NVDA Stock Forecast: 3 Stable Sources of Growth for NVIDIA

 

 

This article was written by Kwon Sok Oh, a Financial Analyst at I Know First.

 

 

NVDA Stock Forecast

(Source: Wikimedia Commons)

NVIDIA Corp. (NASDAQ: NVDA) is the leading designer and manufacturer of graphics processing units and related products and services. It’s main operating segments are the GPU segments and the Tegra Processor segment. NVIDIA currently has 11,528 employees with $9.71 billion in revenue in 2017. It is headquartered in Santa Carla, CA.

Summary

  • NVIDIA Reports Great Results for Q1 2018

  • GPU Segment is Growing due the Gaming and AI Industries

  • Tegra Processor Segment is Expanding Through Autonomous Driving

  • Valuation Models Suggest NVDA is Currently Under Priced

  • I Know First’s Algorithm Forecast is Bullish for NVDA in the Long Run

NVIDIA Reports Great Results for Q1 2018

Revenue for Q1 2018 was $3.21 billion, which is a staggering growth of 66% year-over-year and 10% quarter-over-quarter. NVIDIA has four main market platforms: Gaming, Professional Visualization, Datacenter, and Automotive. All four market platforms grew year-over-year, which indicates a balanced and well-hedged development of market platforms and respective revenues. The strong growth in datacenter revenue and GeForce gaming GPU’s pushed up gross margin for Q1 2018 up to 64.5%, which is a significant year-over-year and quarter-over-quarter increase.

(Source: Flickr)

Operating expenses also grew for Q1 2018 due to increased headcounts and pertinent costs for its growth initiatives in gaming, autonomous driving and AI. Even though operating expenses grew, the investment in these areas of growth initiatives will generate high returns because of strong future demands in these areas.

GPU Segment is Growing due the Gaming and AI Industries

The GPU Segment revenue was $2.77 billion, which is a growth of 77% year-over-year and 12% quarter-over-quarter. The growth was driven by the gaming and datacenter revenue increases. Gaming GPU revenue increase was led by the general rise in demand from the gaming industry and led the overall improvement of gross margins for the GPU Segment. According to Newzoo, the global eSports market will increase up to $905.6 million in 2018, which is a 38% year-over-year increase, and by 2020, it will grow up to $1.4 billion. There will be 380 million eSports audiences globally in 2018, and this figure is also speculated to grow at an alarming rate. Such growth in the gaming industry will prove to be the dominating factor of constant growth of gaming GPU revenue.

(Source: Deviant Art)

Moreover, the excellent performance of AAA cinematic games and the Battle Royale genre are also pushing consumers towards NVIDIA GPU’s. A critical optimistic growth factor for NVIDIA is that regardless of which game developing companies grow or atrophy, it does not affect the overall eSports market because the demand for quality games always exists as shown by Newzoo’s speculations. For instance, whether consumers play Battle Royale or Player Unknown’s Battle Grounds is not important. What is important for NVIDIA is that consumers play any of these survival games and create demand for high quality NVIDIA GPU’s.

Furthermore, the tailwind of GPU revenue from crypto mining deserves a mention. An important point to emphasize is that even if crypto miners move away from NVIDIA GPU’s to other mining technologies, such as ASIC’s, NVIDIA’s GPU revenue will not decline abruptly because the price of NVIDIA GPU’s driven up by crypto miners will return to its normal state, allowing gamers to regain access to NVIDIA GPU’s. Hence, this will maintain demand for NVIDIA GPU’s.

NVIDIA’s announcement of NVIDIA RTX during Q1 2018 also proved to push the firm’s revenue growth. NVIDIA RTX is a computer graphics technology that creates high-resolution images in real time, and it is available on NVIDIA Volta architecture GPUS’s.

Finally, datacenter revenue reached $701 million, a year-over-year increase of 71%. Datacenter revenue growth was driven by the strong sales of the Volta architecture due to demand from the AI Industry, including HPC design wins, new DGX systems, and the success of NVIDIA Tesla V100. Tesla V100 GPU’s are now available with an improved 32GB memory, and the new NVSwitch GPU interconnect fabric supports 16 GPU’s in a single server node. NVIDIA’s DGX-2 is built on the new NVSwitch architecture. Furthermore, the TensorRT 4, the lastest version of the TensorRT AI inference accelerator software, now provides a variety of neural machine functions. Such improvements are leading to higher demand from scientists, engineers, and researchers in the AI, deep learning, HPC, and graphics industries. The unwavering growth of these industries prove to be a source of stable growth for NVIDIA.

