Nvidia’s Drive PX Pegasus Is A Royal Flush For Self-Driving Cars – NVIDIA Corporation (NASDAQ:NVDA)

The Auto segment of Nvidia (NVDA) is the smallest contributor in terms of quarterly revenue. It only contributed $142 million in Q2 FY18. The Auto segment can probably see a big spurt in growth when Nvidia starts shipping its Drive PX Pegasus next year. Drive PX Pegasus is Nvidia’s ambitious license-plate-sized in-vehicle datacenter-level processor intended for level 5 (or fully autonomous) robotaxis. There are now 25++ companies developing Nvidia Drive PX-based robotaxis.(Source: NVIDIA)

Anything that can help increase the quarterly revenue of Nvidia’s Auto business unit is an important matter that should be discussed here. To gauge just how important self-driving car technology-related products like the Drive PX Pegasus, read on Google’s (GOOG) (NASDAQ:GOOGL) billion-dollar legal suit against Uber allegedly receiving Waymo trade secrets.

The Drive PX Pegasus is 10x more powerful than the Drive PX 2 hardware. It can reportedly match the compute power of a 100-server datacenter rack. I consider this new hardware from Nvidia as the super-sized version of Intel’s (INTC) neuromorphic processor.

A little tweaking from Nvidia and Drive PX Pegasus can also self-learn like a human brain. Simultaneously, it can still deliver over 320 trillion operations per second compute performance without being tethered to the cloud.(Source: NVIDIA)

The Drive PX Pegasus could catapult Nvidia as the go-to processor supplier of the $38 billion/year ride-hailing industry’s adoption of robotaxis. Goldman Sachs also expects the ride-hailing industry to grow to $285 billion by 2030.

The Drive PX 2 Pegasus level 5 autonomous car processor can make Nvidia the enabler of some unicorn companies. The massive valuation of ride-sharing firms/taxi-hailing like Uber ($68 billion) and Didi Chuxing ($50 billion) can probably come true when they start augmenting their human-driven cars with Nvidia-powered robotaxis.

Nvidia can usher in the datacenter-in-a-car concept. Now that AMD is encroaching the high-end gaming/workstation GPU market with its Vega GPUs, Nvidia needs to work harder growing its Auto and datacenter GPU businesses.

Why I Am Optimistic About Robotaxis

Since Intel and Advanced Micro Devices (AMD) won’t have an equalizer to the Drive PX Pegasus, Nvidia can sell it at a high markup. After government regulators approve level 5 autonomous cars on the road, taxi fleet operators and ride-sharing companies will start using them. It is probably going to take 3-5 years before government regulators approve level 5 robotaxis. However, Nvidia’s surging valuation is already boosted by its potential role as the top supplier of semiconductor products for self-driving cars.

The three-year return of NVDA is more than 1,000%. Nvidia launched its Drive PX hardware/platform in March 2015. Nvidia priced its first Drive PX car processor at $10,000 and it still found acceptance. There are now more than 25 car manufacturers who work with Drive PX hardware. We have to conclude that the Auto segment is a contributor to the massive 3-year return of NVDA. No other company has matched Nvidia Drive PX’s level of acceptance among car manufacturers.

(Source: Morningstar)

Going forward, self-driving taxis can be better taxi-hailing service providers than human driven cars. More often than not, human drivers tend to burden me with stories about politics, their health, their family, their favorite TV shows and sports teams. I am ride-sharing to get from Point A to Point B. I do not need the additional aggravation of listening to another person’s ills/problems/thoughts.

If the travel time will take more than 30 minutes, I would prefer to nap rather than petty talk with a human driver. Robotaxis will assure me I won’t be driven around by chance by a sickly/DUI driver. Unlike a human driver, the Nvidia Drive PX Pegasus-based robotaxi won’t consider kidnapping or robbing its passenger.

Final Thoughts

The Gaming segment is currently the biggest revenue/profit generator of Nvidia. However, AMD will eventually take more market share in discrete gaming/mining GPUs. Nvidia developing more GPU products for Auto and datacenter is commendable. As far as I know, AMD still has no car-centric GPU in the pipeline.

As per released specs, the 500-Watt Drive PX Pegasus will come with 2 integrated Volta GPUs and 2 discrete post-Volta GPUs. The first Volta GPU, the Tesla V100 comes with 21 billion transistors, 5,120 CUDA cores, and 640 Tensor cores.

(Source: Wikipedia/Nvidia)

The Drive PX Pegasus is a stellar example of how far Nvidia has achieved in making its formerly gaming-only GPUs become in-demand for other enterprise-level, scalable applications. The rapid appreciation of Nvidia’s market cap over the last twelve months is because many investors believe in the future roles of GPUs in datacenter/deep learning and self-driving cars.

NVDA is a buy. According to the Artificial Intelligence-powered Relative Valuation Model of FundamentalSpeculation, NVDA is fairly valued.

(Source: FundamentalSpeculation)

FundamentalSpeculation derived a fair value of $182.74 for NVDA. It came about after FundamentalSpeculation’s AI computed the average valuation ratios of other companies with similar business fundamentals of Nvidia to get the Cohort Fair Value. After which, the Cohort Fair Value was modified with values derived from calculating the average valuation ratios of Nvidia’s peers in the Technology sector and Computer Hardware Industry.

Disclosure: I am/we are long NVDA, AMD, INTC, GOOG.

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’s AI Developments Don’t Change Self-Driving Car Timeline (NASDAQ:NVDA)

Robotics Analyst: Nvidia's AI Developments Don't Change The Self-Driving Car Timeline

NVIDIA Corporation (NASDAQ: NVDA) stirred the markets Tuesday with news of its groundbreaking supercomputer capable of supporting fully autonomous vehicles. The announcement drove Nvidia shares to the $190 level.

But for all the excitement, the world’s first artificial intelligence computer for “Level 5” autonomy may not widely impact the AV space.

“This is definitely a net positive for the entire self-driving car space but doesn’t change our thesis on electric or self-driving vehicles,” Austin Bohlig, robotics industry adviser at Loup Ventures, told Benzinga. “At the least, it may have modestly shortened the time frame when we begin to see self-driving vehicles on the road, but our 2020 date for the influx to begin still holds.”

