Optimism Surrounding NVIDIA Corporation Is Reaching Uncomfortable Levels

The past several days have been particularly good ones for NVIDIA Corporation (NASDAQ:NVDA) shareholders. The NVDA stock price today is right around $197, well up from September’s close of around $179, largely driven by upgrades and upped price targets.

NVDA

Source: Shutterstock

Mizuho Securities, for instance, recently reiterated its “Buy” rating on NVDA and raised its target to $220. Shortly before that, Needham reiterated its “Buy” opinion as well, upping its price target primarily because it sees Nvidia as the primary beneficiary of the advent of artificial intelligence.

 

The bullish arguments make sense. The NVDA news headlines make it pretty clear that the company is leaving rival Advanced Micro Devices, Inc. (NASDAQ:AMD) behind on the A.I. front and, though each cryptocurrency could collapse at any given time, the cryptocurrency mining industry itself isn’t going away anytime soon (if ever).

Nvidia is one of the centerpieces of that movement too.

The sentiment tide has turned extremely optimistic of late, however, with a slew of analysts piling on with raised opinions and raised targets, touting the same bullish case as one another — and the same bullish case each of them has made in the past.

Might all this table-pounding quietly hint that a top — even just a short-term one — is nigh?

In a word, yes.

Groupthink?

Giving full credit where it’s due, this idea comes from Bruce Kamich of Real Money fame. He suggested on Monday that the recent wave of raised price targets for NVDA indicated “crowd behavior,” where one analyst simply follows the lead of another and then another analyst feels obligated to chime in with more optimism of his/her own, prompting another analyst to do the same… and so on and so on.

Such developments are dangerous because they’re not rooted in the fundamentals. They’re psychologically driven, with the analytical community creating the very stock-driving NVDA news they believe will prod Nvidia shares higher.

It works, but only for a while. Sooner or later, investors look back and see how far they’ve come, and realize the run-up wasn’t justified by any plausible NVDA earnings outlook.

And that’s when the pendulum for story stocks like Nvidia can turn the other direction, and make a return stroke larger than most everyone was expecting.

It’s not just in your (or my) head either. The upgrades, raised price targets and general table-pounding have been coming fast and furious in just the past few days.

That’s an awful lot of cheering in a short period of time, most of which was gratuitous.

Don’t misread the message. Nvidia is a solid company with a fantastic future. It really is the heart and soul of the artificial intelligence movement thus far, and its graphics cards are always cutting edge, whether they’re being used to mine cryptocurrencies or simply play video games.

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Autonomous Vehicles To Drive Nvidia Revenues – NVIDIA Corporation (NASDAQ:NVDA)

Price Target: $210.35 – Discount: 8.10% Consensus Outlook

Nvidia (NASDAQ:NVDA) has seen revenue growth of almost 38%. Wall Street expects almost 30% revenue growth in 2018, stemming almost entirely from GPU sales.

Catalysts

Autonomous car producers are rapidly adopting Nvidia’s DRIVE PX AI automotive platform. Here is our forecast for Nvidia automotive sales.

Catalyst – Autonomous Vehicles (Artificial Intelligence)

  • By 2025, we estimate that Nvidia will have an $8 billion opportunity as there will be approximately 25 million cars using Nvidia AI technology, 5 million of those being fully autonomous.
  • New partnerships for the DRIVE PX AI platform show the advancements of over 225 car and truck makers using the Nvidia system, which will only grow as autonomous driving leads us into the future. Such partnerships include Audi (OTCPK:AUDVF), Mercedes-Benz, Toyota (NYSE:TM), Volvo (OTCPK:VOLAF), Bosch (OTC:BSWQY), Baidu (NASDAQ:BIDU), and many others.
  • Autonomous technology falls into four phases (shown in Figure 2), the last phase being fully autonomous vehicles with no driver needed. We are currently in phase 2 of autonomous adoption with limited driver operation. Nvidia is showcasing the 2019 Audi A8 as the first car to use its phase 3 complete autonomous technology.
  • Nvidia CEO Jen-Hsun Huang expects phase 4 autonomous cars to begin showing up on roads by 2021. Currently, several cities in the United States beta test self-driving vehicles. By 2019, Huang says these cars will serve commercial purposes (such as Uber services).
  • The extensive partnerships that Nvidia has with automakers mitigate the risk of competition. Nvidia works with each automaker to tailor chips to their needs. We believe that Nvidia will become an industry standard in the automotive sector as automakers incorporate Nvidia technology into all of their models, high and low-end.

