NVDA Stock Forecast: Is Nvidia’s growth sustainable?

 

 

This article was written by Isabelle Tao, a Financial Analyst at I Know First.

 

NVDA Stock Forecast

“My mom taught me English a random 10 words at a time before we emigrated from Taiwan” – Jensen Huang, CEO of Nvidia

(Source: Wikimedia Commons)

Highlights

  • Strong Q2 earnings led by Datacenter and Gaming sectors

  • Turing architecture will drive further growth in GPU

  • Nvidia is likely to stay ahead in competition with Intel and AMD

  • I Know First algorithm is currently bullish on NVDA in the long run

(Source: Flickr)

“I’m the product of my parents’ dreams and aspirations,” Huang, who is married with two children of his own, told CNBC’s “Mad Money” host Jim Cramer in a recent interview. Nvidia has been a company to watch. Its $14.40 per share in May 2013 has grown to around $273 per share.

Strong Q2 earnings led by Datacenter and Gaming

Nvidia’s Q2 revenue reached $3.12 billion, up 40% from a year earlier and higher than the projected amount. Among the different sectors (Gaming, Datacenter, Pro Visualization, Automotive), gaming revenue grew 40% from last year to $1.8 billion. Data Center revenue is 83% year-on-year growth and up 8% sequentially. EPS nearly doubled from last year. Here are some key technologies readers should be aware:

  1. Max-Q technology: Enables gaming PC OEMs to pack a high-performance GPU into a slim notebook that is just 20 millimeters thick, or less. Gaming notebook was the top performer with strong demands for thin and right form factors.
  2. Turing architecture: Named after the famous British mathematician and computer scientist Alan Turing, NVIDIA claims this is their most important innovation since the invention of the CUDA GPU. New, dedicated ray-tracing processors or RT Cores, and new Tensor Cores for AI inferencing will make real-time ray-tracing possible for the first time.

Key developments in the $760 million datacenter sector:

  1. AI Developments: Powers real-time services such as search, voice recognition, voice synthesis, translation, recommender engines, fraud detection, and retail applications.
  2. Tensor Core GPU: Volta has been adopted by every major cloud provider and hyperscale datacenter operator around the world. It is also on the Google Cloud platform.
  3. DGX: DGX Systems are designed to give data scientists tools that go from desk to data center to the cloud. Recently adopted by Fujifilm.

Surprisingly, after the Q2 earnings announcement where Nvidia announced the new Turing developments, its shares dropped -8%. This caught investors off guard because Nvidia Q2 ER beat both revenue and EPS estimates. It was mostly because of the lower Q3 guidance despite high R&D fundings that went into developing Turing.

The demand and adoption of these cards matter because Nvidia already has very high growth in the Gaming segment. For it to grow even more at the YoY pace of 52% and 57%, Turing needs to be something enthusiasts and professionals adopt. I have decided to do a SWOT analysis for long-term analysis.

Nvidia CEO Jensen Huang (Source: Wikipedia)

Strengths

Diversified products: Gaming, Professional Visualization, Datacenter and Automobile sectors allow Nvidia to penetrate more industries than its competitors like AMD.

R&D and Innovation: Nvidia invests large amounts of money (17% – 20% of revenue) into R&D, which explains its cutting edge technology and would continue to make it a leader in the high-growth technology industry.

Weaknesses

Mobile GPU: Mobile GPU has not been able to capture a large market. Tegra mobile chips which NVIDIA manufactures are not used in bestsellers like the iPhone.

Opportunities

Growing eSports industry: Nvidia is partnering with EA and Square Enix to make GeForce the PC gaming platform for Battlefield 5 and Shadow of the Tomb Raider respectively. I expect its core gaming business to continue rising because the eSports audience now approaches 400 million, up 18% over the past year. These numbers are only going to rise.

Increasing demand for virtual reality: The Turing architecture will be used in cinematic quality gaming and markets of visualization, such as IKEA Catalogs and product designs that require photorealistic images. Healthcare started using AI in medical imaging too.

Growing automobile industry: The Turing Datacenter has many opportunities in the ride-sharing and ride-hailing field, where high-performance computers are needed to optimize problems on a very large scale. Self-driving cars is also an industry that has to use high-performing computers to simulate testings.

Threats

Fierce competition with AMD and Intel: Given Qualcomm’s exit from the GPU data center processor market, there are only two main players in that multi-billion dollar space: AMD and Nvidia (NVDA). In Q1 2017, Nvidia had roughly 70% market share while AMD had 30%. In Q1 2018, Nvidia’s share dropped to 66%, against AMD’s 34%. This is because Nvidia has focused more on datacenter CPUs, self-driving cars and AI products, while AMD ramped up their GPU sales. AMD announced that the 7nm technology INTC is However, the launch of Turing shows that Nvidia is attempting to reverse the dip in GPU market share. AMD announced the 7nm process technology would start sampling this year for volume ramp in 2019, while Intel is following behind with the 14nm product. NVIDIA is competing head-on-head with AMD by launching the 7nm Next-Gen-GPU built by TSMC in 2019.

While Nvidia chips dominate the AI training chip market, where their chips help algorithms learn new tasks, Intel dominates the next step’s market: data centers where tasks are to be carried out. Hence, it is a challenge for Nvidia to expand to Intel’s current market space. Furthermore, large companies like Facebook are thinking of developing their own chips.

Rapid tech changes and hype: The hype in AI, self-driving cars and cryptocurrency has benefited Nvidia immensely these few years, because its GPU can be used in all these markets. However, tech breakthroughs are getting faster and faster and every new introduction could be a threat to Nvidia.

Analyst Recommendation

(Source: Yahoo Finance)

The current analyst consensus rating supposed at 2.0 on company shares (1.0 Strong Buy, 2.0 Buy, 3.0 Hold, 4.0 Sell, 5.0 Strong Sell).

Conclusion

NVDA has both short term and long term growth potential. Demand in the growing gaming industry will likely support continued growth. Other areas like AI technology and self-driving cars are much more forward-looking and would take many years to establish a strong customer base. At the moment, given high confidence in the new GeForce GTX 1180 and Turing, I expect this new GPU generation to boost the continuing growth. Looking at the market, the advent of deep learning is projected to generate more than $10 billion in revenue by 2024. It is currently a potential $2.4 billion market for chip-makers and could grow more. My expectations resonates with current bullish I Know First forecast.

Current I Know First Bullish Forecast

How to read the I Know First Forecast and Heatmap

Past I Know First Success with NVIDIA

In our previous premium articles on NVDA from August 3rd 2018, July 9th 2018, and Sep 24th 2017 we issued these bullish forecasts for NVDA:

Forecast date I Know First Forecasts Indicators Results
August 3rd 2018, 1 Month Forecast Signal of 15.84

Predictability of 0.42

10.5% increase in 1 month
July 9th 201 3 Month Forecast Signal of 22.40

Predictability of 0.43

4.31% increase in 3 months
Sep 24th 2017, 1 Year  Forecast Signal of 323.49

Predictability of 0.71

61.6% increase in 1 year

Current I Know First subscribers received this bullish 1 Year forecast for NVDA forecast on September 24th 2017.

Get today’s forecast and Top stock picks