Nvidia is already considered a leader among AV suppliers. Loup managing partner Gene Munster previously listed Nvidia as the field’s top components manufacturer and the best way to play the AV theme outside of a Tesla Inc (NASDAQ: TSLA) stake.

The Tesla Impact

Tesla currently uses Nvidia chips, but was recently reported to have partnered with Advanced Micro Devices, Inc. (NASDAQ: AMD) in an alleged step toward self-sufficiency. Analysts posited that the move could be indicative of Tesla’s eventual shift from Nvidia products but insisted that Nvidia investors had little to worry about.

Tesla supporters were similarly unconcerned by Nvidia’s latest demonstration of strength.

“As it relates to Tesla, I don’t think they are second guessing themselves [with regard to the AMD partnership],” Bohlig said. “While Nvidia may have a slight [leg] up in the GPU space, AMD has made great progress over the last couple years and is much more competitive today.”

Loup still considers Tesla and Alphabet Inc (NASDAQ: GOOGL)’s Waymo leaders in self-driving auto manufacturing.

Related Links:

The Autonomous Future: Munster’s 2020 Vision Of The Road

Gene Munster: Traditional Car Manufacturers Face ‘Innovator’s Dilemma’

Posted-In: Analyst Color News Travel Top Stories Exclusives Tech Trading Ideas General Best of Benzinga

Nvidia Is Powered By Strong Momentum – NVIDIA Corporation (NASDAQ:NVDA)

Nvidia (NVDA) stock is on fire. Actually, that’s an understatement: shares of the graphic chips leader have gained a jaw-dropping 170% over the past year. On a forward looking basis, the cold-hard data indicates that Nvidia is driven by vigorous momentum in different areas, and this is a big positive for investors in the company.

A Quantitative System Based on Momentum

Momentum is a powerful force in the market. It basically means that winners tend to keep on winning over time, and companies that are outperforming the market continue on the right track more often than not.

The following quantitative system picks stocks based on a variety of indicators, with a deep focus on measuring momentum at different levels. The system begins with a screening process, meaning that only companies that meet a specified criteria will be considered for inclusion.

The selection criteria is as follows:

  • Over the counter stocks are excluded from the universe to guarantee a minimum liquidity level.
  • Sales growth over the trailing 12 months needs to be above the industry average.
  • Earnings expectations for the current year are currently higher than they were eight weeks ago.
  • Revenue expectations for the year also are higher than they were eight weeks ago.
  • The stock needs to be outperforming other stocks in the industry, both over the last 26 weeks and over the last 52 weeks.

From a starting universe of nearly 5,000 names, this filter leaves us with 139 candidates, so the screening criteria is quite selective. Among those names, the system picks the strongest 50 companies based on the Power Factors system, a proprietary quantitative system that ranks stocks based on three different factors: financial quality, valuation, and momentum. The backtesting assumes that the portfolio is rebalanced monthly and positions are equally weighted.

The system performed remarkably well over the years. The quantitative portfolio produced an average annual return of 15.24% per year since 1999. This is much better than the 3.87% annual return generated by the S&P 500 in the same period. In cumulative terms, the system generated a total return of 1,323.87% versus 103.46% for the S&P 500.

Needless to say, this difference in returns could make a huge impact on the value of investor’s capital over time. A $100,000 investment in the S&P 500 in 1999 would currently be worth around $203,500. In stark contrast, the same amount of money allocated to the portfolio recommended by the system would have a current market value of more than $1.4 million.

Strong Momentum Driving Nvidia

Nvidia is a global market leader in digital media processors and related software. The company pioneered the GPU – graphic processing unit – a high performance processor that generates high-quality graphics on personal computers, smartphones, game consoles, and other platforms. Nvidia’s products are used in a variety of end markets, including high-end gaming PCs, data centers, and automotive systems.

Source: Nvidia.

Nvidia has benefited tremendously from growing demand for gaming products over the past several years, and the company is positioned for growth in areas with extraordinary potential for expansion in the years ahead. Artificial intelligence and deep learning applications that use the company’s graphic chips are particularly promising, and Nvidia is betting on autonomous vehicles with its Drive PX self-driving platform.

Source: Nvidia.

Financial performance doesn’t leave much to be desired. The company has delivered booming revenue growth over the past three years, while profit margins have enlarged. Rapidly growing sales in combination with expanding profit margins on sales have provided a double boost to earnings per share over time.

ChartNVDA Revenue (TTM) data by YCharts

The following chart compares key financial performance metrics for Nvidia versus the average company in the industry, and Nvidia is substantially above-average across the board. Revenue growth, net income growth, operating profit margin, net profit margin, return on assets (ROA), and return on equity (ROE) are all pointing in the same direction.

The most recent financial report from Nvidia confirms that the business is firing on all cylinders. The company produced a record $2.23 billion in revenue during the quarter ended in July, a big increase of 56% vs. the same quarter in the prior year. Gross profit margin expanded by 5 basis points year-over-year, and adjusted earnings per share jumped 91%.

Both sales and earnings came in above Wall Street expectations last quarter, and the company has consistently outperformed forecasts by a considerable margin over the past four quarters in a row.

Quarter ended

10/30/2016

1/30/2017

4/29/2017

7/30/2017

EPS Est.

0.57

0.83

0.66

0.7

EPS Actual

0.83

0.99

0.79

0.92

Difference

0.26

0.16

0.13

0.22

Surprise %

45.60%

19.30%

19.70%

31.40%

Jensen Huang, founder and CEO of Nvidia, sounded quite confident about the company’s prospects in the press release.

“Adoption of Nvidia GPU computing is accelerating, driving growth across our businesses. Datacenter revenue increased more than two and a half times. A growing number of car and robot-taxi companies are choosing our DRIVE PX self-driving computing platform. And in Gaming, increasingly the world’s most popular form of entertainment, we power the fastest growing platforms – GeForce and Nintendo Switch.

