NVDA Stock Forecast: Is There a Limit to NVIDIA’s Growth?

Sergey Okun  This NVDA Stock Forecast article was written by Sergey Okun – Financial Analyst, I Know First.

Highlights:

  • Since April 2020, the company’s stock has grown by 150%
  • Solidly profitable business with a strong perspective of growth (Net Margin is 26% and ROE is 30% that better than 93% and 94% companies in the Semiconductors industry)
  • DCF support around $674 or over 11% upside for NVDA stock for the coming year
(Source: wallpaperuse.com)

Overview

NVIDIA Corporation operates as a visual computing company worldwide. It operates in the Graphics segment and Compute & Networking segment. The company’s products are used in gaming, professional visualization, datacenter, and automotive markets. The company headquarter is located in Santa Clara, California, Nvidia was incorporated in California in April 1993 and reincorporated in Delaware in April 1998. Shares of the Company’s common stock are listed on the Nasdaq Global Select Market under the symbol “NVDA”. The company pays a quarterly dividend of $0.16 per share. In FY2021 the company reported operating revenue and net income growth by 53% and 55% respectively. Moody’s Nvidia credit rating is A2 (Rated as upper-medium grade and low credit risk). The company’s financial year 2021 finished on January 31st, 2021.

Steady Growth at Unpredictable Time

(Source: pixabay.com)

Nvidia’s graphics processing units (GPUs) and AI software are used in a broad range of industries. For instance, the transportation industry is turning Nvidia’s platforms for auto vehicles, the healthcare industry uses the platforms for enhanced medical imaging and accelerated drug discovery, and the financial services industry is using them for fraud detection. According to GuruFocus, Nvidia is one of the most profitable companies in the Semiconductors industry.

(Figure 1 – Comparison of NVDA’s profitability ratios within the Semiconductors Industry)

Historically Nvidia is a high growth rate company that continues to expand its business and it is difficult to say where a limit of this growth. Today, Artificial Intelligence applications are infiltrating into different industries and becoming a factor that can give an advantage over competitors. Nvidia is one of the key global companies that develop AI solutions and offer them to clients through its goods. I have applied different methods to evaluate Nvidia’s revenue and EPS growth rates.

(Figure 2 –NVDA’s growth rates)

Now Nvidia trades on high valuation ratios that underlined market expectation that the company will be able to realize its perspectives of growth in the future. Historically, average annual values of P/B, P/S, and P/E (except data for January 2009 and January 2010) are 6.7, 6.1, and 32.9 respectively; median values of P/B, P/S, and P/E (except data for January 2009 and January 2010) are 4.1, 3.4 and 25.0 respectively.

(Figure – 3 The dynamic of NVDA’s Price ratios)

Nvidia works in an intensively competitive market and it is really important to be competitive in all aspects of the business including funding for corporate acquisitions. A comparison of Nvidia’s price ratios with competitors is also underlining NVDA’s potential growth that the company can leverage in future acquisition deals.

(Figure – 4 Price Ratios of Comparable Companies on April 12th, 2021)

During the fiscal year 2021, NVIDIA made a number of announcements for each specialized market they operate in:

  • Gaming Platform: announced the launch of new laptop models powered by NVIDIA GeForce GPU; unveiled GeForce RTX 30 Series GPUs including the second-generation NVIDIA RTX; expanded NVIDIA GeForce NOW
  • Professional Visualization platform: launched mobile workstations with Acer, Dell, HP, Lenovo, and Microsoft based on NVIDIA Quadro graphics for professional creators; released NVIDIA Quadro View
  • Data Center platform: announced the NVIDIA A100 Tensor Core GPU and DGX A100, the first products based on the NVIDIA Ampere architecture; announced more than 50 NVIDIA A100-powered systems with OEM partners and released NVIDIA-Certified Systems with NVIDIAA100 GPUs to OEMs
  • Automotive platform: announced with Mercedes-Benz that the automaker will launch software-defined, intelligent vehicles using end-to-end NVIDIA technology starting in 2024; announced that NVIDIA DRIVE autonomous driving technology is powering a range of electric vehicles from carmakers SAIC, Nio, Li Auto, Xpeng, robotaxi-maker Zoox, and cables truck-maker Einride; announced that Hyundai Motor Group’s entire lineup of Hyundai, Kia and Genesis models will come standard with NVIDIA DRIVE in-vehicle infotainment systems starting in 2022

Expanding Horizons

(Source: habr.com)

Nvidia realizes a fabless manufacturing strategy, whereby Nvidia employs suppliers for all phases of the manufacturing process, including wafer fabrication, assembly, testing, and packaging. Such a strategy gives the opportunity to use the expertise of the industry-leading suppliers and avoid many of the significant costs and risks associated with owning and operating manufacturing operations. At the same time, Nvidia prefers to focus resources on product design, additional quality assurance, marketing, and customer support. The opposite side of this strategy is that Nvidia must continue to scale and adapt the supply chain as the company’s business grows.

The COVID-19 pandemic had both positive and negative effects on Nvidia’s business. Gaming and Data Center market platforms benefited from stronger demand as people continue to work, learn, and play from home (Data Center revenue increased by 69% without taking into account revenue from Mellanox). Automotive revenue was down by 23%, reflecting lower revenue from the expected ramp down of legacy infotainment modules and autonomous driving development agreements, partially offset by increases in AI cockpit and autonomous vehicle solutions. Professional Visualization revenue was down 13% from a year ago due to lower sales of graphics processing units (GPUs) for desktop workstations as enterprise demand was impacted by COVID.