The figure below shows the growth in automotive revenue for Nvidia 52% from 2016 to 2017. As mentioned above, this figure also shows the growth in the number of automakers using DRIVE PX (currently, over 225 automakers).

creen Shot 2017-08-16 at 10.05.35 PM.pngSource: Nvidia’s Investor Presentation

The following figure shows the timeline for adoption of autonomous technology and advancement. Separated into four phases. Currently, in phase 2 (2015-2019), drivers must provide some input while driving. Phase 3 technology (2018-2022) requires a human to be present but should not have to interfere with driving. Nvidia is in pursuit of phase 4 technology which requires no human presence.

utonomous car.pngDiscounted Cash Flow Valuation

Our DCF Model uses:

  • 2.17% for the 10-year U.S. Treasury risk-free rate of return
  • A 9.50% market risk premium
  • A forecast of sales growth for the next nine years
  • A perpetual growth of 3% in year 15
  • A 1.40 Beta for Nvidia Corporation

Given recent demand for Nvidia products, we believe the company can easily attain consensus estimates of 8.94 billion in sales for 2018. Our model presumes 30% growth, or 8.98 billion in sales, for fiscal 2018. The excess growth in our estimate over the consensus stems from an approximate 48 basis point contribution from Nvidia’s automotive segment. We estimate sales growth to remain 30% for 2019, with declining growth rates until 2032.

Management disclosed that it has high hopes for Nvidia’s automotive sales but intends to focus resources on the development of automotive technology until 2019. CEO Jen-Hsun Huang forecasts that autonomous vehicles will start serving commercial purposes in 2019 and will become commonplace by 2021. Until then, Nvidia will be working to make sure these vehicles will come equipped with its technology.

  • We forecast automotive sales to grow at an average CAGR of 39.75% for the next 15 years.
  • In 2028, we forecast that automotive revenue will contribute 24.83% of Nvidia’s entire sales.

Gross margin expanded almost 20% in the last six years; our model presumes gross margin will expand 80 basis points to 59.6% in 2018. This figure is 50 basis points ahead of management’s estimate. It will expand 50 basis points subsequently until 2022; from then on, it will remain at 61.6%.

We expect operating margin to expand 190 basis points in 2018 to 29.79%. Afterwards, we expect operating margin to expand 50 basis points each year until 2022; from then on, it will remain at 31.79%.

The lower beta reflects how much growth is expected from Nvidia in the future. If you were to run a regression, you may find beta anywhere from 1.7 to 2.2, depending on the time horizon.

Shares of Nvidia trade for $197.75, an 8.10% discount according to our model.

*To see our model, click here to download (this sheet uses the closing price of 9/21/17).

WACC vs. ROIC

Nvidia is generating more return on its capital than the cost of acquiring the capital.

*shares in millions

Porter’s Five Forces

Competition with Nvidia (High Force):

Nvidia faces high pressure on selling price reductions due to foreign companies that can compete at reduced costs. Nvidia heavily relies on its patents and licensing agreements to protect its intellectual property, and product imitation can be found in companies outside the U.S. Intellectual property is not protected in Asia as it may in the U.S, affecting the bottom line of the business.

Threat of New Entrants (Low Force):

The threat of new entrants to Nvidia is low due to the number of patented products by the company. If new entrants introduce new products to the market, this can adversely affect market share for the company, but this will most likely occur with bigger companies already established in the market. Financial resources required to start up poses as a barrier to entry.

Threat of Substitutes (Moderate Force):

Although switching costs are low for the individual final customer of most consumer goods in which Nvidia’s products are embedded, engineering, and technology integration costs (as well as quality and performance risks) might be high for Nvidia’s OEM customers. The company stated in its 10-K, “customers typically introduce new system configurations as often as twice per year, typically based on spring and fall design cycles or in connection with trade shows”. If Nvidia’s OEM, ODM, and AIB products are not up to par with features, configurations, and or functionalities, customers will not purchase Nvidia’s products until the next season.

As most competitors invest in high levels of research and development, a major risk of substitutes might come from product enhancement, new technological advancements protected by patents, and/or service offerings. This is even more impactful with competitors who operate and maintain their own fabrication facilities and have longer operating histories, greater name recognition, larger customer bases, and greater financial, sales, marketing, and distribution resources.

Bargaining Power of Nvidia’s Customers (Moderate Force):

Concentrated large orders from a limited number of clients increase buyers’ bargain power and represent a risk for Nvidia’s revenues due to order cancellations, price pressures, or major customers switching to competitors. Also, revenue from sales to customers outside of the United States and other Americas accounted for 80%, 79%, and 75% of total revenue for fiscal years 2017, 2016, and 2015. If customers outside the U.S decide to leave Nvidia for a foreign competitors’ product, this can dampen company profits.

Bargaining Power of Nvidia’s Suppliers (Moderate Force):

Suppliers of general purpose circuits and components are more susceptible to competition on price and are most likely to have low switching costs and consequently lower bargain power. Nvidia’s distinct product components, though, might be protected by patents held by their suppliers, increasing their bargain power.

Nvidia utilizes industry-leading suppliers, such as Taiwan Semiconductor Manufacturing Company Limited (NYSE:TSM) and Samsung Electronics Co. Ltd. (OTC:SSNLF) to produce its semiconductor wafers. It also utilizes independent subcontractors, such as Advanced Semiconductor Engineering, Inc. (NYSE:ASX), BYD Auto Co. Ltd., Hon Hai Precision Industry Co., Ltd. (OTCPK:HNHAF), JSI Logistics Ltd., King Yuan Electronics Co., Ltd., and Siliconware Precision Industries Company Ltd. (NASDAQ:SPIL) to perform assembly, testing, and packaging of most of its products and platforms.

