Nvidia’s (NASDAQ: NVDA), the visionary founder and CEO has positioned the company for decades of growth trends (gaming, data centers, self-driving cars, AI, machine learning) thanks to its strong technical and market positioning in GPUs. has been placed at the center of Additionally, with strong margins, enhanced earnings growth and a pristine balance sheet, the company is well positioned to seize market opportunities and generate strong returns for its shareholders.
Nvidia is a fabless company that designs and sells graphics processing units (GPUs) and systems-on-a-chip (SOCs) for a variety of applications. The company’s core end market used to be gaming. However, over time, Nvidia has also become a major player in the professional design, cloud, AI, and automotive end markets.
Given the company’s legacy as a graphics processing hardware provider, gaming and professional visualization account for 51% and 11% of revenue, respectively. Data centers, on the other hand, account for 27% of revenue. The company derives 92% of its revenue from outside the United States. However, this number can be misleading as the customer’s ultimate end-user may be in a different location.
Visionary founder at the helm
Nvidia was co-founded by Jensen Huang, who remains the company’s CEO. Jensen was born in Taiwan, but moved to the United States at the young age of 10. He holds a Bachelor of Science degree in Electrical Engineering from Oregon State University and a Master of Science degree in Electrical Engineering from Stanford University. Prior to founding Nvidia, he worked at LSI Logic and his Nvidia competitor AMD. Nvidia’s first chip was released in 1995 after the company raised funding from his Sequoia Capital and Sutter Hill Ventures. Unfortunately, the release failed to gain momentum and the company had to lay off half of its workforce, facing closures. But Nvidia doesn’t stop there. It survived, but captured a dominant share of the GPU market segment. Jensen has repeatedly demonstrated his ability to face challenges and navigate difficult waters in an ever-evolving technological environment.
The company’s core gaming market opportunity is intact
Nvidia’s dominance in gaming is evidenced by its market share of nearly 70% in discrete graphics units worldwide, with AMD trailing far behind at nearly 30%. The gaming industry is undergoing rapid changes leading to demand for more advanced hardware solutions. For example, according to Newzoo, a gaming industry research and analytics firm, esports viewership in 2019 fell just short of his 450 million viewership. That number is expected to grow to 646 million by 2023, a nearly 46% increase from 2019.
Additionally, the cloud gaming market is expected to grow from $1.15 billion in 2019 to $2.7 billion in 2025, according to Mordor Intelligence. Nvidia recently launched cloud gaming network GeForce Now to capitalize on this opportunity. The company has continuously introduced GPU upgrades to stay ahead of the curve. Last year he announced his GeForce RTX SUPER card with higher capacity and more processing power. The company’s RTX series features “ray tracing” technology that greatly improves graphics quality. The leap in quality has led several game developers to come up with products that incorporate ray tracing into their games. Below are comments from the company’s CEO on the latest earnings conference call.
“Ray tracing is clearly the most important new feature in next-gen graphics. There are 30 games announced and over 30 shipped. 11 or so games have shipped. The upcoming pipeline of ray-traced games is very exciting.”
The Emergence of Non-Gaming Applications for GPUs
Over the last few years, Nvidia has transformed from a dedicated gaming power provider to a company at the heart of several large and growing non-gaming markets. A major reason for Nvidia’s growing relevance is that the computing power of GPUs has made them relevant in many non-gaming markets in recent years. CPUs are generally good for complex tasks that are sequential in nature, while GPUs are good for multiple parallel and simple tasks. This fundamental difference makes GPUs ideal for AI, machine learning, and cloud applications that integrate AI/machine learning. In fact, the growth of CPU computing power has stagnated, a phenomenon known as “the death of Moore’s Law.” GPUs are taking over an increasingly AI/machine learning world by continuously improving computing. Power with all subsequent upgrades. Unsurprisingly, Intel (INTC) is expected to announce its own GPUs in the near future, but it will take years to come up against Nvidia significantly.
Nvidia’s data center business sees strong growth
Given Nvidia’s strong position in the gaming GPU market, it’s no surprise that the company has been able to capitalize on the growing relevance of GPUs in non-gaming applications as well. The data center market in particular has been a gold mine for Nvidia. In fact, since 2016, the company’s data center revenue has nearly nine times that of his, and it’s making more forays into this segment. Since 2019, Nvidia has acquired Israeli network company Mellanox Technologies. In addition to being at the heart of the modern data center, Mellanox Technologies has acquired a data storage and management platform company called SwiftStack. The company predicts that the total market addressable in the data center segment will exceed $60 billion by 2023.
