Nvidia: NVDA // Blue 8 // Strike Price = {subscribe}
// TL;DR
We now know Nvidia is a force to be reckoned with, thanks to the massive AI tailwind that is transforming the world and that Nvidia has the best-in-class hardware and an emerging AI-software-as-a-service business model. We also know the robots are hungry for as many GPUs to power their brains as they can get. As long as R&D continues and management manages with competence, revenue, margins and earnings will flow naturally to Nvidia.
Just don’t buy now; await the Strike Price to reduce your downside risk and maximize your upside reward. This stock has volatility and gaps to fill on the chart after the massive run up. A price to revenue ratio of 37 is kinda out of control (MSFT is 12, Tesla is 7, AMD is 9). But when the Strike Price strikes again, don’t be shy, buy. Your friends will have invidia (envy) of your significant returns.
// DIAGNOSTICS
- 10 year CAGR = 59.7% (May 29, 2013 to 2023 || $3.61 -> $389)
- 5 year CAGR = 44.3%
- Future Growth Rate Estimate: {subscribe}
- Over the past 10 years Revenue has grown at 20.6% and Net Income at 25.8%. It’s possible the stock may continue at the 44% pace of the past 5 years but that’s not the base case. Analyst estimates for the next 5 years for Revenue and EPS are low to mid 20s outside of the current year which is seeing an EPS explosion with normalized EPS going from $3.34 to $7.68. Thus the stock price re-rating we just witnessed.
- 5 year Price Target = {subscribe} at a Price to Revenue multiple of {subscribe}
- The sector median is 2.8 and NVDA is 37.3 with a 5 year avg. of 17.4
- The multiple they have is unlikely to be sustainable. However, Nvidia is now in their prime. The stock may not grow as fast, but best-in-class with a massive AI tailwind and bulk up their EPS and FCF.
- Price to Free Cash Flow / Share = 188.8 😢
- Operating Margin = 17% 😀
- Return on Invested Capital = 17.9% 😀
- Long Term Debt to Total Assets = 22% 🤔
- Cash & Equivalents to Total Operating Expense = 152% 😀
// TWO BITS FROM THE AI BOTS
Nvidia is a leading technology company that specializes in graphics processing units (GPUs) and artificial intelligence (AI) technologies. The demand for these technologies is expected to grow in the coming years, which could drive up the value of Nvidia’s stock. Additionally, Nvidia has a strong track record of growth and profitability, which could make it an attractive investment opportunity.
// TWO BITS FROM THE GREEN GARAGE MECHANICS
Last year, CEO Jensen Huang, said the TAM was $300B in hardware and $300B in software. The latest investor presentation has upped that to $1T: Gaming 10%, AI Enterprise Software and Omniverse Enterprise Software 15% each, Automotive and Chips & Systems 30% each. Their TTM revenue is about $26B, or 2.6% of their total addressable market. As a best-in-class designer of the most state-of-the-art semiconductors, some of the most complex technology devised by humans, boosting that 2.6% to 5.2% is not inconceivable. The latest GPUs are integrating software into their existing hardware business model. To put the revenue number in perspective, Apple’s TTM revenue is $385B and according to ChatGPT the total addressable market is $1.3T but even if we triple that to $3.9T Apple is at 10% of their TAM. Nvidia has room to grow.
According to this excellent article on Seeking Alpha, “By improving the bandwidth issue, Nvidia’s goal is to create more demand for their DGX Pod and SuperPod Systems, which in turn, will create more demand for their software.”
With the cloud being where most of the development now happens, it means Nvidia is becoming an AI-as-a-service company. Remember what happened to Adobe, etc when they figured out how to become SaaS companies? Boom. 💥
If software-as-a-service ain’t your style, think about it like an iPhone moment. Sure the phone was great, nice camera, good texting and browsing, but the game-changer was the APP Store that enabled functionality that was previously incomprehensible to most.