Risk

Nvidia’s P/E ratio is trading at 46.78x, the highest amongst its peers. Investors should be careful as expectations for earnings are steep, risks of Nvidia missing earnings is possible and can result in a price drop.

Nvidia’s market is always evolving, which requires constant innovation. Identifying new products, services, or technologies, in order to successfully compete in target markets is essential. Nvidia’s revenues are extremely sensitive to this matter.

If Nvidia’s products fail to achieve expected manufacturing yields by OEM customers, financial results can be impacted.

The renewal of the Intel’s (NASDAQ:INTC) licensing revenues may adversely affect financial results:

  • In January 2011, Nvidia entered into a patent cross-licensing agreement under which Intel agreed to pay Nvidia an aggregate of $1.50 billion over six years. This allowed Intel to use Nvidia’s GPU intellectual property in its own homemade iGPUs. The final $200 million payment under this agreement was received on January 2016. According to Nvidia’s 10-K, it will be “recognizing revenue under this agreement through the first quarter of fiscal year 2018”. Risks lie on the renewal of this licensing agreement, as it could affect income and financial results.

*I co-authored this article with my colleagues at Precision Asset Management (PAM) of Mihaylo College of Business and Economics: Elad Fedida, Cody Swan, Alia Leiyn, and James Dabbah.

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.

NVIDIA Brings Back Destiny 2 Bundle Again for GTX 1080 & 1080 Ti Cards

For what is the 3rd time this year, NVIDIA is offering the “New Legends Will Rise” Destiny 2 bundle for GeForce GTX 1080 and 1080 Ti graphics cards, systems, and laptops. From today until November 29th (or while supplies last), qualified purchases will come with a digital copy of Destiny 2 via Blizzard Desktop App, officially launching on October 24th for PC. As a reminder, eligible systems may include NVIDIA’s own GeForce GTX Battlebox PCs.

The massively multiplayer online sci-fi first-person shooter, a concept Bungie previously described as a “shared world shooter”, supports High Dynamic Range (HDR) and SLI. Having collaborated with Activision and Bungie on the game’s graphics, NVIDIA has detailed the PC graphics options for Destiny 2 in a blog post, with the removal of MSAA the only difference from the Beta. In addition, GTX 1060 performance testing at 1080p was done for each graphical option. At a glance, Destiny 2 seems to be considered as a genuine improvement over the original, not to mention the PC availability.

The game codes may only be redeemed until December 31st. Fortunately, this comes just after at the end of the Middle-earth: Shadow of War bundle for GTX 1080 and 1080 Ti cards. Otherwise, no other bundles are active this time.

NVIDIA Current Game Bundles
(10/18/17)
Video Card
(incl. systems and laptops)
Bundle
GeForce GTX 1080Ti/1080 Destiny 2 Bundle
GeForce GTX 1070 None
GeForce GTX 1060/1050Ti/1050 None

On the bundle page, NVIDIA has listed an Amazon link for a list of qualifying cards.

The bundle landing page has links to all eligible retailers. Codes must be redeemed through GeForce Experience (3.2.2 or higher), utilizing driver 373.06 or higher. Game must be redeemed via GeForce Experience on a desktop or notebook PC with the qualifying graphics card installed. Once the code is redeemed in GeForce Experience, the game must be redeemed in the Blizzard Desktop App in seven days. A Blizzard account is required to redeem and play the game. Be sure to verify the participation of any vendors purchased from as NVIDIA will not give codes for purchases made from non-participating sellers.

Nvidia Plans to Be a Force Behind Level 5 Autonomous Vehicles

Nvidia wants to be figuratively and literally under the hood of level 5 autonomous vehicles. The graphics chip maker has unveiled a series of new product developments – all targeted at or applicable to autonomous vehicles, and aimed at showcasing its move into the automotive space.

The Drive PX Pegasus is the size of a license plate and can deliver 320 trillion operations per second. (Image source: Nvidia)

Nvidia is attempting to leapfrog straight into level 5 autonomy with the release of its new Drive PX Pegasus, the latest in its series of Drive PX AI computing platforms. The company calls Pegasus, “The world’s first artificial intelligence computer designed to drive fully autonomous robotaxis.”

During a press briefing Jensen Huang, Nvidia founder and CEO said that with Pegasus Nvidia’s goal is to enable the development of vehicles that can function without drivers, steering wheels, pedals, or mirrors … essentially functioning as a mobile office or living room.” Driverless cars will enable new ride- and car-sharing services,” Huang said. “New types of cars will be invented, resembling offices, living rooms, or hotel rooms on wheels. Travelers will simply order up the type of vehicle they want based on their destination and activities planned along the way. The future of society will be reshaped.”