Nearly every industry and company is awakening to the power of AI. Our new Volta GPU, the most complex processor ever built, delivers a 100-fold speedup for deep learning beyond our best GPU of four years ago. This quarter, we shipped Volta in volume to leading AI customers. This is the era of AI, and the Nvidia GPU has become its brain. We have incredible opportunities ahead of us.”

In this context, Wall Street analysts are rapidly increasing their earnings forecasts for Nvidia, and this is driving vigorous price gains. Stock prices and earnings expectations tend to move in the same direction over time, and both variables are moving upwards in this particular case.

ChartNVDA data by YCharts

None of this means that Nvidia is immune to risks. The company operates in a very dynamic and competitive industry, and valuation is quite demanding. With a forward price to earnings ratio above 45, the entry price does not provide much of a buffer in case there is any disappointment in financial performance down the road.

That being said, Nvidia is producing impressive performance, both on a standalone basis and in comparison to industry peers. As long as the company keeps crushing analysts’ expectations, the stock should continue doing well in the middle term.

Charts and data are from Portfolio123, and the full list of companies currently picked by the system is available to subscribers in my research service: The Data Driven Investor.

Nvidia: The Essential Pursuit Of Drones, Oil And The Orient – NVIDIA Corporation (NASDAQ:NVDA)

Company Pursues Inference Business

Nvidia Corp. (NASDAQ:NVDA) recently announced agreements with two large corporations for drone applications that represent vast revenue potential in the high growth AI and deep learning segment. These moves show Nvidia seeking to secure a substantial share of the AI inference business to build on revenue derived from the training of neural networks. They also illustrate the company targeting the huge Chinese market for AI applications.

The first of the two agreements is with JD.com, Inc. (NASDAQ:JD), the second largest online retailing company in China, for the manufacture of drones, with aerial drones representing an area of autonomous robotics beyond autos. Under this agreement, drones will be applied to uses in delivery to retail customers, in agriculture, and for rescue operations.

Autonomous Drone Navigation with Deep Learning. Flight over 250 meter Forest Trail” frameborder=”0″ allowfullscreen>

Nvidia’s Jetson platform will provide navigation intelligence to an aerial drone and to a ground-based drone, with the latter needing to negotiate uneven terrain. JD declared that Jetson was selected due to its low power draw and low cost.

One Million Drones In Next Five Years

As to the performance parameters of the aerial drones, JD has said that they will fly at velocities of up to 100 km an hour to deliver packages of up to 30 kg, with future models perhaps able to deliver packages of approximately 200 kg.

Most interestingly for Nvidia, and demonstrating the centrality of such end markets in the company’s forward planning for inference applications, JD claims it will produce one million drones in the next five years. This projection is largely based on JD’s calculation that drones will reduce logistics costs by 70%, especially when it is considered that parts of China suffer from inadequate infrastructure which impedes overland delivery.

(Image Credit: JD.com, Inc.)

The potential impact on Nvidia’s stock price of the JD agreement is appreciable. With overall revenue from GPUs standing at approximately $1.6 billion in Q2 FY18, this and similar contracts will establish a new income stream for the company which may be described as a sub-group of auto, namely autonomous vehicles excluding automobiles.

Lower Marginal Cost

Much of the groundwork has been laid by the work the company has already done within the autonomous automobile sector, providing Nvidia the opportunity for market expansion of the autonomous segment with lower marginal cost, reaping the benefits of sunk costs and economies of scale.

With the prospect of one million drones being produced by JD alone over the next five years, clearly this inference application for the retail market around the world will be highly revenue-generative for Nvidia when the company’s current 58.39% revenue margin is borne in mind. Expanding the paradigm and building on the knowledge base derived from the JD project to serve other large retail adopters around the globe promises significantly enhanced revenue.

Nvidia Corporation (NASDAQ) Quarterly Revenue (Source: Nvidia)

It can be seen from the chart above that Nvidia currently depends for 58.3% of its revenue on one market, gaming, and consequently is in dire need of broadening its revenue streams to insulate it against a possible downturn in that segment. This provides strategic logic to its pursuit of end-user inference applications: a quest for greater defensive flexibility.

ChartNVDA data by YCharts

The second of the noteworthy agreements Nvidia has struck to develop aerial drones is with Avitas Systems, a General Electric Company (NYSE:GE) venture. The purpose of the agreement is to combine AI, analytics, and drones to more efficiently undertake inspections of heavy industrial facilities, like oil rigs, where the installation is located in an inhospitable environment. Drones will shoot video of the installation, which will then be analyzed by AI computers to locate issues requiring attention, such as leaks and corrosion.

Hundreds Of Millions Spent On Inspections

Avitas estimates that industrial companies outlay hundreds of millions of dollars each year for inspection and maintenance, much of it mandated by insurance companies. Market expansion for Nvidia within the market for industrial testing, inspection, and certification will lay in the direction of autonomous underwater vehicles and robot crawlers.

As with the JD aerial drone project, when Nvidia has built an inference ecosystem for the Avitas project that will be transferable to other customers with similar operating needs, the company will have achieved a paradigm that will attract new customers within the sector at a lower incremental production cost.

Avitas will utilize Nvidia’s DGX-1 and DGX training systems to achieve defect identification, while developing convolutional neural networks for image categorization, with ancillary generative adversarial neural networks to reduce the compute necessary to identify images.

Large Potential Revenue Stream

Nvidia and Avitas believe that the cost of plant inspections may be reduced through the use of drones by 25%. End-user markets will include oil and gas, petrochemicals, aerospace and defense, construction, food and beverage, brewers and distillers. Transparency Market Research holds that the global market for testing, inspection, and certification will grow at an annual rate of 5.7% to 2024 to reach $285.34 billion, clearly representing a large potential revenue stream for Nvidia.

Previously Nvidia’s growth in AI has been driven by the neural network training market rooted in the data centers of U.S.-based cloud services providers. Now, building on the recent introduction of TensorRT3 software in all of China’s major data centers, the company is developing business in the machine learning inference segment of the fast-evolving Chinese AI market.

China’s State Council anticipates annual IT spending in the country will top $901 billion by 2020, while research firm i-Research projects that China’s AI market will grow at a 50% CAGR. China has been estimated to offer half of the most interesting AI opportunities in the world, according to venture capitalist Jim Breyer.