// CATALYSTS
H100 GPUs for enterprise, best in class, and 3x less energy use than their predecessor, A100. H100 is a turning point from hardware to software. AI + data center industry growth. AI industry forecast to grow at 20% CAGR. Chips for the auto industry. Partnerships with Mercedes, Foxconn, etc (370 partnerships in self-driving cars).
// RISKS
Margin pressures from higher costs, inflation or a recession that impacts enterprise spending on data centers and consumer spending on gaming and devices. AI development stagnates. Competition from other chip makers including big tech companies that make their own.
// CONCLUSION
Nvidia crushed their latest earnings especially with their guidance; revenue of $11B vs consensus of $7.2B. Mega cap stocks don’t usually shock Wall St like this. The stock got re-rated +25%. But you needed to be in it before the re-rating. We are moving the Strike Price up to reflect the changes but the future growth rate hasn’t changed much and remains very solid but not excessive. The revenue and earnings need to catch up and bring the multiples down. The PE ratio is 200. Microsoft is 35 and its price makes it very over-valued.
Nvidia has best-in-class products and a massive secular tailwind thanks to AI. They are poised to become one of the Big Five in terms of market cap. But the stock price needs to cool off. The balance sheet is fine, it’s the income and cash flow statements that need some work. But when the Strike Price hits again, don’t be shy, buy. Volatility is different from risk. Make friends with volatility, buy low and sell high to reduce your risk. However, we are giving Nvidia a💰instead of 😻 because taking some profit makes sense given the cyclical nature of this industry and the era of market uncertainty that is prevailing these days.
The 10 year CAGR of this stock is crazy. Don’t expect that to continue but do expect it to be substantial and well out-pace the benchmark, especially if you can be patient and buy on sale.
// NEWS & COMMENTS
May 31, 2023
SA // sell: Nvidia Bulls Are Way Overestimating AI GPU Demand
“Under a condition that is beyond optimistic, I have shown that NVDA still will not grow earnings to justify its market cap. Factoring in recent GPU efficiency innovations, if NVDA captures the entire large language model GPU demand, revenue will grow from $27 billion to $33 billion dollars. Using the same profitability model as above, this comes out to $13 billion in profits. Thus in this scenario, NVDA trades at 60.5x earnings–even after assuming it captures 100% of GPU TAM. Even though there will be an increased demand in GPUs, I’ve also highlighted current research advances that will reduce GPU inference and training needs. I’ve pointed out competitors that may not fully challenge NVDAs dominance but may occupy some space when it comes to training deep learning models. For these reasons, I think NVDA is overvalued.”
// GGI 💬
Elsewhere in the article the author says GPU usage decrease of ⅔ is implied by his analysis. Possible. But Nvidia spends a lot on R&D and can be expected to be in the vanguard of the charge to the next system. Compute gets more efficient with each new iteration but the need for compute isn’t going anywhere for many years, (sans force majeure).
But, this is why we vehemently encourage buying on sale. Sometimes our valuations are off, or people and things aren’t what we thought, or the market for some reason turns nasty on everything. Protect your downside with a margin of safety.
May 30, 2023
SA // buy: Nvidia Will ‘Still’ Surpass Apple’s Valuation
“I’ve also gone on record to say that Nvidia stock will surpass the valuation of Apple Inc. (AAPL). That particular analysis compared the impact that AI will have to mobile, with AI adding $15 trillion to GDP compared to mobile’s $4.4 trillion. Mobile brought us three FAANGs: Apple, Google (GOOG, GOOGL), and Facebook (META). It has been my stance for years that AI will bring us a new set of FAANGs, one of which will be Nvidia.
The A100 was special but it’s the H100 that is Nvidia’s iPhone moment. The reason is quite simple – it’s the release that will help Nvidia breakout from hardware and put the company firmly on the map for AI software.
Hardware has allowed Nvidia to become a $700B market cap company, but it is the recurring revenue from AI software that will propel Nvidia into a market cap worth trillions.