Nvidia believes its GPU technology is up to the challenging demands of level 5 autonomy, which will require high-res, 360-degree cameras as well LIDAR and an array of sensors for positional tracking, GPS, and keeping the vehicle aware of its environment as well as its passengers and pedestrians. Huang said the computing requirements of level 5 driverless vehicles are 50 to 100 times those of the most advanced cars on the road today.

The Drive PX Pegasus has a performance of over 320 trillion operations per second and is about the size of a license plate according to company specs and would replace all of the computing equipment seen in current level 5 prototypes, which takes up about the entire trunk space of the car, Huang said. “In the old world, the more powerful your engine, the smoother your ride will be,” Huang said. “In the future, the more computational performance you have, the smoother your ride will be.”

In conjunction with the Pegasus, Nvidia has also released a software development kit (SDK) – Nvidia Drive Intelligent Experience (IX) – to allow developers to program functions around self-driving vehicles including sensor fusion, facial recognition, and passenger monitoring. The SDK is expected to open for early access in the fourth quarter of this year.

 

 

Finally, Nvidia announced that Holodeck, its VR collaborative work environment announced back in May, is finally opening for early access. While the company has said that Holodeck has a wide range of applications, early demonstrations have leaned heavily on its automotive design applications. Powered by Nvidia’s graphics technology, Holodeck presents a virtual prototyping environment that delivers real-world scale and accuracy along with low enough latency to allow for seamless remote collaboration among design and engineering teams.

Nvidia said it has 225 partners currently developing

Nvidia’s plan to turn data from 500 million cameras into AI gold

Video is the world’s largest generator of data, created every day by over 500 million cameras worldwide. That number is slated to double by 2020. The potential there, if we could actually analyze the data, is off the charts. It’s data from government property and public transit, commercial buildings, roadways, traffic stops, retail locations, and more.

The result would be what NVIDIA calls AI Cities, a thinking robot, with a billion eyes watching our infrastructure to help keep people safe.

“Historically, video data has always been used in a forensic, after-the-fact kind of use case,” says Milind Naphade, CTO of AI City at NVIDIA and one of the speakers at VB Summit: Riding the AI Wave on October 23 & 24 in Berkeley.” But these omnipresent sensors can impact everything from public safety, traffic, and parking management to law enforcement and city services.”

The challenge up to now is not just that it’s difficult to move this data, store it, and analyze with any kind of timeliness. Video is also its own special kind of creature, in the world of sensors, not like a temperature sensor or a pressure sensor that gives you just one particular indicator. Video requires interpretation via powerful deep-learned algorithms, and the kind of computational power that would allow this algorithm to operate in the kind of time that it needs for that insight to matter is massive.

“The quintessential breakthrough is that we finally have access from the edge to the cloud,” Naphade says.

Unveiled in May, Metropolis is an edge-to-cloud video platform that includes tools, technologies, and support to build smarter, faster AI-powered applications. It’s designed to put AI behind every camera, on-premises video recorder and server, and in the cloud. As neural networks are trained on increasingly complex recognition tasks, their accuracy and scalability grow to tremendous heights — and then they’re set loose to save both lives and dollars.

On a large transportation authority network, sparsely populated subway or train stations can be monitored 24/7 to summon aid for riders who encounter trouble or danger at a station — the commuter who trips at the top of the escalator, the kid who gets too close to the edge of the platform. Train tracks are subject to wear and tear over millions of miles of back and forth travel; there are more than 600,000 bridges in the United States alone, and every damage inspection causes traffic to back up for miles. Inspections by video-enabled drones would eliminate the kind of disruption that closes down the Golden Gate Bridge.

More than 50 NVIDIA AI city partner companies are already providing products and applications that use deep learning on GPUs, among them industry leaders like Avigilon, Dahua, Hanwha Techwin, Hikvision, Alibaba, Huawei, and Milestone.

With Metropolis, Hikvision has achieved recall rates of more than 90 percent for its identification and matching technology, which makes it easier to find lost people in crowded places. It works with a camera and network video recorder, plus compute-intensive system at the edge, cloud servers, and an AI supercomputer for training.

Alibaba Cloud’s City Brain offers real-time traffic management and prediction, city services and smarter drainage systems. In Hangzhou’s pilot district City Brain helped to ease traffic congestion by 11 percent.

Huawei is combating traffic congestion using intelligent video analytics, combined all the data necessary, including vehicle information, speed, direction, and more, to provide real-time traffic analysis and improve traffic flow. They have seen speed congestion rates drop by 15 percent.

And development is speeding up with their partner program, which gathers together a dozen software partners to offer a curated list of applications that make it easy for systems integrators and hardware vendors to build new products.

Among them is a facial recognition solution from SenseTime, designed for public safety, retail, and access control. The company is already working with Chinese industry leaders, including China Mobile Communications Corp, China UnionPay and Sina Weibo Corp, to leverage its technology for security and surveillance, finance, education and robotics.

Pilot projects are running in the Bay Area, where the NVIDIA Metropolis platform is being leveraged to make parking an easier, frictionless experience.

