NVDA with Nobias technology: Can Nvidia Continue On Its Recent Bullish Tear?
Harsh Chauhan, a Nobias 5-star rated analyst recently published an article which began with the sentence, “If you had $10,000 to invest at the beginning of 2016 and bought shares of Nvidia (NVDA) using that money, your initial investment would be worth just about $250,000 right now.” Chauhan highlighted Nvidia’s nearly 2,400% total returns since 2016, then boldly states, that be believes the company has the potential to “repeat -- or improve upon -- its terrific stock market performance once again in the coming years.”
Regarding Nvidia’s past, Chauhan said, “Nvidia's dominance of the GPU (graphics processing unit) market has accelerated its revenue and earnings growth over the years. In fiscal 2016, the company had reported just $5 billion in annual revenue and $929 million in adjusted net income. In fiscal 2021, which ended in January this year, Nvidia's annual revenue had ballooned to $16.7 billion and adjusted net income had jumped to $6.2 billion.”
Regarding the company’s future potential, he continued saying, “First, Nvidia controls 80% of the discrete GPU market, according to Jon Peddie Research. The discrete GPU market is expected to generate $54 billion in annual revenue by 2025 as compared to $23.6 billion last year.”
Chauhan notes that he does not believe that Nvidia will cede much in the way of market share to its smaller rival, Advanced Micro Devices (AMD), which plays a major role in his expectations for continued outperformance. He states, “According to a survey by game distribution service Steam, Nvidia's flagship RTX 3090 card is outselling AMD's latest RX 6000 series cards by a ratio of 11:1.” And, this is despite the fact that NVDA’s product is much more expensive than AMD’s, pointing towards the market’s withheld belief that not only is NVDA’s product of superior quality, but also, an appealing value.
Chauhan mentions that the gaming segment makes up roughly 50% of NVDA’s sales. He points out that the data center and automotive segments are quite large now as well, and these are areas of the semiconductor industry have bright growth prospects as well. Chauhan notes, “The data center segment, for instance, generated just $339 million in revenue in fiscal 2016. The segment's fiscal 2021 revenue jumped to $6.7 billion and accounted for 40% of the total revenue.” He says that the company is focusing its efforts on the “data center accelerator space”, which is expected to grow from $4.2 billion in 2020 to $53 billion in 2025. Assuming NVDA can capture a significant portion of this market like it has in the gaming space, this has the potential to be another strong revenue driver for the company.
Lastly, Chauhan highlights the company automotive segment, which is rather small at the moment, generating just $536 million in sales during its most recent fiscal year. However, he notes, the company “says that it has built an automotive design win pipeline worth over $8 billion through fiscal 2027” and therefore, he believes that this can be yet another business than can propel NVDA shares higher over the medium-to-long term.
Harsh Chauhan isn’t the only 5-star rated analyst that we track who has recently published a bullish report on NVDA shares. Nicholas Rossolillo, another Nobias 5-star rated analyst, recently wrote an article explaining why he continues to be very bullish on the company’s prospects. Rossolillo’s thesis revolves around the idea that not only is Nvidia a leading producer of semiconductor hardware, but that the company continues to dedicate great resources into becoming a software powerhouse, vertically integrating its business which allows it to better compete against other well known big-tech players who’re pursuing the same strategy.
Rossolillo writes, “Nvidia is pouring vast resources into research and development, and coming up with an expanding suite of cloud-based software as a result. The rulebook is changing for semiconductor industry success, and Nvidia's combo of tech hardware licensing and software makes it the best bet for the 2020s.” He continued, saying, “The company has been planting all sorts of seed for its future cloud software and service library. It has its own video game streaming platform GeForce Now, Nvidia DRIVE has partnered with dozens of automakers and start-ups to advance autonomous vehicle software and system technology, and the creative collaboration tool Omniverse, which builds on Nvidia's digital communications capabilities, is in beta testing.”
Rossolillo concludes, “Between its top-notch tech hardware licensing business and newfound software prowess, it's clear Nvidia is no normal semiconductor company.” He wrote, “While public cloud computing firms like Amazon, Microsoft (MSFT) and Google get all the attention, don't ignore Nvidia. It's going after the massive and still fast-expanding software world as secular trends like the cloud and AI are forcing the transformation of the tech world.” And, while noting that the company’s current valuation is lofty, given enough time (patience) and discipline (to hold through potential near-term volatility), he believes NVDA is going to be a winner saying, “However, if you're looking for a top semiconductor investment for the next decade, look no further than Nvidia, as it's poised to rival the scale of the biggest of the tech giants.”
Stavros Georgiadis, a Nobias 4-star rated analyst, recently published a report on NVDA at InvestorPlace, highlighting many of the same growth prospects as Chauhan and Rossolillo; however, unlike those two, he expressed a bearish opinion on shares, due to the company’s high valuation. After touching upon NVDA’s strong growth prospects, Georgiadis wrote, “But there is one problem that is too important to ignore — the lofty valuation.” He continued, “Nvidia trades at over 24x expected 2021 revenue and according to Zacks, it has a forward P/E ratio of 50.3 and a PEG ratio of 2.92.”
On a trailing basis, the company appears to be even more expensive. Georgiadis explained, “The PE Ratio (Q1 TTM) for NVDA is 132.75, while for the industry and sector those numbers are 36.54 and 40.67 respectively. The Price to Sales (Q1 TTM) ratio for Nvidia is 37.33 and for the industry and the sector is 7.3 and 7.4 respectively. Finally, the Price to Book (Q1 MRQ) ratio for Nvidia is 26.84 and for its industry and sector is 7.3 and 10.2 respectively.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
These figures are simply too much for the company to overcome, coming from his conservative, value oriented perspective. Georgiadis concludes his piece saying: “Overall, Nvidia has many high qualitative features related to its financial performance. Morningstar mentions a three-year average growth for revenue, net income, and EPS of 19.74%, 12.44%, and 12.7% respectively. Impressive numbers. The one thing that I do not like about NVDA stock is unfortunately what matters most, its valuation, which is too high. A very crucial factor that summarizes my financial analysis on Nvidia. Yes, growth seems positive enough, but the price is just too high for right now.”
Overall, the majority of the credible authors that we track with the Nobias algorithm reside on the bullish side of the fence when it comes to NVDA shares. Right now, 67% of such authors offer “Bullish” opinions on shares. The average analyst price target for NVDA amongst such authors is currently $226.27, which implies no upside potential relative to today’s share price of $222.05.
In short, while the majority of the analysts that have written recent reports on the stock note that the stock’s growth trajectory remains intact, after its strong performance in recent years, there are heightened concerns surrounding the stock’s valuation premium and the headwinds that this presents to the company’s share price.
It will take time for Nvidia’s double digit growth to justify its current price-to-earnings multiple, but given enough patience, it appears that an investment in NVDA has the potential to pay off in a big way.
Disclosure: Of the stocks mentioned in this article, Nicholas Ward is long NVDA and MSFT. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.