net income. Both of these metrics have seen substantial growth as costs have been reduced and profit margins have improved. Since 2010 both the total assets and total capital available have nearly doubled to $7370 million and $4580 million respectively. Nvidia has also seen substantial improvements in its ROA, ROC, and ROE. As of FY2016 reporting, ROA is 10.59%, ROC is 17.04%, and ROE is 17.46%. It is estimated that in FY2017, Nvidia will see revenue of $6098 million (12.12% increase from FY2016), net income of $1381.4 million (41.8% increase), and an EPS of $2.30 (67.9% increase).
Nvidia’s TTM P/E ratio is currently sitting at 38.28 compared to an industry average of 15.2 and has a P/BV ratio of 7.51 compared to an industry average of 2.7. Normally these may indicate that the stock is overvalued, however Nvidia is seemingly at the forefront of a huge growth phase in an emerging industry and it appears that the market has priced this future growth in. In the coming months we should see a reduction in the P/E ratio due to higher EPS levels. As of their latest reporting, Nvidia has a current ratio of 2.56. This shows a lot fundamental strength for Nvidia to meet and short-term liabilities. Nvidia’s FY2016 profit margin was 15.58%, and impressive number alongside an equally impressive ROE of 17.46%.
Given current fundamentals, Nvidia will be able to see a growth rate of 11.1%. This number is based on an equally-weighted average between the company’s Long-Run Growth Rate (10.90%) as shown on the company’s Bloomberg Terminal page and the Sustainable Growth Rate (11.28%) derived from the following formula: (ROEb)/[1-(ROEb)] where ROE is the company’s return on equity for the previous fiscal year and b is the retention ratio for the company. Nvidia’s current WACC is 12.5%, which is used as a benchmark for required return. Based on these two values and Nvidia’s returns over the last six years, Nvidia has an implied value of $46,827.67 million when using an earnings power valuation model. With 535 million shares outstanding, this implies a stock price of $87.52 per share. At the closing price of $62.84 on Sept. 16, there is a margin of safety of 28%.
In spite of the huge returns Nvidia has already seen this year, I believe that it still has huge upside potential and would be a fantastic long-term buy. Nvidia’s upcoming product lines and revenue streams have positioned them positioned the company to be at the forefront of a growing deep learning and AI industry. Automation and self-learning software are becoming a larger part of our lives every day and Nvidia is creating the tools necessary to meet these new computational demands.