Inference To Contribute More Than Training

The inference market should in the longer run provide more revenue for Nvidia than will the training market, its erstwhile prime revenue contributor within the AI sector. However as Nvidia moves further towards end-user applications by increasing participation in the inference market, the company may anticipate that the level of competition will escalate.

As a consequence, Nvidia’s unit profit might decline as price competition sets in, yet increased volume, sunk costs and economies of scale should more than offset this consideration. Importantly, full immersion in the inference market is an essential strategic move for the company to maximize its continued growth, as it seeks to remain central to the evolutionary changes of the next generation of AI applications.

With the costs of penetration of the inference market reduced by the amount of research and production experience the company has already acquired through its activities in the autonomous autos market, Nvidia will enjoy a reduced risk position when pursuing end-user inference application opportunities.

Conclusion

In the rapid evolution of the AI market, becoming integral to the applied applications of end users in the inference segment, whether that be in retail delivery or deep-water oil rig inspection, is a well-advised course for Nvidia to both benefit from market extension and to ensure continued exponential growth.

That is all the more the case when it is considered that the company is already sitting on a storehouse of autonomous expertise acquired in the auto sector, a factor which should reduce incremental market penetration costs.

A further important consideration for the company is that currently Nvidia derives 58.3% of its revenue from just one market, gaming, and is consequently in great need of developing increased defensive flexibility. Its potential vulnerability to the possibility of a downturn in this market demands that it devote considerable resources to developing new revenue streams.

Retaining its centrality in the high growth China market for AI is an equally important objective for the company, as it builds on its strong position in the data center market there to embrace end users’ inference applications.

With the company’s outlook of reduced incremental cost, a high revenue margin, and substantial new revenue streams from the inference sector, this strategy may be expected to significantly raise Nvidia’s share price over time.

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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.

How To Profit From Nvidia’s Q3 Report – NVIDIA Corporation (NASDAQ:NVDA)

Simple low-cost index investing has historically been a very profitable strategy. However, if you are not satisfied with the returns index investing is producing, you need to look for ways to create alpha. One possibility to achieve this is to use a core-satellite based portfolio composition where the satellite portion can be based on actively managed trading strategies and the core portion can be based on low-cost index investing. In this article, I will be presenting one actively managed trading strategy which could be suitable to achieve alpha.

As in the short term it is not possible to know which way markets are headed, market-neutral strategies are a great way to make profit in any market situation. There are several means how this kind of a position can be constructed, but one way to achieve such is via a straddle.

Straddle option strategy is used by option investors when they are expecting extreme stock price movements in either direction. In practice, the idea behind the strategy is to purchase one call option and one put option, which have the same expiration date and exercise price. As long as the share price deviates far enough from this exercise price, the option investor will make a profit. In practice, the profits could be unlimited and the loss is only limited to the premium paid for the two options. Since it is widely known that volatility is highest right after an earnings report, this is the best time to apply a straddle.

Nvidia

Nvidia is about to present its Q3 numbers in mid-November. Let’s look at how the options chains are looking at the moment for Nvidia. The share price is currently around $178. Since the earnings release is still so far away, let’s for now look at only call and put options with an expiration date of October 6, 2017, and with an expiration price of $180 (the closest one to the current share price).

We can see that they are valued at $2.34 and $3.85 (ask prices), respectively. If the Q3 release would be already next week, the premium would be greater due to expected higher volatility. However, an investor can still use these values in order to see whether this strategy makes any sense with Nvidia and check again the premiums just before the Q3 report.

Figure 1. Calls on the left side and puts on the right side.
Source: MarketWatch

The reason for the high premiums can be explained by looking at historical share price developments and implied volatility (which was 31.6% for the last trading day). As a result, Nvidia’s share price has been surging in recent years. This can be explained by the company’s aggressive focus on artificial intelligence which could be highly profitable. Especially, self-driving cars will be a massive opportunity. In addition, Nvidia’s graphics processing units have gained a nice foothold in data centers where they are processing heavy amount of data collected by, for instance, mobile and Internet of Things devices.

Source: author-made

Applying straddle to Nvidia

If an investor would want to initiate an “at-the-money” straddle, this would cost $6.19 ($2.34, $3.85). Considering that the current share price is around $178, the share price would have to move by at least 4% from this level in either direction before the straddle would turn into profit.

Let’s next take a look at how the share price has developed during previous earnings releases. This does not of course guarantee that similar reactions would happen during Q3, but it gives an idea what to expect. Nvidia has previously released its earnings reports after trading hours, so I checked how the share price developed the following trading day (see figure below).

During the last seven quarterly earnings reports, the share price has moved more than 4% 6 times while the average absolute movement has been 12.1%. Just to recap, a 4% move in either direction is the minimum what we require. Even if the premium were higher, this average value still provides plenty of safety margin. Therefore, we could conclude that the straddle option strategy could make sense to apply just prior to the Q3 report.

Quarterly report Absolute share price reaction the following trading day
Q2 2017 5.32%
Q1 2017 17.82%
Q4 2016 2.37%
Q3 2016 29.8%
Q2 2016 5.59%
Q1 2016 15.2%
Q4 2015 8.6%

Source: author-made

The below figure outlines the profit potential of this strategy when applied to Nvidia if an investor purchased 100 call and put options at premiums stated above.

Source: author-made

Earnings season is always an interesting time for investors due to many reasons. First of all, it provides more information about the company’s business situation and future dividend potential, but it as well gives a possibility to profit from extreme share price movements. The latter can be achieved with a straddle option strategy. I surely intend to check the call and put option premiums just before the Q3 report to see if they are still well below the 12.1% level and in this case, initiate a straddle with Nvidia.

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.

Nvidia: Why The Selling? – NVIDIA Corporation (NASDAQ:NVDA)

Calling tops in a bull market is generally seen as a mug’s game. It certainly hasn’t worked with Nvidia (NVDA) over the last few years. Or at least, it’s been a lot easier and profitable to just buy and hold.

