After a stellar run-up in the shares and valuations getting a bit stretched, it’s natural the shares of Nvidia (NASDAQ:NVDA) are sensitive to some downdraft and wobbly knees.
We propose a simple investment thesis. Take advantage of the weakness in the share price by accumulating shares on dips.
Why? Simple, Nividia is very well positioned to take advantage of some of the biggest growth opportunities in tech, so whatever the short-term weakness will be, the longer-term uptrend is still intact.
This is not to deny that there are short-term concerns. But we should also take not of the fact that the stock price has already sold off 25% from its highs. Investors should take advantage of this in a measured way.
Tuesday market another phase in this downdraft, this time produced by concerns uttered by an analyst at Crest, who downgraded the stock to underperform and slapped on a $90 price target. His reasons:
- Saturation in the desktop GPU PC market
- A possible pause in the sale to data centers
- Lower margin business from Nintendo’s Switch
The analyst cites 3 months of inventory in the desktop PC market, but this is partly offset by sales to Nintendo, albeit at lower margins:
While $400 million of incremental revenue from Nintendo will serve as an offset to flat desktop GPU sales at NVIDIA this fiscal year (in fact, we estimate only a ~$115 million hit to our gaming segment revenue estimate if these two scenarios indeed play out), we estimate that this sales mix change will lead to a 50 bps and 110 bps adverse impact to company gross and operating margin, respectively, resulting in a ($0.10) impact to EPS.
With respect to datacenter growth the analyst noted reduced lead times from Tesla (NASDAQ:TSLA) and the notoriously lumpy datacenter business, whilst arguing that the long-term trend (upwards) is still intact.
So what we get is some possible lesser demand growth in two of its markets, one of which has compensation (albeit at lower margins). We already knew this, sort off, from SA contributor The Structure of Price, who deems Nvidia even more vulnerable to downturns in gaming and points out declining PC sales as a threat.
As it turns out, there are even a few arguments against these short-term concerns.
For instance, while it is true that PC sales have been declining for some time, rather than declining in sympathy, Nvidia’s gaming sector has been on a rampage:
And since competitor AMD (NASDAQ:AMD) has most of the console market, this mostly comes from PCs.
Then we have analysts from Bluefin who actually see strong PC demand, but that doesn’t necessarily favor Nvidia (indeed, the company wasn’t mentioned in the research).
There are some reasons for concern though, AMD is gaining market share in discrete GPUs. On the other hand, as our former SA contributor Ashraf Eassa noted, Nvidia’s newest flagship GPU, the GeForce GTX 1080 Ti introduced last month, was sold out.
There is of course also the issue of the fall in IP revenue from Intel, which expired on March 17 and has netted Nvidia roughly $67M per quarter, but this has been known for quite some time.
The long-term case for Nvidia
There are solid long-term trends in favor of Nvidia, a series of potentially very big market opportunities in the early stages of what most would agree will be explosive growth ahead, like:
- Virtual reality (VR)
- Artificial Intelligence (AI)
- Internet of Things ((IoT)) including autonomous vehicles.
Even gaming, still Nvidia’s core market still has solid growth in it, more especially in the third world, according to analysts from Citygroup.
And we’ve already mentioned the Nintento Switch console win, despite lower margins, this is a significant win for Nvidia, especially given the popularity of the Switch.
Nvidia also has significant opportunities in cloud gaming, and more especially in VR, which goes way beyond gaming. While VR is off to a fairly slow start, it is still nearly universally expected to become a multi-billion market within years when hardware and software improves and becomes cheaper.
Nvidia benefits mainly through powering the graphics in PCs necessary to render the high-end consumer VR solutions from Facebook (NASDAQ:FB) and HTC (HTC).
These won’t have the market to themselves, and might even struggle against cheaper solutions which work on your phone (Samsung’s Gear VR, Google Daydream View) and augmented and mixed reality (AR, MR) glasses like Microsofts (NASDAQ:MSFT) Hololens, Magic Leap, OSVR, Vuzix, Intel (NASDAQ:INTC) Project Alloy and a host of others.
So far as there is a risk, it could very well be that these latter categories win more market acceptance compared to the PC based headsets where Nvidia dominates (apart from the Playstation VR), especially given that it might be corporate applications that drive most of the early adoption.