“The proof is in the pudding,” Naphade says. “We’re seeing a proliferation of the cities that are now interested in having this technology at their fingertips.”

Years ago you couldn’t live without electricity. Today, you can’t live without internet, Naphade says. And in the next few years, we’ll see AI becoming that pervasive in our lives,

“AI is going to be permanently, irreversibly changing the paradigm in transportation and cities,” he adds. “I can tell you that every city will be leveraging AI, not just for video sensing and intelligence, from edge to cloud, but you will have AI in sidewalks, AI in self-driving cars, bridges, buildings, bikes, traffic signals and more. Pervasive, right? Because this will deliver value to citizens. They’ll come to expect it. It will not be the exception. It will be the norm.”

NVIDIA Stock Near 52-Week High. How Are Things Looking for the Company? — The Motley Fool

NVIDIA (NASDAQ:NVDA) has been one of the hottest tech stocks on the market over the past year, rising nearly 200% thanks to terrific growth across its entire business. The chipmaker now trades at the higher end of its 52-week range, and it is likely that it could scale greater heights as the emerging tech trends that it is pursuing could substantially boost growth.

But at the same time, investors shouldn’t forget that NVIDIA isn’t the only one trying to make a living out of graphics chips, self-driving cars, or artificial intelligence. It has well-heeled rivals such as Intel (NASDAQ:INTC) and Advanced Micro Devices (NASDAQ:AMD), among others, who can rain on its parade.

So does this indicate that it might be a good time to start selling your NVIDIA stock, or should investors remain patient in anticipation of more gains? Is now a good time to buy more shares or open a position? Let’s check.

A NVIDIA GTX 1080 GPU.

Image Source: NVIDIA 

Why NVIDIA could get better

NVIDIA’s foray into fast-growing areas of technology has been a successful one so far. The company has been witnessing impressive growth in the automotive and the data center businesses, while the ever-expanding use of graphics cards in applications such as cryptocurrency has also been a tailwind.

NVIDIA’s data center revenue jumped 175% year over year during the latest quarter, becoming its second-largest revenue source. NVIDIA’s data center business has now witnessed five consecutive quarters of triple-digit revenue growth.

This business won’t be running out of steam anytime soon as data centers are going to need more graphics processing unit (GPU) accelerators to tackle complex applications related to high-performance computing (HPC). Markets and Markets forecasts that HPC could be a $36 billion market by 2020, spawning the need for more GPU accelerators as they will be mission-critical for enabling parallel processing to run complex programs.

Furthermore, NVIDIA has established strong relationships with major cloud service providers (CSPs). Amazon — the biggest CSP in terms of market share — has been a regular customer of NVIDIA’s GPUs to accelerate the performance of its cloud computing platform. Recently, Amazon Web Services (AWS) chose NVIDIA once again to launch a new service that allows users to switch between one, two, or four Tesla M60 GPUs as per their needs.

NVIDIA’s GPU accelerators have allowed Amazon to double the computational capacity of the new service as compared to its predecessor. This will make it easier for AWS customers to tackle complex cloud-based applications such as 3D rendering, virtual encoding, or launching virtual reality apps.

Finally, NVIDIA’s gaming business, which supplies over 53% of its total revenue, should keep getting better as the PC gaming hardware market is estimated to clock 6% annual growth through 2019. The market exceeded $30 billion in revenue last year, with most of the sales taking place in the high-end market that NVIDIA dominates. As NVIDIA commands over 70% of the GPU space, the market’s secular growth should eventually have a positive bearing on the chipmaker’s top line as well.

Growth across all these end markets could encourage existing investors to keep holding NVIDIA stock in their portfolios in the hope of more gains.

Why NVIDIA could run into trouble

However, NVIDIA isn’t going to have a free run at the opportunities it is pursuing. Intel, for instance, has turned out to be a big hurdle for NVIDIA’s self-driving car dreams.

NVIDIA has built a lot of hype around self-driving cars, boasting of its relationships with Tier 1 automakers and component suppliers. Tesla was one such company using NVIDIA technology to power self-driving features and the infotainment system across its electric vehicle range, but Intel now seems to have crashed the party, including via a partnership with Alphabet‘s self-driving car subsidiary, Waymo.

Furthermore, Intel’s formidable automotive alliance plans to put more autonomous cars on the road, posing more trouble for NVIDIA in the automotive space. On the other hand, Advanced Micro Devices could hurt NVIDIA where it hurts the most — gaming and the data center.

It is no secret that AMD has clawed back substantial market share from NVIDIA in recent months, and it will look to sustain the momentum with the Vega line of GPUs. Of course, there have been concerns that AMD’s Vega cards can’t significantly outperform NVIDIA’s existing lineup, but recent tests indicate otherwise.

An independent test by ComputerBase.de found that the flagship RX Vega 64 blew away the NVIDIA GTX 1080 Ti by some distance under certain test conditions. So, NVIDIA investors shouldn’t discount AMD’s potential in the high-end GPU space.