But there’s a misconception that shorts have been steamrolled and consistently lost money on NVDA. That’s simply not true as my articles in June and August hopefully demonstrate.

Traders such as myself who can’t bring themselves to invest for the long term at these prices can still make money playing both sides.

And although shorts have been hard work, I think things could get a lot easier.

Drivers of a decline

Fundamentally Nvidia looks in great shape. It leads the way in high-end GPU and GPGPUs. Earnings are fantastic. There is huge potential for growth. How could it ever fall?

Well clearly after a 680% gain since the start of 2016, much of the fundamental positives are already priced in. The PE ratio has jumped from just over 20 to 48. Nvidia has a lot to live up to.

And while the company is likely to continue doing very well, there are some possible catalysts for why it may find it hard to live up to the lofty expectations.

Competition from Advance Micro Devices (NASDAQ:AMD) could weigh on the gaming revenue. The data center business could also come under pressure from competition. Perhaps the Bitcoin (COIN) bubble bursts and causes headwinds.

However, the eventual catalyst for a drop is probably one few people are talking about now. In fact, it could be completely unrelated to Nvidia the company. Nvidia moves in line with the broader market and related sectors such as Technology (XLK). Here is a how a beta adjusted portfolio of long NVDA versus long XLK looks.

Software developed by Arbitrage Trader

The middle left chart clearly shows the portfolios move in line; NVDA is in red, XLK in blue. The correlation over the last 150 days is as high as 0.94. NVDA is essentially a leveraged position on XLK.

So while you may feel a warm glow looking at Nvidia’s current balance sheet, a market correction will cause a drop around three times a large in the stock. And that is regardless of earnings, growth or any stock specific catalyst.

In other words, if there are signs of selling and a top, it may be related to macro factors. And a warning could come from other high flying tech stocks such as Apple (AAPL), Amazon (AMZN), Alphabet (NASDAQ:GOOG) (GOOGL), and Tesla (TSLA), all of which have recently reversed and possibly topped. They haven’t all suddenly had bad company specific news.

One factor may be the Fed’s policy of balance sheet reduction which was first properly aired in late May. While this didn’t cause an immediate reaction, Tech stocks have generally struggled to rally since then. It signaled the Fed is determined to tighten financial conditions, and there are theories this is less to do with controlling inflation (consider there have been four hikes and inflation is still below the Fed’s target rate) and more to do with equity bubble prevention (or even giving the Fed room to act if the bubble pops).

I think this quote from Paul Tudor Jones is apt,

“By watching [my first boss and mentor] Eli [Tullis], I learned that even though markets look their very best when they are setting new highs, that is often the best time to sell. He instilled to me the idea that, to some extent, to be a good trader, you have to be a contrarian.”

Source: 25iq

The path to a top

This article isn’t intended to merely point out there are risks for Nvidia longs. All stocks have risks, at all times. But the patterns on the charts are quite clearly suggesting the big money is trying to get out. I don’t know exactly why yet, but no doubt it will become clear in time.

The path to a top has been playing out quite predictably. Rallies since June have struggled to hold new highs, strength has been sold, and the pullbacks are getting deeper. I posted this chart in the comments section of my August article projecting a final rally.

The projection was based on the below pattern, and ending diagonal, which is created by slowing momentum and selling at each new high.

Source

On 20th September I followed it up with the below post on Matrixtrade.com.
The move to new highs came on good news as Evercore raised its price target to $250. Markets tend to top on euphoria and good news, allowing the large players to exit positions. It seems they did exactly that and prices began to fall two days later. The reversal tells us the gap higher on the 18th September was indeed an exhaustion gap.

It’s interesting Intel (INTC) topped with the same pattern at the height of the last tech bubble in 2000.

Strangely enough, Intel’s PE ratio peaked at 55 in the year 2000, the exact same figure NVDA topped at earlier this year.

Sentiment, positioning and faith in the future are all comparable in these two stocks and periods. So is the Fed’s hawkish stance and the concern about equity bubbles. I think this is one reversal pattern we shouldn’t ignore.

Conclusions

Nvidia is a great company, but is priced for perfection. There are signs the trend is reversing and the smart money is leaving. Why?

At the moment we can only speculate on the reasons. There are potential headwinds for the company, but similar reversals are happening in related stocks and it seems the catalyst is affecting the broader market. I think it relates to the Fed’s concern with elevated equities and their hawkish stance. Either way, I would take note of the price action and what it tells us.

If Nvidia does manage to recover I would expect any new highs to be brief and an opportunity exit longs or short.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in NVDA over 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.

Nvidia Takes The GPU Technology Conference On The Road – NVIDIA Corporation (NASDAQ:NVDA)

Rethink Technology business briefs for September 26, 2017.

First stop: Beijing, and some announcements about Xavier and Tensor RT3

Source: Nvidia

As part of a marketing push for Nvidia’s (NVDA) AI technology, Nvidia is staging a series of GPU Technology Conferences in various parts of the world, including Beijing, Munich, Tel Aviv, Taipei, Washington, and Tokyo.

The conferences are primarily technical, aimed at attracting AI researchers and software developers, especially in the areas of autonomous vehicles and robotics. By this, Nvidia hopes to pave the way for early adoption of Nvidia products by fledgling AI startups.

Nvidia has also been doing things like giving away Tesla V100 accelerators, and it has a contest for the “best AI startup” at the Beijing event for which the prize will be a DGX-1 “AI supercomputer.”

The conferences are also a source of information and news that might not have been shared at previous GTC events, such as the main GTC event held last May. Today in Beijing, CEO Jensen Huang gave a keynote that also provided useful information about key software and hardware products.

Huang announced TensorRT 3, a software package designed to accelerate inference processing. TensorRT 3 enables use of the TensorFlow AI framework on Nvidia’s GPUs. Nvidia makes a bold claim that TensorRT 3 delivers the “world’s fastest inferencing.” Google (GOOG) (GOOGL), which has spent considerable time, effort, and money on its Tensor Processing Unit, may disagree. I would really love to see a head-to-head competition between the two.

