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Why I Bought NVDA
I’ll walk you through my thought process on why I am now long Nvidia. But first, let me tell you a little bit about the company.
Nvidia was founded in 1993 by Jensen Huang, a microprocessor designer at AMD, Chris Malachowsky, an electrical engineer at Sun Microsystems, and Curtis Priem, who also worked at Sun Microsystems as a graphics chip designer. Jensen Huang is Nvidia’s President and CEO today.
The three founders believed, back in 1993, that accelerated or graphics-based computing is the future. Man were they right!
They thought that video games, in particular, presented a unique challenge. They believed video games would be huge, but computational challenges would impact their development.
The founders put together $40,000 and Nvidia was born.
Well, they didn’t have a name for the company when they started. They were going with NV. NV as in Next Version. That then led them to Nvidia, the Latin word for envy.
They later raised $20 million of venture capital. They used the money for research and development, solving significant computational problems for video games.
They released the Riva TNT in 1998 which helped grow their reputation as a strong developer of graphics cards.
In 1999, Nvidia became a public company.
That same year, they released the GeForce 256. And that was a game-changer, outperforming all of the existing products at the time.
This helped Nvidia win a contract to develop the graphics hardware for Microsoft’s Xbox.
In 2000, they released the GeForce Two GTS.
Starting in 2002, Nvidia went on a shopping spree.
They acquired 3D FX, a 3D graphics technology company, and Exluna, which made software-rendering tools.
In 2003, they acquired MediaQ and in 2004 they acquired iReady.
In 2004, it was announced that Nvidia would help Sony with the design of the graphics processor for the PlayStation 3.
In 2005, Nvidia acquired ULI Electronics and in 2006 they acquired Hybrid Graphics.
Also in 2006, the US Department of Justice issued subpoenas to Nvidia regarding possible anti-trust violations.
That didn’t slow them down. In 2007, they acquired PortalPlayer. That same year, Forbes named Nvidia “Company of the Year”.
A few years, and a few more acquisitions later, Nvidia released the Tegra 3 ARM in 2011, a system-on-chip for mobile devices. Oh, they also bought Icera, a British baseband chip company, for $367 million.
In 2013, they unveiled the Tegra 4, as well as the Nvidia Shield. The Nvidia Shield was an Android-based handheld game console.
They continued their shopping spree that year and bought PGI.
In 2016, Nvidia released the first GPUs from the GeForce 10 series.
The Nvidia Titan V was released in 2017. And in 2018, they released the Nvidia Quadro GV 100.
That same year, Google said that it will use Nvidia graphic cards in its Google Cloud artificial intelligence platform.
More shopping in 2019, and their acquisitions were getting larger. They bought Mellanox Technologies, a data center company, for $6.9 billion.
They also announced their first laptop, the RTX Studio. Claims at the time were that this laptop was 7 times faster than a top-end MacBook Pro.
And just a few months ago in May, Nvidia announced their Ampere GPU micro-architecture and the Nvidia A 100 accelerator.
Over the past few weeks, cards from Nvidia's Ampere range have been selling out within seconds or minutes of being released.
In July, reports came out that Nvidia was in talks with SoftBank to buy Arm, a UK-based chip designer, for $32 billion. A deal was agreed at $40 billion recently.
Okayyyyyyy, we’re in the present now.
Today, Nvidia operates through two main segments: Graphics, and Compute & Networking.
Their key markets are gaming, professional visualization, data centers, and automotive.
In their latest quarterly earnings, they easily beat estimates. Their revenue for the quarter, helped by the acquisition of Mellanox, increased 50% to $3.9 billion.
The acquisition of Mellanox adds $1.4 billion in high-margin, annual revenue.
And for the first time ever, gaming wasn’t their largest revenue driver. The data center segment generated 45% of revenue. Gaming generated 43% of revenue.
Even without Mellanox, their revenue increased 26%.
Across their two main segments, Graphics generated $2.09 billion in revenue, about 54%, and Compute & Networking generated $1.78 billion in revenue.
Market data has been positive too. Spending on video games grew 30% year-on-year to a record $11 billion. More than 100 different laptop models equipped with Nvidia’s GeForce GPUs were launched last quarter.
Gaming companies released new games that support RTX ray tracing. Nvidia believes it has a 2-year lead in ray-tracing technology. And with the rise of RTX enabled games, such as Minecraft and Cyberpunk, that’s great news for Nvidia.
Revenue from their smaller segments were down last quarter, understandably. Professional visualization generated $203 million in revenue, down 30%.
And automotive revenue of $111 million was down 47%.
However, those two segments combined are just 8% of revenue. And I think they will recover at some point.
Nvidia has a strong balance sheet, they have almost $11 billion dollars in cash – even after the acquisition of Mellanox.
Debt is just under $7 billion. They have a strong and growing operating cash flow. Cash flow from operations was $4.76 billion last year.
Although some might be concerned that their debt is growing due to their acquisitions, Nvidia has a current ratio of more than 6x.
Their margins are very, VERY solid, with a gross margin of 62.8% and a profit margin of 25.9%.
They pay a tiny dividend, about a 0.1% yield, but I honestly don’t give this much thought. Dividends is not the reason I invested in Nvidia.
Allllllright. So earnings were great. But let me tell you why I think it’s a buy, given where the stock price is right now.
After all, that’s what matters, right?
Does Nvidia’s stock price represent good value?
Well. If you look at the typical ratios, you might say it’s overvalued. More than 100 times PE, 28x sales, 81x free cash flow! The insanity!
However, Nvidia has grown earnings by an average of 32% over the past 5 years.
And although analysts expect it to grow by an average of 17% annually over the next 5 years, I think Nvidia has the chance to seriously outperform current estimates.
Not only has Nvidia outperformed the market this year, and in years past, we are still at the early stages of more data centers, autonomous vehicles, gaming and professional visualization.
There’s plenty of growth opportunity left, and Nvidia is in the driver’s seat.
Analysts have price targets that range from $450 to $700, but I think most of these analysts will keep revising their price targets upwards after every earnings announcement.
Many have told me to wait for a pull-back before buying Nvidia stock, but I won’t try to time the market. I buy and hold with a long-term view. I think that with a long-term view, market cycles don’t matter as much.
All in all, I think we live in the age of artificial intelligence, deep learning, and GPU driven applications, and Nvidia is front and center.
Oh, and gaming is exploding, and Nvidia can be a big part of that story too. It HAD to be in my portfolio!
What do you think of Nvidia? Are you bullish? Do you think the stock is too expensive? Are you waiting for a pull-back? Please let me know.
It’s been a pleasure.
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