Therefore, proper execution by NVIDIA’s rivals could dent the company’s growth, which makes it a risky bet at the current valuation.

Is it still a good buy?

NVIDIA’s hot streak on the stock market has made the stock very, very expensive. It currently trades at a price-to-earnings (P/E) ratio of over 50, which is more than double the 24.2 industry average. Furthermore, a price-to-sales (P/S) ratio of 14.1 as compared to the industry average of just 4.2 suggests that anyone looking to initiate a long position will have to pay a rich premium.

This makes NVIDIA a risky bet for investors buying shares at the current valuation. Analysts expect NVIDIA’s earnings to grow at just under 13% a year for the next five years, significantly lower than the 34% annual growth it has clocked in the past five years. However, existing investors sitting on long-term gains might be more comfortable holding as the company works to make more strides in the big-growth markets.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Nvidia, and Tesla. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.

Intel unveils new family of AI chips to take on Nvidia’s GPUs

When the AI boom came a-knocking, Intel wasn’t around to answer the call. Now, the company is attempting to reassert its authority in the silicon business by unveiling a new family of chips designed especially for artificial intelligence: the Intel Nervana Neural Network Processor family, or NNP for short.

The NNP family is meant as a response to the needs of machine learning, and is destined for the data center, not your PC. Intel’s CPUs may still be a stalwart of server stacks (by some estimates, it has a 96 percent market share in data centers), but the workloads of contemporary AI are much better served by the graphical processors or GPUs coming from firms like Nvidia and ARM. Consequently, demand for these companies’ chips has skyrocketed. (Nvidia’s revenue is up 56 percent year on year.) Google has got in on the action, designing its own silicon named the Tensor Processing Unit to power its cloud computing business, while new firms like the UK-based Graphcore are also rushing to fill the gap.

Intel’s response has been to buy up AI hardware talent. It purchased vision specialist Mobileye this March; the chipmaker Movidius (the firm responsible for the silicon in DJI’s autonomous drones) last September; and deep learning startup Nervana Systems in August 2016. Since then, it’s been busy teasing this line Neural Network Processors, which were previously known under the codename “Lake Crest.” The NNP chips are a direct result of its Nervana acquisition and fold in the company’s expertise to achieve “faster training time for deep learning models.” (Intel says it also took advice from Facebook on the chip’s design — but didn’t give much detail.)

But how much faster exactly? Intel isn’t saying. While Google touted the launch of its latest-generation TPU chips by publishing head-to-head tests against rival hardware, Intel will only say that it’s on track to meet its goal of improving deep learning training speeds by 100 times by 2020. The company is similarly vague on when its NNP chips will be available to customers, though perhaps more details will leak out today. Some time before the end of the year in limited quantities is the expectation.

NVIDIA Up 88%, But Still Room for a Rally: Mizuho

Who cares if NVIDIA Corp.’s (NVDA) stock is already up 88% this year. There’s more room for the rally to continue, thanks to cryptocurrency and PC gaming.

That’s the takeaway from Mizuho USA, which over the weekend hiked its price target on the graphics chip manufacturer to $220 from $180 a share. With the stock currently trading at $197.92 Mizuho analyst Vijay Rakesh thinks shares can appreciate 12%. That’s on top of the 88% gain in NVDA so far in 2017. Mizuho isn’t the first to get even more bullish on the chipmaker’s prospects, and is likely not the last. But while many on Wall Street are betting on the company’s prowess in artificial intelligence and the data center, Mizuho sees cryptocurrency and its core gaming business as key drivers. (See also: Goldman Gets Even More Bullish on NVIDIA.)

In a research note to clients, Rakesh said shares of Santa Clara, Calif.-based NVIDIA will continue to benefit from “strong underlying trends in cryptocurrency and gaming” that are ahead of even the company’s expectations. And that comes even as graphics processing units (GPU) pricing remains stable. “We believe NVDA continues to see strong GPU trends in cryptocurrency and gaming. GPU pricing remains up post-launch (of its new graphics chip) given shortage and strong demand,” wrote the analyst.

A Bitcoin Boom

Ever since bitcoin and other cryptocurrencies blasted onto the scene, NVIDIA and rival Advanced Micro Devices Inc. (AMD) have benefited from an increase in demand for their graphics processors. Mining these digital coins require a high-end graphics cards, and thus have created strong sales for both semiconductor companies. While cryptocurrencies have gotten a lot of bad press in recent weeks, with China banning cryptocurrency exchanges and JPMorgan Chief Executive Jamie Dimon calling bitcoin a “fraud,” the price has continued to skyrocket, recently hitting an all-time high of $5,800. That ascent is drawing more miners, which means more sales for the likes of NVIDIA. (See more: Two Factors Influencing Bitcoin’s Price Right Now.)