We’re still very much in the early stages, before mass acceptance, so much of this is speculative. Given the heavy graphic processor demand of VR, Nvidia’s opportunity seems relatively assured, whatever form the market will take.
Lumpy as it might be, cloud investments will still grow substantially, according to Gartner:
Gartner estimates that public cloud infrastructure investments will grow almost 37% this year, to $34.6 billion, thanks to investments from Amazon, Microsoft (NASDAQ:MSFT), and Alphabet’s (NASDAQ:GOOG) Google to bring their data centers up to speed
And that growth isn’t likely to slow down significantly any time soon (from Cloudcomputing):
The global data landscape will total an eye-watering 163 zettabytes by 2025, up from 16 ZB last year and the equivalent of watching the entire Netflix catalogue 489 million times, according to a new missive from Seagate. The study, Data Age 2025, was put together in conjunction with research firm IDC, and finds that within the next decade enterprises will become the primary creator of the world’s data, at 60% by 2025.
Much of that data will be stored in the cloud. Nvidia benefits not only from this massive underlying growth trend, but its GPUs are a relatively new phenomenon in cloud servers. The parallel processing capabilities of GPUs turn out to be very useful for crunching through massive amounts of cloud data.
This is especially useful in many AI applications, Nvidia is hitching here on yet another enormous growth trend. Indeed, according to an MIT Technology Review survey, machine learning is the ground for new competitive advantage and is running mostly in the cloud.
Nvidia has just expanded its cloud reach to China via a deal with Tencent (OTCPK:TCEHY), the latter will use Nvidia’s solutions (Tesla GPU accelerators, NV link and deep learning software) offering AI in the cloud for its customers. Tencent is only the latest, after IBM (NYSE:IBM), Microsoft , Facebook , Google (NASDAQ:GOOG) and others.
Another big growth opportunity is the Internet of Things, in several ways. First because it tremendously boosts the amount of data produced, which needs to be stored and analyzed, boosting the cloud and AI.
Second, there are specific markets for which Nvidia is especially well placed, like autonomous driving. This too generates an explosive amount of data:
Intel CEO Brian Krzanich believes that a single autonomous car could generate 4,000 gigabytes of data daily if driven for just one hour, thanks to all the sensors and cameras installed. Machina Research, on the other hand, forecasts that the number of connected devices will grow over fourfold, to 27 billion, by 2025.
But Nvidia has been able to leverage the advantages of its Tegra processors for in-car entertainment systems to develop an autonomous driver platform, first with the Drive PX, followed by the Drive PX2. While it’s still just 7% of revenue, growth is fast (52% in the last quarter).
They have already raked up a host of deals and partners, amongst which Tesla, Audi, Mercedes Benz, Baidu, BMW, Volvo and others (80 in total).
Perhaps more importantly, it recently teamed up with Bosch, a German technology giant and tier-1 supplier to most major car manufacturers. It’s based on Xavier AI system-on-chip, capable of up to 30 trillion operations per second while drawing just 20 watts of power. Here is TechCrunch:
This is the kind of strategic tie-up that lets both partners do what they do best – Nvidia can focus on developing the core AI supercomputing tech, and Bosch can provide relationships and sales operations that offer true scale and reach. Nvidia’s deep learning model does not depend on specific rules being coded for each individual situation; instead, it provides the systems with a number of examples from human behavior, and then the AI can determine on its own what to do in specific scenarios.
And they’re moving the concept to trucks, partnering with Paccar (NASDAQ:PCAR) with its Drive PX2 platform enabling level 4 autonomy.
There is lots of other stuff that the company offers (improving the resolution of your photo’s, streaming TV and games, Virtual Reality, smart home).
Time to buy?
We could give you a valuation analysis, but we really cannot improve upon the one provided by SA contributor Truth Investor.
Despite the substantial (7.6%) decline on Tuesday, the shares are still on the rising support line. If that holds, one could buy in. If it doesn’t the shares could fall back to the mid 90s, at which point we think one could start accumulating, but keep some dry powder.
While it doesn’t seem likely to us, one can never discard further falls, especially as the market is a little frothy. But the essence is that we think the longer-term perspectives are in tact for the company. It is well positioned to profit from big trends and growth markets like gaming, VR, IoT, automotive and, perhaps most of all, AI (even if there is considerable overlap between them).
Disclosure: I am/we are long NVDA.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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