Summary

NVDA has had tremendous run in last few years but is down almost 50% from highs

Major pullback triggered by international trade fears and slump in cryptocurrency mining

Business core is GPU segment ($10.18 billion) but Tegra processors ($1.54 billion) have vast potential in AI sector

Price target at $191 per share based on comparative analysis and highs of most recent trading range

NVDA from 2014 to present. Source: Yahoo Finance

Business Overview

This article was written by Gabriel Rodan, a Financial Analyst at I Know First

In recent years, Nvidia has taken Wall Street by storm as revenues have ballooned from approximately $4 billion in 2014 to 11.7 billion in the 2019 fiscal year and the stock appreciated by a factor of 17.8 from its low in 2014 to its peak in 2018. This has been fueled by the strong performance of its two main business segments, Graphics Processor Unit (GPU) and Tegra Processor segment. The GPU segment offers processors for PC, PC gaming, cloud based gaming services, computer-aided design, AI technology, graphics, data processing, and general computing. The Tegra processor segment supports the branded platforms DRIVE and SHIELD. DRIVE focuses on enhancing automotive and self driving capabilities and SHIELD supports devices and services to leverage mobile-cloud computing aimed at enhancing entertainment, AI and gaming. In 2019 the GPU segment accounted for $10.18 billion in revenue while Tegra processors accounted for $1.54 billion.

Key Trends, Growth Factors and Market risks

As noted above, Nvidia’s main source of revenue is the GPU segment. Its gaming platform is benefitting from an expansion in the gaming industry which is already worth over 100 billion dollars per year and will be partially driven by growth in developing countries as they develop and have more access to these technologies. The gaming segment will also benefit from a pipeline of blockbuster games and the company works closely with game developers to leverage their products and improve the integration of Nvidia’s hardware with games. Other trends in the gaming industry include E-sport and virtual reality. This is a rapidly growing industry and NVDA will benefit greatly.

There are several macroeconomic issues that have adversely affected its performance and pose as a risk to NVDA. Among these is the exposure it has to the trade issues between the US and China which is an important market as China and Taiwan account for roughly 50% of its sales. A slowdown in the Chinese economy would have direct implications for Nvidia’s performance in the region. Their presence in China gives them heavy exposure to the looming trade conflict between the US and China which remains unresolved and has escalated recently. In the scenario that this trade conflict evolves to full blown protectionism and there is a slowdown in the global economy, gaming sales would be impacted significantly as discretionary spending is slashed. A strengthening US dollar would also adversely impact revenues in USD.



Nvidia’s processing units are also used extensively in the mining and use of cryptocurrency which has suffered and is off significantly from its peak as bitcoin fell from over $20,000 to a low of $3120 and has rebounded to its current price of around $7600. Higher demand and usage of cryptocurrencies has a direct correlation with the demand and usage of data processing technology used to mine these cryptocurrencies and this is an important factor for Nvidia’s GPU sales. When Bitcoin crashed in 2018, the demand for mining chips disappeared and Nvidia attributed a decline in revenues to this as there was an excess of crypto mining GPUs that flooded the secondhand market.

Bitcoin with NVDA Overlay. Source: Yahoo Finance

Bitcoin chart. Source: Yahoo Finance

One of the most disruptive technological innovations is currently in the works as companies race to complete self driving car technologies and advanced driver assistance systems. Nvidia is partnered with over 80 companies including Tesla and has either shipped or plans to ship over 24 million devices for cars with advanced driving capabilities. The DRIVE platform within Nvidia’s Tegra segment will grow significantly from these efforts, contribute to the company’s bottom line, and increase profitability since these services have a higher operating margin than the GPU segment.



AI and Machine Learning technologies will have applications beyond self driving capabilities and will be adopted across many industries in the coming years. The increased use of big data and deep learning resulting from this trend underscores the demand for advanced data processing and the need for Nvidia’s GPU-accelerated data centers. These focus on high performance computing and cloud technology that is needed to support the rise of AI technologies.



A recent significant contribution to Nvidia’s capabilities, specifically in its datacenter business is the purchase of Mellanox, which is expected to yield important strategic and financial synergies. However, in their annual report, management has expressed the risk that in the most bearish case “We may not be able to realize the potential financial or strategic benefits of business acquisitions or strategic investments, including the Mellanox acquisition, and we may not be able to successfully integrate acquisition targets, which could hurt our ability to grow our business, develop new products or sell our products.”

Competitors and Acquisitions

Nvidia can be classified within the semiconductor and computer hardware industry. As such, its main competitors are AMD, Qualcomm and Intel. Within the gaming market, Nvidia dominates with a 76.4% market share compared to 13.9% and 9.6% for AMD and Intel respectively. This is up from 56.7% in 2016 and Nvidia GPU specifications, capabilities, and price points suggest that it will keep growing. Its closest rival would be AMD and the Nvidia GPU is faster, cheaper, and has ray tracing technology which still has not been released by AMD. Although there are few games than can take advantage of this technology at the moment, there will be more in the next year. In the data processing space they face competition for Intel which is why they bought Mellanox for 6.9 Billion dollars in what could be interpreted as an aggressive move. Nvidia is being proactive in expanding its datacenter business and likely beat out Intel in bidding for Mellanox. This purchase gives NVDA a more prominent position in the data center market and it is a good strategic and financial fit. In subsequent years NVDA will reap the benefits of these synergies and analysts expect it to increase EPS by 9% by 2020.

Valuation

Nvidia is currently trading at a P/E of 27, P/R of 7.51, and their EV to EBITDA ratio is 21.42. Considering how dominant they are in the GPU market and how well positioned they are in the Artificial Intelligence and Automotive sectors which have better operating margins, I believe they should be trading at a premium compared to their peers. The earnings and revenue multiples along with enterprise value can be seen below in the table. Assuming P/E multiples in line with QCOM and EPS of $5.29 TTM, they would be trading at $191.13 per share which would also be the initial price target based on the current trading range.

Technical Outlook

NVDA is down sharply from this years highs of $289.36 per share and is currently trading at $141.28 which is a 51.2% decrease and could present a buying opportunity. As seen in the graphs below, $125 is an important technical price level and NVDA has crossed this threshold since it broke into this trading range. This level is a good stop loss and one way to trade this is to buy and hold unless it trades under $125. The first price target would be near the previous high of $193 reached in April.

Source: Yahoo Finance

Source: Yahoo Finance

I Know First Bullish NVDA Stock Prediction

This is the I Know First NVDA stock prediction for the next year. It currently has a positive outlook with a signal strength of 276.34 and predictability indicator of 0.81.



Past I Know First Success with Nvidia Stock Prediction

On October 12, 2016 I Know First made bullish NVDA stock prediction for the next year and NVDA rose over 189% in that timeframe.

This Bullish stock forecast on Nvidia was sent to current I Know First subscribers on October 12, 2016.

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Please note – for trading decisions use the most recent forecast