Mizuho’s Rakesh said that after a recent Asia trip, GPU and motherboard original equipment manufacturers said September quarter shipments were up 50% compared to past expectations for shipments that were flat quarter over quarter. The OEMs also said there is nearly no GPU inventory in the channel. “GPU pricing has been trending up for much of the quarter and should be another tailwind,” the analyst noted. “Peers AMD and INTC expect to report Oct 24 and 26 which should be positive precursors for NVDA.” NVIDIA is slated to report September-quarter earnings on Nov. 9. Mizuho has a buy rating on the stock.

Nvidia Portfolio Update – NVIDIA Corporation (NASDAQ:NVDA)

Nvidia booth at Computex, via Bing.Nvidia Booth At Computex Taipei

You Could Have Owned This Portfolio Instead

In June, we criticized Fairholme Fund (FAIRX) manager Bruce Berkowitz for riding Sears Holdings (SHLD) down for years, and we mentioned our Marketplace service as an alternative for readers open to a different approach (Interview With The Dogcatcher). With Sears tanking Monday on the news that Berkowitz was stepping down from its board, we decided to look back on a hedged portfolio we shared with our subscribers a few days before our Sears article in June. Here we update the performance of our top names hedged portfolio from June 16th, with a focus on Nvidia (NVDA) and its hedge.

Our June 16th Hedged Portfolio Featuring NVDA

Each week, we present three portfolios to our subscribers. One is the $100,000 portfolio with the highest ratio of potential upside to potential downside, another is the highest ratio $1,000,000 portfolio, and then we present a $1,000,000 portfolio comprised of our top names. This was our top names portfolio. The idea here was for an individual to hold a concentrated portfolio designed to maximize his potential upside while strictly limiting his downside risk to a drawdown of no more than 9%. This is what Portfolio Armor presented us with, given those parameters:

Image via Portfolio Armor.

Image via Portfolio Armor.

In addition to Nvidia, the site included Activision Blizzard (ATVI), CSX (CSX), IAC/InterActive (IAC), JD.com (JD), Lam Research (LRCX), and TAL Education Group (TAL) as primary securities, based on their net potential returns. The site attempted to allocate roughly equal dollar amounts to each of those names, but rounded down the dollar amounts to make sure it had round lots of each stock.

In its fine-tuning step, it selected Yandex N.V. (YNDX) to absorb as much of the remaining cash as possible. That’s what “cash substitute” refers to in the portfolio: it doesn’t mean this is a cash equivalent (of course, it’s not); it means it’s a security that when collared according to your risk tolerance with a tight cap (the site uses 1% or the current money market seven-day yield, whichever is higher) has a potential return greater than the current money market rate. The point is to minimize your cash level because cash offers negligible returns and, because each position in your portfolio is strictly hedged, you don’t need cash to ameliorate your risk.

Our June 16th NVDA Hedge

Note that each of the underlying securities was hedged. On our website, each of the “+” signs in a portfolio can be clicked to expand the hedge. Here’s a closer look at the hedge on NVDA:

Image via Portfolio Armor.

As you can see above, Nvidia was hedged with an optimal, or least expensive collar, as were the other primary securities. This is in contrast to other recent portfolios, where some primary securities were hedged with optimal puts. Portfolio Armor tries hedging securities both ways, estimating the net potential return both ways, taking into account the historical incidence of outliers. Essentially, the lower hedging cost of collars is weighed against the chance for higher upside when hedging with puts. In the case of Nvidia and the other primary securities here, the collar won out.

Nvidia’s Performance Since (Unhedged)

Recall in our hedged portfolio above, Portfolio Armor estimated a potential return of 22.4% for NVDA over the time frame of the hedge (which expires in mid-December). It’s been four months since the portfolio was created, but so far, NVDA has outpaced our estimate, having gained 30.53% since.

Chart via YCharts.

NVDA’s Performance Since (Hedged As Above)

First, let’s look at the current quotes on the options in NVDA’s hedge above, then work out how it has done since, taking into account the hedge. Here’s the relevant part of the option chain for NVDA via Fidelity:

Image via Fidelity. The columns we’re concerned with there are the ones labeled Bid, Ask, and Strike. The way we value options when tracking performance is to use the intrinsic value or the midpoint of the bid-ask price, whichever is lower (we don’t use last price since options often don’t trade every day and the last price can sometimes be unrepresentative of what you’d be able to buy or sell the option for now).

Recall that the call option in our NVDA collar hedge was the $190 strike one. Since NVDA closed at $197.93 on Monday, the intrinsic value of that option was $7.93. On the bottom left of the image above, you can see it has a bid price of $17.30 and an ask price of $17.65. So we value this at $17.475, and since we had 8 contracts covering 800 shares, the call position as of Monday would have cost about $13,980 to buy-to-close.

The put option in our hedge was the $150 strike one, which you can see at the top right of the excerpted option chain. Since NVDA closed well above that on Monday, that put had an intrinsic value of $0, so we value it at the midpoint between its bid price of $0.76 and its ask of $0.80, which is $0.78. And since we had 8 contracts covering 800 shares, that comes out to $624.