(Figure 5 – NVDA’s revenue by markets and regions (FY2021 finished on January 31st, 2021)

The company has a positive return dynamic in all regions, but the demand for company goods may not be sustainable if conditions change. So, stronger demand globally has limited the availability of capacity and components in Nvidia’s supply chain, particularly in Gaming, which could cause to order an excess amount if demand changes, pay higher prices, or limit the company able to obtain supply at necessary levels.

Nvidia also actively uses acquisitions as a way to speed up growth. In April 2020, the company completed the acquisition of Mellanox for approximately $7 billion, a supplier of high-performance interconnect and networking products. Today, Mellanox is a part of Nvidia’s Data Center market platform. The acquisition of Mellanox has given the way to optimize across the entire computing, networking, and storage stack to deliver data center-scale computing solutions.

On September 13, 2020, Nvidia entered into a Share Purchase Agreement with SoftBank to acquire all allotted and issued ordinary shares of Arm Limited in a transaction valued at $40 billion. Nvidia paid $2 billion in cash at signing and will pay upon closing of the acquisition $10 billion in cash and issue to SoftBank 44.3 million shares of the common stock with an aggregate value of $21.5 billion. Also, the transaction includes a potential earn-out, which is contingent on the achievement of certain financial performance targets by Arm during the fiscal year ending March 31, 2022. If the financial targets are achieved, SoftBank can elect to receive either up to an additional $5 billion in cash or up to an additional 10.3 million shares of common stock. After closing, Nvidia will issue up to $1.5 billion in restricted stock units to Arm employees. Expected that the acquisition will close in the first quarter of the calendar year 2022. However, the deal has to be approved by the government. Arm Limited is a chip architecture licensing company that generates on the order of $2 billion in sales. Nvidia wants to bring together Nvidia’s AI computing platform with Arm’s vast ecosystem. The main value of the deal is to push all of Nvidia’s technologies – its own GPUs for computing and graphics and Mellanox network interface chips, DPU processors, and switch ASICs – through an Arm licensing channel to make them all as malleable and yet standardized as the Arm licensing model not only allows but encourages.

Nvidia sells productions on high-growth markets. So, it is expected that the Gaming, Professional Visualization, Artificial Intelligent , and Automotive Software markets will grow at CAGR 10.5%, 9.69%, 17.5%, and 13% respectively.

DCF Estimates $674 NVDA Stock Forecast

The DCF analysis shows that NVDA’s target stock price should be around $674 by end of 2021. This expected share price makes some 11% upside from the price on April 12th. The below forecast is based on average data from previous years, the direction of the company’s policy (including the acquisition of Arm), and macroeconomic expectations.


(Figure 6 – DCF Model of NVDA’s stock)

I have made the next assumptions and estimations for this DCF:

  • Nvidia will close Arm Limited acquisition in the FY2023 and will pay an additional $5 billion in cash for SoftBank
  • the effective tax rate is 5.26% (it is an average tax rate for FY2018 and FY2020)
  • market Beta is 1.38
  • the risk-free rate and risk premium are equal to 1.92% and 5.6%, respectively

COVID-19 had a structural impact on the market risk profile between financial assets, which can have a positive or negative effect on WACC.

(Figure 7 – The Dynamic of Market Beta with the Frame of 5 Years)

Such low beta value means that investors will ask for less required return from NVDA stock. It is reasonable to expect that in the future when the story with COVID-19 will be over, the beta coefficient will increase that will raise WACC, having a negative effect on the company value. I made a sensitivity analysis of NVDA based on WACC (in brackets are written the value of Market Beta) and growth:

(Figure 8 – Sensitivity Analysis of NVDA’s stock)

Do Technical Indicators Support Bullish NVDA Stock Forecast for 2021?


(Source: Yahoo Finance)

As we can see in the chart, currently NVDA’s stock price is on the uptrend and it is higher than all three moving averages (the green line is MA-50; the yellow line is MA-100 and the red line is MA-200). The price reached the resistance line of $614 and with taking into account the amount of volume on April 12th I suppose this resistance level will be surpassed in the coming days.

Conclusion

I take a buy-side on NVDA stock because the stock holds a positive DCF forecast resulting in a $674 target price, i.e., around 11% upside potential.  The company products and services are used in a broad range of industries. Nvidia is one of the most profitable companies in the semiconductors industry and shows a steady growth rate. Nvidia aggressively acquires companies to accelerate its growth.

It is worth paying attention that the stock-picking AI of I Know First has a high signal on the one-year market trend forecasts, supporting my position for the NVID stock forecast. The dark green for all forecasts is a strong bullish signal.

Past Success with NVDA Stock Forecast

I Know First has been bullish on the NVDA stock forecast in the past. I Know First analyst published a premium article on April 2nd, 2020 about the great NVDA’s stock potential in the coming year. The NVDA’s stock prediction was successful on a 1-year time horizon resulting in more than 126.51%.

(Source: Yahoo Finance)
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Please note-for trading decisions use the most recent forecast.