(Source: Wikipedia)

Tegra Processor Segment is Expanding Through Autonomous Vehicles

Tegra Process Segment revenue increased by 33% year-over-year, led by the boost of revenue from SOC modules for development services and gaming platforms and the 4% revenue increase in the automotive sector through infotainment modules, DRIVE PX platforms and development agreements for autonomous cars. The SOC modules were implemented in Nintendo’s Switch gaming console, which is accredited as the fastest selling console in Nintendo’s history. The success of games such as “The Legend of Zelda: Breath of the Wild,” “Mario Kart 8 Deluxe,” and “Super Mario Odyssey” led to high sales of Nintendo Switch, which in turn lead to more revenues for NVIDIA.

(Source: Flickr)

During Q1 2018, NVIDIA released its NVIDIA DRIVE Constellation server with DRIVE Sim software, which allows the testing of autonomous vehicle performance over billions of miles in virtual reality through the use of NVIDIA GPU’s and NVIDIA DRIVE Pegasus. Recent accidents involving autonomous cars of Tesla and Uber underscore the importance of a through preliminary testing of performance, and NVIDIA’s products are exactly what are needed to proceed these tests.

Valuation Models Suggest NVDA is Currently Under Priced

Inferring from the 5-year DCF analysis, the target price of NVDA for January 1st, 2019, is $283.07, which is a 14.45% upside from the current price of $247.33 (Jul. 6th, 2018). The main assumptions made were a constant growth of the Gaming segment (35%) and the Professional Visualization (5%) segment, along with a high initial growth rate of the Datacenter segment with more moderate growth rates in the future (starting out at 90% and decreasing by 10% each year). We can clearly see that Gaming and Datacenter revenue are the principal sources of revenue for NVDA due to high demand from the gaming and AI industry, and these segments are projected to be the primary sources of revenue in the future too.

According to the 5-year dividend discount model, NVDA’s target price for January 1st, 2019 is $261, which is a 5.70% upside from the current price of $247.33 (Jul. 6th, 2018). NVIDIA has been paying out less and less dividends during the past 5 years, with 41% paid out on 2017. Hence, the dividend payout ratio is assumed to be 40% for the next 5 years and 100% after that into perpetuity.

NVIDIA is a unique company in the sense that it is the dominant supplier of GPU’s. Although AMD is also a player in the same market, NVIDIA’s market cap is roughly 10 times that of AMD. Hence, there are no ideal choices of firms that can be used for the relative valuation method. As shown below, NVDA is priced at a higher value compared to Intel, Microsoft, and Qualcomm. However, compared to AMD, which is a smaller entity competing in the same market, NVDA’s price is fairly priced.

MACD Indicator is giving a Buy Signal

(Source: NASDAQ)

The MACD indicator is giving a strong buy signal for NVDA. The Signal line (red line) is currently above the MACD line (black line), but it is moving towards a crossing trend, which means that the time to go long on NVDA is imminent. More importantly, both lines are below the zero line, which means that NVDA is in an oversold condition. Hence, MACD analysis also indicates a good buying opportunity.

I Know First’s Algorithm Forecast is Bullish for NVDA in the Long Run

I Know First’s algorithm has very bullish forecasts for the 1-month, 3-month, and 1-year time frames, all with predictability ratings of over 0.5 for the 3-month and 1-year times frames. The forecasts for longer time horizons have stronger signals and predictabilities, further supporting the long-term bullish stance of I Know First’s algorithm.

How to interpret this diagram

Past I Know First’s Success with NVDA

On August 15th, 2017, I Know First’s senior analyst Motek Moyen published a premium article regarding I Know First’s algorithm’s forecast on NVDA. I Know First’s algorithm made bullish forecasts for the 1-month, 3-month, and 1-year time frames. The forecasts for the 3-month and 1-year time frames had high predictability ratings of over 0.5. As shown in Yahoo Finance’s NVDA chart below, NVDA’s stock price has risen roughly 50% since the past forecast, further iterating the success of I Know First’s algorithm.

(Source: Yahoo Finance)

Current I Know First subscribers received this bullish NVDA forecast on August 15th, 2017.

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