In general, the value of a hedged position equals the value of the underlying security, plus the value of the put options you own on it, minus the value of the call options you’re short on it (if any). So the value of the NVDA position in our portfolio, as of June 16th, was $121,296 (800 shares @ $151.62) + $14,920 – $6,400= $129,816.

And the value as of Monday was $158,344 (800 shares @ $197.93) + $624 – $13,980 = $144,988.

$144,988 represents an 11.7% gain from $129,816. Nowhere near as high as NVDA’s unhedged return, but an attractive return so far, nevertheless.

As you can see, this is a bit tedious to calculate manually, so we’ve created an automated tool to track performance in hedged portfolios. Let’s use it see how this portfolio has done since.

Hedged Portfolio Performance Since

Here’s how the entire portfolio has performed since June 16th:

Image via Portfolio Armor.Image via Portfolio Armor.
The portfolio as a whole was up 7.41% as of Monday, net of hedging cost and opening trading fees for all positions. Over the same period, the market, as represented by the SPDR S&P 500 ETF (SPY), was up 5.22%.

Note, though, that SPY and this portfolio don’t start at the same dollar amount on the left side of the graph. SPY starts at $1,000,000, but this portfolio starts at $996,003. Our portfolio starts $3,967 in the hole, due primarily to our assumption that we enter each option position at the worst end of its spread. As one of our Marketplace colleagues commented to us recently, this is a very conservative assumption.

Performance Of Our Primary Securities, Unhedged

What if you had just bought our 7 primary securities in this portfolio, each of which were in our top 10 on June 16th? If you bought equal amounts of each of them, you would have been up 25% by Monday.

Chart via YCharts.

Our Top Names > Our Hedged Portfolio > SPY > FAIRX

Readers of our recent article on our security selection method (Seeking Alpha? Here’s Alpha) may not be surprised by the strong performance of Nvidia and our other top names included in this portfolio. That they outperformed our hedged portfolio in a rising market shouldn’t be a surprise either, due to the drag of hedging. But what might be a surprise is that our hedged portfolio outperformed SPY (and FAIRX, for that matter) over the same time frame, and did so while taking far less risk.

Chart via YCharts. In a worst-case scenario – if another 2008-style crash happens over the next couple of months, SPY or FAIRX might be down 40% or more. A handful of our top names, unhedged, could be down much more than that. In that scenario, the NVDA hedged portfolio shown here would be down 8.49% at most. You have a shot at decent returns when the market is doing well, and you won’t lose much when it’s not. Heads you win, tails you don’t lose too much.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Monday’s Vital Data: Nvidia Corporation (NVDA), Wells Fargo & Co (WFC) and Netflix, Inc. (NFLX)

Options activity provides a look at expectations on NVDA, WFC and NFLX

U.S. stock futures are are trading broadly higher this morning, as Wall Street prepares for another round of corporate earnings — one led by Netflix, Inc. (NASDAQ:NFLX) after the close. What’s more, geopolitical concerns are back in the headlines, after President Donald Trump threatened to withdraw from the Iran nuclear deal over the weekend.

Monday’s Vital Data: Nvidia Corporation (NVDA), Wells Fargo & Co (WFC) and Netflix, Inc. (NFLX)Against this backdrop, futures on the Dow Jones Industrial Average are up 0.04%, while S&P 500 futures have inched 0.01% higher and Nasdaq-100 futures higher by 0.10%.

In the options pits, volume was brisk with about 15.7 million calls and 13.2 million puts crossing the tape. On the CBOE, the single-session equity put/call volume ratio slipped to 0.65, while the 10-day moving average ticked higher to 0.65 — it’s highest reading in a month.

Taking a closer look at Friday’s volume, Nvidia Corporation (NASDAQ:NVDA) saw increased call option volume after Needham lifted its price target on the company’s A.I. chips outlook. Meanwhile, Wells Fargo & Co (NYSE:WFC) dipped and puts piled due to a poor expense-related outlook. Finally, Netflix calls gained popularity as NFLX stock broke $200 ahead of today’s earnings report.

Monday’s Vital Options Data: Nvidia Corporation (NVDA), Wells Fargo & Co (WFC) and Netflix, Inc. (NFLX)

Nvidia Corporation (NVDA)

Nvidia’s has gained considerable notoriety in the past week following the release of its latest artificial intelligence semiconductor platform: Drive PX Pegasus. NVDA stock gained additional momentum on Friday, after Needham analysts reiterated a “buy” rating a boosted their price target to $250 from $200. According to Needham, “Virtually all carmakers, transportation as a service companies, as well as startups are using NVIDIA AI in the development of Level 5 vehicles.”

NVDA options traders tee’d off on the news, flooding the stock with bullish call options. Volume topped out at 217,000 contracts, with calls snapping up 67% of the day’s take. Looking out to November options, the $200 strike is the second most popular, with more than 5,900 calls in residence. Only the in-the-money $185 strike is more popular.

If NVDA’s momentum holds through this week, we could see the shares top $200 by Friday.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/10/monday-vital-data-nvidia-corporation-nvda-wells-fargo-co-wfc-netflix-inc-nflx/.

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