Huang also announced that Alibaba (NYSE:BABA), Baidu (NASDAQ:BIDU), and Tencent (OTCPK:TCEHY) are all deploying Tesla V100 GPU accelerators in their cloud services. This certainly suggests that AMD’s so-called “collaboration” with Baidu doesn’t pose a threat to Nvidia.

In addition, Huawei, Inspur, and Lenovo (OTCPK:LNVGY) are incorporating Tesla V100 GPU accelerators into their datacenter offerings via the HGX reference standard.

Huang indicated that first availability of the Xavier SOC, the core of Nvidia’s next generation Drive PX hardware platform, will begin in early 2018 with sampling to select partners. General availability will be in 2018 Q4.

This is a somewhat slower rollout of Xavier than we were led to believe. Originally, Xavier was to begin sampling by the end of 2017.

I believe the delay means that Xavier will be fabricated on a 10 nm process (probably by TSMC (TSM), rather than the 16 nm TSMC process originally announced. By late 2018, the 10 nm process will have matured sufficiently that it would provide an economical and higher performance process for Xavier.

Nvidia is part of the Rethink Technology Portfolio and is a recommended buy.

Did Tesla drop Nvidia for… Intel?

Just last week, there were reports that Tesla (TSLA) was dropping Nvidia as a supplier of chips for its Enhanced Autopilot computer in favor of a custom chip reputedly designed by Jim Keller, who had led chip design at Advanced Micro Devices (AMD). My take on the reports was that AMD was probably developing a “semi-custom” chip in concert with Keller’s staff at Tesla.

Today we have another report in the same vein, this time from Bloomberg, that Tesla has dropped Nvidia as the processor supplier of its infotainment system, primarily the large touch screen, in favor of Intel (INTC).

I have to say, this particular rumor doesn’t make a lot of technical sense. I can believe Tesla replacing Nvidia for the infotainment system. There are any number of ARM processor vendors that would be able to stand in, including Qualcomm (QCOM). But powering what amounts to a sophisticated tablet is something that I would have thought an ARM processor would be better suited for.

It may be that Intel has offered a more compelling package of “connected car” features, including Wi-Fi and cellular modems, than Nvidia could offer. And Intel may have promised to build the chips on its much hyped, but very delayed 10 nm process.

Perhaps, with the adoption of an x86 architecture for its Autopilot computer, Tesla has decided to standardize on x86. For what amounts to a mobile device, that seems like the wrong answer, so I’m a little skeptical.

Morgan Stanley estimates Tesla’s 2018 vehicle production to be 231 K

Adam Jonas of Morgan Stanley (MS) predicts that there will be 531K Tesla cars on the road by the end of 2018. That sounds impressive, except that 300K of those will have already been built by the end of 2017, according to Jonas.

So, in effect, Jonas is saying that Tesla will only produce about 231K cars for 2018, including Model S and X and the Model 3. If Tesla were to reach its goal of 5000 Model 3 cars/week production by the end of the year, then we would expect at least 250,000 Model 3 cars to be produced in 2018.

So Jonas apparently doesn’t believe the bullish prognostications of Elon Musk. Good for him. One of the areas I haven’t been particularly optimistic about is Tesla’s ability to make good on its schedule. Never has, and probably never will.

I’ve expected that Tesla’s production ramp would be protracted, but Jonas is even more pessimistic than I am. I had expected Tesla to build at least 200,000 Model 3s next year, even in my pessimistic scenario.

Does this mean that Tesla is doomed? Well, it certainly doesn’t help. Tesla really needs to get profitable in 2018, and that means controlling costs while ramping sufficient Model 3 volume to cover its operating expenses. Reasonable people have questioned whether it’s even possible for Tesla to do this.

I can only say that I hope so. But investments shouldn’t be based on hope, and I continue to rate Tesla a sell.

Disclosure: I am/we are long NVDA, TSM, QCOM.

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.

Tesla AMD Partnership Rumor Shows A Chink In Nvidia’s Armor – NVIDIA Corporation (NASDAQ:NVDA)

Nvidia (NVDA) is a terrific Company. The Company’s CEO, Jen-Hsun Huang, in our view, rates to be one of the most effective CEOs in high tech industry. But, a solid company with a great CEO does not make for a sound investment if the stock price is in the stratosphere.

In the recent past, NVDA has been a story stock with analysts falling all over themselves to paint increasingly rosier prospects for the Company. However, we believe the Nvidia investment thesis is stretched pretty thin with the onset of potent competition.

CNBC Story Raises Flags

This week’s CNBC story about Tesla (TSLA) working with Advanced Micro Devices (AMD) gives investors a preview of what is ahead for Nvidia stock as competition materializes.

To be sure, there has been a bit of controversy about the story and CNBC amended the initial story since it originally reported it on Wednesday. While the initial story indicated that Tesla was a customer of Globalfoundries, that no longer appears to be the case. When the dust settled, a close reading of the publicly available information boils down the narrative to the following items:

  • CNBC source suggests that Tesla has already gotten first silicon on its AI chip and the unit is currently undergoing testing.
  • Tesla is in an IP deal with AMD for the AI chip development

It has been long known that Tesla was working on its own silicon so the former news item is akin to a project status update. However, it is the latter item that has the market excited and has taken a toll on Nvidia stock.

Sizing The Potential Lost Opportunity

While we have no details on the deal, the rumored deal could have some or all of the following components:

  • AMD may be doing a semicustom design for Tesla.
  • AMD may have licensed its GPGPU technology, very likely Vega or a variant, to Tesla.
  • AMD may have licensed its Infinity Fabric interconnect technology to Tesla to enable Tesla chips to connect with other Tesla or AMD chips.

If Tesla apparently is already testing the silicon, it is possible that Tesla may be able to ramp this chip starting mid-2018. Assuming that Tesla can use AMD IP starting mid-2018, the worst case sales hit for Nvidia for 2018 may be a loss of 150,000 units of what otherwise would have been Nvidia business. 2019 sales hit could be 300 or 400 thousand units or higher. Over the lifetime of the chip, it is conceivable that Nvidia will lose the opportunity to sell a million Dive PX type units to Tesla (assuming Tesla is in business that long).