Gross margins for the business are at least a few hundred basis points higher than those for the gaming business, so higher data center revenues will also boost margins. Not surprisingly, the company’s gross margin expanded from his 57% in fiscal 2016 to his 63% in fiscal 2020. Note that the data center market segment grew as its contribution to revenue rose from his 7% of total revenue in fiscal 2016. It will increase to 27% in 2020. Over the long term, we expect margins to improve further as a result of the mix shift.
Several growth opportunities exist, further expanding the overall addressable market
Autonomous Vehicle (AV): Nvidia has created a suite of products that enable self-driving cars. The company’s high-power computing products enable on-road data collection, training and simulation using deep learning models, providing solutions that help vehicles process data and make real-time decisions.
Nvidia offers Tesla (TSLA) GPUs used for mapping and training deep neural networks with big data, and DRIVE AGX Orin computing platforms for running autonomous driving on the road. The DRIVE AGX Orin solution is nearly seven times more powerful than previous variants. The company has partnered with a number of automotive companies to help develop their AV programs. According to the company, the self-driving car market will be his TAM opportunity of about $60 billion by 2035. The self-driving car industry is certainly in its early stages, but the growth curve could be very steep as adoption gains momentum.
Similarly, GPU applications in the fields of robotics and medical sciences via AI and machine learning have opened up new opportunities to expand the company’s addressable markets over the next five years.
Improving recent earnings growth trend after a period of temporary volatility
Nvidia suffered a temporary setback in the first half of 2019 and 2020 as a sharp drop in cryptocurrency prices impacted demand for its GPUs. This GPU was popular with cryptocurrency miners due to its computing power. Additionally, during this period, there was a pause in capital spending on data center capacity by major technology companies, which also impacted Nvidia’s data center segment.
However, the latest quarterly results showed a strong recovery. Data center revenue rose 43% year-over-year as data center capex spending picked up momentum again, and gaming revenue also recovered (as stagnant inventories over the past few quarters self-corrected). Nvidia also recently partnered with Tencent (OTCPK: TCEHY), the world’s largest gaming platform, to bring his cloud-based PC games to China. As part of the deal, Nvidia’s GPU technology will be used in Tencent’s START cloud gaming service.
Healthy balance sheet and attractive valuation
In 2020, Nvidia generated $4.3 billion in free cash flow. This is a 36% increase from 2019. FCF translates to his FCF yield of nearly 3%. for the next five years. It has a whopping $11 billion in cash and only $2 billion in debt. Finally, Nvidia paid out a small dividend, and the board of directors has approved him to buy back more than $7 billion in shares. In 2020, the company did not repurchase its own shares. However, it is likely that buybacks will resume in FY2021.
On a futures price-to-sales basis, Nvidia is trading just under 10x. The assessment believes there is room for price increases from both multiple expansions and continued revenue growth, especially in the data center market. As Nvidia continues to be the leader in cutting-edge GPUs, the company’s stock price can be highly cyclical and volatile, but there is a significant long-term uptrend.
coronavirus: Nvidia derives most of its revenue from China, with manufacturing of product components and final assembly of its products in Taiwan, China, and South Korea (which has seen severe shutdowns due to the recent coronavirus outbreak). It is done. The company’s management has cut its earnings guidance for the first quarter of fiscal 2021 by $100 million due to the coronavirus. However, there is a risk that the amount will increase due to worsening conditions outside of China. In a recent earnings call on February 15, 2020, Colette Kress, his CFO at the company, said:
“While it is still too early to estimate the ultimate impact, we have lowered our first quarter earnings guidance by $100 million in light of the potential impact.”
“The $100 million reflects supply challenges and overall demand.
Despite the negative outlook around the outbreak, investors are optimistic that the number of new cases in China has dropped significantly and that manufacturing activity is slowly rebounding, potentially supporting supply ties. Be careful.
competition: AMD’s transformation in the last few years has been remarkable, and it may be able to challenge Nvidia in the short term. Similarly, Google (GOOG, GOOGL) or Amazon (AMZN]) may release compatible chips sooner than expected, which could slow Nvidia’s data center growth. If Google tries to develop his TPU and sell it outside of his GCP ecosystem, it could take market share away from Nvidia. The chip industry is moving from “his one chip for everything” to “chip for every application”. Therefore, ASICs and FPGAs are gaining momentum and will be an alternative approach that can greatly compete with Nvidia should competitors make a technological leap forward.
Geopolitical: Nvidia has a globally diverse supply chain. Trade conflicts and trade agreements affect all aspects of a company’s operations. Rising trade tensions could lead to skyrocketing operating costs, which could directly impact revenue.
Keyman risk: Jensen (Jen-Hsun) Huang is the visionary founder and CEO of Nvidia, leading the company to become the world’s dominant GPU player with a $140 billion market cap.His absence could seriously affect the company.
long form report
To learn more about Nvidia’s risks, ratings, and what we love about Nvidia, check out our detailed report below.