It is our belief that NVDA is setting up for a sizable pullback, which we believe will open the door for better long-term entries. The reasons for this are below: The structure/pattern of NVDA’s bounce signals caution.
The Red Count suggests that the October low was THE low. This will still set us up for a sizable pullback into the $220 – $167 region before setting up to make a run to new highs.
The devil is in the details and not a lot of investors or analysts care to look into Nvidia’s complex hardware products.
For my readers, it has worked out in their favor that talking heads prefer to discuss stocks after they are up triple digits in price, and that the masses are collected around hindsight narratives.”
// GGI 💬
Find the above article on Seeking Alpha or Forbes and follow these folks. They got game. Better yet, follow Green Garage so we can pay I/O Fund for their premium research 🙂
May 30, 2023
SA // hold: I Was Wrong About Nvidia
“Nonetheless, I have made some takeaways from the Nvidia-induced rollercoaster ride, and several factors to consider include:
- Don’t underestimate Nvidia or the company’s power to demolish revenue and earnings expectations.
- Nvidia remains a one-of-a-kind, revolutionary company with incredible revenue growth and substantial earnings potential.
- Never underestimate the market’s appetite for Nvidia’s stock (a company with massive potential).
- Nvidia’s “problems” are transitory, and there was too much negative emphasis on Nvidia’s cryptocurrency segment and its ability to influence Nvidia’s bottom line.
- Don’t underestimate the power of AI and Nvidia’s leading position in the segment.
- Don’t get tempted by near-term profits when there is immense long-term potential for Nvidia’s shares.
Moving forward, Nvidia is a stock I want to own. The company has tremendous long-term potential in several lucrative segments like data centers, gaming, AI, and more. Despite the plausibility of a near-term pullback, Nvidia’s stock price should move significantly higher in the coming years.
Consensus EPS figures are for $9.61 next year, but Nvidia will likely beat the estimate. Nvidia’s EPS could come in toward the higher-end range of estimates ($12-14). If we put a forward P/E multiple on a $13 EPS estimate, the company’s stock is trading around 30 times forward EPS now. Thirty times forward earnings is not tragically expensive for a company in Nvidia’s advantageous position. If the company can achieve higher-end EPS estimates, the stock looks attractive in the $300-400 range.”
// GGI 💬
Pay attention to the bullets above. However, the much of an EPS beat might be optimistic. But the metrics moving back to reasonableness makes sense.
May 29, 2023
SA // hold: Quantifying The AI Exuberance
“Nvidia is a tremendous company that has gradually developed multiple engines of growth, from gaming and data center GPUs, to automotive and software applications. I liked Nvidia prior to the “AI exuberance” but now I like the company even more. Unlike other disruptive technologies such as “Blockchain”, AI has many real-world use cases in which consumers and companies are already finding value in. Yes, there is excitement in the industry and I believe it’s best to quantify the “froth” in the market, which according to my calculations is at least 10% (hence the overvaluation). However, this is not as much as most people (including myself) would have initially expected, given the huge surge in stock price. But keep in mind, the Nvidia thesis has changed because it is now priced for perfection and the market is expecting strong growth from the company. Given my investment style is more of a contrarian, I prefer to buy when others are selling (such as Nvidia in September 2022), and thus I will likely be trimming part of my position. Although, this is just a personal preference, as I believe the company is fantastic, has plenty of runway ahead for growth and my overall position is a “hold”. Nvidia is still the backbone of the industry, and it is poised to become one of the largest companies in the world, (my terminal value is a $1.6 trillion market cap) in year 10.”
// GGI 💬
He comes up with a ‘fair’ value of $347. Our Strike Price is somewhat below this. If you want to minimize your downside risk you need to buy on sale. It sucks because you could miss out on more upside yet, but next time it cycles, be prepared. Sometimes you get lucky but practice risk management in this game.
AI image prompt: dog-like robots in a factory sniffing human brains on a conveyor belt … how come the dog looks so much like our family dog?!?!