At a million units, assuming ASP per unit between $100 to $200, the range on potential revenue contribution from this project to Nvidia could have been in the range of $100M to $200M. Sizeable, but, not a material hit to Nvidia.

The Impact Goes Farther Than Tesla

It is never a good thing to lose a large high profile customer and there can be a massive reputational loss to Nvidia here. Any deal with Tesla is likely to offer AMD:

  • Significant reputational benefit to AMD for winning a socket against Nvidia.
  • A validation of AMD’s GPGPU IP. Vote of confidence from a high profile name in the auto industry may bring positive tidings to AMD such as design wins at other auto manufacturers.
  • A perception among customers that switching from Nvidia to AMD could be economical and not that difficult.

In other words, while the immediate opportunity loss may be limited, an AMD win at Tesla can be a harbinger of bad news ahead for Nvidia.

Whether the CNBC story turns out to be true or not, we continue to believe that AMD will now increasingly take market share from Nvidia. As such, in spite of teething problems, we believe that AMD has now become competitive with Nvidia in the GPGPU space. Also, when coupled with the strong Epyc server platform, we expect AMD to continue to start taking share from Nvidia.

The potential for market share loss does not stop with AMD. Nvidia also faces challenges from new entrants in the space. In addition to semiconductor players such as Intel, verticals such as Google (GOOG) (NASDAQ:GOOGL) and Apple (AAPL) building their own solutions, there has also been a massive VC investment boom in the machine learning semiconductor space.

The VC gold rush speaks to the attractiveness of emerging artificial intelligence and machine learning applications. Each and every company in the space are attempting to find superior solutions for high volume applications. It is impossible for Nvidia to defend its turf in an increasingly diverse application space. With billions of dollars invested, it is fair to say that some of the emerging chip companies will carve out pieces of the machine learning market from Nvidia.

Stock Reaction & Implications

Nvidia stock fell about $6 or over 3% since the CNBC story broke on Wednesday. The stock reaction demonstrates the jitteriness of Nvidia investors to competitive news.

The Nvidia storybook valuation is built on the Company having an unassailable lead over competition and a strong moat in software infrastructure such as CUDA. This potential loss of Tesla socket to AMD shows that this moat may be overrated. This loss, if it checks out, will show that the boosters’ claims about the barrier to entry for competition in the ML/AI space, especially against GPGPU peer AMD, are overstated. Over the coming months and quarters, we can expect AMD, Intel (INTC), and several chip startups to make significant headway in a market that Nvidia currently owns.

We believe this is the new reality for Nvidia. From now on, we expect a steady drum beat of competition winning sockets in the artificial intelligence and machine learning space. And, with each such competitor win, the shine on Nvidia’s story will reduce a bit until one day when the story fails to resonate.

From a quarterly results viewpoint, we continue to expect Nvidia growth to moderate substantially within the next couple of quarters.

We believe Nvidia, while a great company, is at a significant risk of valuation compression.

Our view of Nvidia: Sell.

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Disclosure: I am/we are long AMD, GOOG, GOOGL.

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: Decline In Cryptocurrency Revenue Threatens Share Price – NVIDIA Corporation (NASDAQ:NVDA)

Contribution To Revenue Is Substantial

Recently estimated to produce 10% of revenue for Nvidia Corp. (NASDAQ:NVDA), the extent to which the company benefits from cryptocurrencies may already be declining. In turn, this decline in income and profitability may be expected to prompt a fall in share price.

Nvidia CEO Jen-Hsun Huang stated at the time of Nvidia’s most recent earnings call that cryptocurrency is “a very important market.” The company produces graphics cards customized exclusively for mining. Using their P106-100 GPU, this specification is not appropriate for gaming. Nvidia provides these mining cards direct to board partners such as Galaxy, ASUS, Gigabyte, Colorful, EVGA, Palit, MSI and PCP.

Jefferies analyst Mark Lipacis ventures that Nvidia is three times more vulnerable to a decline in cryptocurrency revenue than is Advanced Micro Devices, Inc. (NASDAQ:AMD), based on sales of GPU products with SKUs linked to the cryptocurrency market. Referencing the Jefferies estimate that 10% of overall company revenue derives from this segment, that would place cryptocurrencies as generating $691 million in gross revenue for Nvidia.

Deals Relative Financial Advantage To AMD

Thus an overall pullback in cryptocurrency-fueled demand for high-end graphics cards will deal relative financial advantage to AMD, the less exposed to this sector of the two GPU market competitors. This at a time when AMD is poised to claim a greater share of the data center market, as exemplified by its recent partnership agreement with Baidu Inc. (NASDAQ:BIDU) to trial AMD Radeon Instinct GPUs in Baidu data centers.

Meanwhile Nvidia’s data center revenue at most recent reporting is trailing expectations. Consequently Nvidia is already confronted with a competitor gaining momentum at the premium end of the GPU market. A reduction in demand for cryptos would further add to AMD’s relative momentum.

While Jefferies dealt with Nvidia’s potential vulnerability to a cryptocurrency downturn, RBC Capital Markets goes a step further and holds that demand for the company’s graphics cards for cryptocurrency mining is already actually in decline in Nvidia’s current financial quarter.

Need For Nvidia Chips Reduced

Additionally, RBC asserts that changes in Ethereum payment verification procedures, moving from the “proof of work” method to “proof of stake” processing, may soon arrive to “dramatically lessen the need for powerful chips from Nvidia.”

The chart below shows how Ethereum’s share of the cryptocurrency market has increased exponentially to approximately 30% since early 2017, just as that of bitcoin has collapsed, exacerbating the potential negative affect of a change in Ethereum payment procedures. An escalated deterioration in revenue from Ethereum as a result of a change in its payment verification procedures would deal a significant hit to Nvidia at a time when overall cryptocurrency market activity is weakening.

Shares of CryptoCurrency Market(Source: Autonomous NEXT)

Increasing the probability that Nvidia will face a decline in revenue derived from falling cryptocurrency demand, major banks are aligning themselves in opposition to cryptos. Large investment and commercial banks, with the enormous political and regulatory influence they wield, will not stand idly by as their profit base is eroded by the free transfer of anonymous cryptocurrencies.

