Nvidia Corporation (Nasdaq: NVDA) has quite a story to tell and investors seem to be all ears these days — with good reason. Nvidia bills itself as a pioneer that has “supercharged” a form of…
Nvidia Corporation (Nasdaq: NVDA) has quite a story to tell and investors seem to be all ears these days — with good reason.
Nvidia bills itself as a pioneer that has “supercharged” a form of computing loved by the most demanding and eclectic computer users in the world — scientists, designers, artists, and gamers. For them, NVDA has “built the equivalent of a time machine,” the company states on its website.
Business-wise, the California-based technology company believes it has advanced the GPU computing to a new level, at the intersection of virtual reality, high-performance computing, and artificial intelligence. The market agrees, as NVDA stock has taken off in 2018. Will that trend continue for the rest of the year and into 2019?
It sure looks that way, as artificial intelligence starts moving into commercialization mode, with Nvidia well positioned to take full advantage.
NVDA stock at a glance. Nvidia is currently billed as one of the most touted stocks on Wall Street, after Needham pegged NVDA with a $350 price target on Sept. 14.
The chip-making behemoth is currently trading at around $290 per share, as the company continues to make deep inroads into the potentially lucrative artificial intelligence market.
“Robotics, automation and artificial intelligence is the next technological revolution, perhaps the most important tech revolution in our lifetime, and certainly comparable to that of the internet and mobile in the past two decades,” says Jeremie Capron, head of research at Robo Global.
Computers are now driving cars and trucks, robots can translate and interpret natural language and even defeat champions of chess, Jeopardy and more, Capron says. “Robots are starting to proliferate in all sorts of applications, being deployed in hospitals to assist surgeons in the operating room,” he says. “They are taking different shapes, from the traditional robot arms in manufacturing, to mobile robots, flying robots and more recently autonomous cars.”
Capron adds, “AI and machine learning are playing a major role and this is just the beginning.”
Nvidia currently plays a crucial role in this revolution.
“In the past five years, the company delivered a great leap forward with a 500-times increase in computing power,” Capron says. “This has been a key enabler of the boom in artificial intelligence, and Nvidia’s GPUs have quickly become the de facto standard for machine learning and the training of AI in data centers.”
At its current share price level of $290, Nvidia is up 19 percent for the past three months, soundly outperforming the S&P 500, which is up 7.4 percent in the same period. Anaylsts expect NVDA to see year-over-year growth of 45 percent, with earnings per share of $1.93 when it reports earnings in November.
Industry insiders say that Nvidia is swimming in cash, and is putting it to good use.
“Nvidia has over $5 billion of net cash and investments on its balance sheet, despite having spent a cumulative $15 billion in R&D, funding numerous startups via its venture program, and is just completing a massive new state-of-the-art headquarters,” says Bobby Eubank, equity research analyst at Chevy Chase Trust. “Nvidia has done this by generating close to $3 billion in free cash flow last year via high revenue growth with nice margin expansion.”
Of the $3 billion in free cash flow, $1.25 billion was used for dividends and stock repurchases, Eubank adds.
Pros to buying NVDA stock. So far, most of Nvidia’s deep learning-based revenue has come from “training” which is the process of using high-end processors to optimize the algorithms, often in a data center, Eubank says.
“Another large opportunity is in ‘inferencing,’ or using those trained models to actually generate useful results to consumers in the real world,” he says. “Speech recognition in the data center is a particularly successful use. Another large opportunity is to use inferencing on edge devices such as drones, robots, medical devices and automobiles.”
Should Nvidia hardware power autonomous vehicles in the future, this revenue stream “would likely be larger than the gaming market is for Nvidia today,” Eubank says.
High-level and impactful partnerships should also push NVDA stock upward, market experts say.
“Nvidia just gave its investors a heads-up by announcing [a partnership] to engage into artificial intelligence,” says Stephan Unger, associate professor of economics at Saint Anselm College in New Hampshire. “The company is teaming up with Infineon and Yamaha Motors to work on the application of AI in the agricultural field in order to provide unmanned vehicles and drones which are able to perform tasks such as picking and transporting fruits and vegetables.”
Such a kind of vehicle should be ready for commercialization by 2020, Unger says.
By Nvidia’s move to deep learning, it will likely gain important market share in the future, which is reflected in its balance sheet and income statements, as well. “Its operating income and cash positions have exploded since 2016, while liabilities could be kept constant, as reflected by the stock price,” Unger says. “Since income has doubled every year, the stock price is fairly priced, even though it skyrocketed. Thinking of the potential market share to gain in the field of AI, the stock still seems to be underpriced.”
A price target of at least $320 should be “easily reachable” for NVDA within the next year, if the business development continues to be as successful as expected, Unger adds.
Cons to buying NVDA stock. Nvidia has its revenues spread out over several tech-oriented industrial sectors, making it more difficult to pinpoint a single growth path, stock-wise, for the company — even as the general outlook on the company appears positive.
“Well over half of Nvidia’s revenues still come from the consumer gaming market, and the outlook for growth is lower here than for its data center and autonomous vehicle end markets which still account for less than a third of revenues,” Eubank says. “But the market opportunities for deep learning are massive.”
Other industry insiders say that while Nvidia has done an impressive job in improving its business the past several years, right now the stock appears fully valued, and it doesn’t appear like it has significant further fundamentally justified upside.
“GAAP accounting statements do not sufficiently highlight how strong NVDA’s performance has been the past three years,” says Robert Spivey, managing director at Valens Securities, in Cambridge, Massachusetts. “As-reported valuations have also consistently overstated NVDA’s valuations the past several years.”
This has made NVDA look more expensive than it is, and has understated the company’s operating inflection, Spivey says. “By using uniform accounting, and adjusting for major distortions for NVDA in as-reported accounting statements, around areas like excess cash on the balance sheet, R&D expensing versus capitalization, and how to treat stock option expenses, uniform accounting helps us better understand why NVDA has performed so well the past three years, and why further upside may be limited.”
The bottom line on NVDA stock. Over the long term, the semiconductor space has proven to be highly cyclical, Spivey says.
“End-market demand cycles, which tend to expand rapidly and then slow down, as has been seen recently in the crypto market, and as prior boom-and-bust periods for the AI end market, tend to expand and compress over time.”
“NVDA has strong performance, but with the market already pricing that performance to sustain in perpetuity, and not expecting any potential cyclicality in demand going forward, the potential for further equity upside appears limited,” Spivey says.
Others take a more positive stance on NVDA going forward.
“As a technology and market leader in computing, processing and AI, Nvidia qualifies as a member of the ROBO index, which tracks best-of-breed companies around the world that drive the robotics & AI revolution,” Capron says. “The company is enjoying a dominant position in nearly all markets it addresses, and is benefitting from booming demand for gaming products, AI and deep learning applications, autonomous vehicles, and cryptocurrency mining.”
“The results, from an investor’s perspective, are tremendous,” he adds. “In the last two years, shares of Nvidia rose over three times and in the past three years, more than 10 times. This is a reflection of its technology and market leadership, which in many cases translates into fat margins and high return on capital.”