Opposition Has Negative Implications For Nvidia

In illustration, just days ago bitcoin lost 10% of its value when Jamie Dimon of JP organ Chase & Co. (NYSE:JPM) denounced it as a fraud. On September 14, the currency lost more than $500 in a single day. On the same day, Ethereum fell below $250 to a six-week low.

Chart^NYB data by YCharts

Of note when making projections for Nvidia’s future revenue, JPMorgan has been trialling the use of blockchain technology to fight the advent of cryptos. This is the serious financial heft and technological resource of a major institution seeking to build a firewall against the growth of bitcoin et al, with consequent negative implications for Nvidia’s revenue.

While one may or may not agree with Dimon’s take on, and ability to obstruct, the future growth of cryptocurrencies in the long term, Nvidia has a clear vulnerability to a downturn in the cryptocurrency segment in the short- to medium-term. Nvidia investors may wish to consider whether their long term view of the future of cryptocurrencies, and its effect on Nvidia’s revenue, aligns with their own investment time horizon.

Central Banks And Governments Oppose

As a further very powerful factor which Nvidia may expect to ultimately act to depress the rise of cryptocurrencies, and therefore reduce the company’s revenue derived from that market, cryptos will no doubt have the regulatory force of central banks and governments thrown at them, as those institutions fear erosion of their power base, the fiat currencies.

In the course of this process, cryptocurrency markets will be jolted hard and often by many new regulatory challenges. Unquestionably, that assault is only just beginning. Reinforcing this belief, Mohammed El-Erian, chief economic adviser at Allianz Global Investors, stated recently regarding cryptocurrencies that “current pricing assume(s) massive adoption, and I don’t think governments will allow the amount of adoption that’s currently priced in.”

There are further substantial considerations operating against cryptos, and by extension the revenue Nvidia derives from them, with consequent implications for share price. A crackdown by the Chinese government on cryptocurrency exchanges prompted two of the largest Chinese exchanges to issue statements that they will close by the end of October. China is a leading center of bitcoin activity, providing approximately 20% of global bitcoin trade and mining, and consequently of crypto card demand.

As the world’s largest market for graphics cards, China is a market to which Nvidia must give its greatest care and attention to preserve broad market share and the organic process of word-of-mouth referral. If the importance of crypto cards diminishes, this fact could shift competitive emphasis in China to segments where AMD has stronger market positioning, such as gaming.

A report from cybersecurity company FireEye, Inc. (NASDAQ:FEYE) recently identified that North Korean hackers have been attacking crypto exchanges in their efforts to sidestep U.N. sanctions by accumulating reserves of cryptocurrencies for Kim Jong Un’s regime. Of concern for Nvidia, should future hacking activity take place on a sufficiently large scale, it would undoubtedly depress market price of the cryptocurrencies targeted, with a likely spillover affect onto the asset class as a whole, weakening demand for crypto cards.

Conclusions

The cryptocurrency market produces 10% ($691 million) of Nvidia’s gross revenue through the sales of market specific, high margin graphics cards. The challenges faced by this emerging asset class are very substantial, and have strong negative implications for the revenue Nvidia derives from this business segment.

It is probable that cycles of volatile and depressed cryptocurrency market participation will weaken demand for these Nvidia products, hitting the company’s bottom line and affecting share price. A downturn in crypto graphics products will yield relative financial advantage to AMD, the less exposed to the business segment of the two GPU competitors, just as AMD is enjoying new-found momentum in high-end GPUs.

With related Nvidia product sales already believed to be in decline, the cryptocurrency sector faces the great challenges of the staunch opposition of governments, major institutions, investment banks, technology changes in Ethereum payment verification, extreme market volatility which risks alienating market participants, and the systemic disruption of North Korean hackers compromising crypto exchanges.

The consequent vulnerability Nvidia has to this demand sector is therefore in play, substantial and clear.

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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.

NVIDIA Corp. (NASDAQ:NVDA): Could Become Bigger Than Intel

NVIDIA is leading the first cloud upgrade cycle with graphics chips that can handle AI

There is no stopping the stock of NVIDIA Corp. (NASDAQ:NVDA), the graphics chip designer that dominates gaming and, increasingly, Artificial Intelligence (AI).

nvidia stockThe shares are up 76% in 2017, with analysts pounding the table for it and one even nick-naming a dog for it. The latest price target of $250 per share would take the market cap to $150 billion, within sight of mighty Intel Corp. (NASDAQ:INTC), whose value has stalled out at $178 billion.

But this is not a bubble stock. Nvidia sales are growing 50%, year-over-year, each quarter, and it brings 25% of those revenues to the net income line. The company’s debt is just 25% of assets, and has been declining through 2017. Operating cash flow came in at nearly $1 billion for the most recent quarter.

The price to earnings ratio of nearly 54 looks high, but if earnings keep growing you may be paying less than 30 times 2018 earnings if you buy now.

All About the Cloud

If NVIDIA were still suck in its original niche of gaming chips, this would not be happening. But graphics processing can easily be adapted to deep learning, sucking up huge amounts of data and offering quick analysis. That’s the heart of artificial intelligence, which is now being built into clouds.

Systems like Amazon.Com Inc.’s (NASDAQ:AMZN) Alexa, Microsoft Corp. (NASDAQ:MSFT) Cortana, International Business Machine Corp. (NYSE:IBM) Watson, Apple Inc. (NASDAQ:AAPL) Siri and Google Assistant from Alphabet Inc. (NASDAQ:GOOGL) aren’t just voice interfaces. They are front ends to artificial intelligence. They require the support of more processing power than the cheap, low-end silicon clouds were originally built with can deliver.

Now that these clouds are built, the race is on to upgrade them, to add capability that offers instant answers to complex questions. It’s not just the data center market that’s booming, but AI based on graphics chips turns out to be at the heart of self-driving cars, the next hot market.

All this has put NVIDIA in a very sweet spot.

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Article printed from InvestorPlace Media, https://investorplace.com/2017/09/nvidia-bigger-than-intel/.

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