NVIDIA : TIME TO INVEST IN GAMING AND TECHNOLOGY?

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1. Summary

  • Business is focusing into 4 main markets (Gaming, Professional Visualization, Data Centre, Automotive)
  • Direct competitor is AMD who does not have very good financial standing.
  • As of now, NVIDIA still hold the largest market shared in the discrete graphic card business.
  • Good Financial standing with recent history of dividend pay-out but need to consider on the high P/E and P/B ratio.
  • Potential loss in future financial result due to upcoming events and lawsuit pay-out.
  • Target Buy Price is $40.94 (Margin of Safety: 10%). Current Share price (21st Sept 2016: $62.86)

2. Who Are they?

NVIDIA started as a standard PC Graphic Chip company in 1993 until now they have made their presence and became a world leader in visual computing. Currently, they have about 7,300 patent assets.

They have 2 business segments: GPU and Tegra Processor. These business segments will have products which will bring focus into 4 main markets:-

  1. Gaming
  2. Professional Visualization
  3. Data Centre
  4. Automotive

Based on their main markets, their target audience who used their products are Games, Designers and Scientists.

3. Summary

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4. Revenue by Market

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Source: NVIDIA Quarterly Revenue Trend

Majority of their revenue is coming from Gaming (at least 44% and higher), followed by Professional Visualization (15% to 20%).

Although, their OEM & IP is reducing in terms of percentage (28% to 12%) and it might even be contributing lesser when the licensing agreement with Intel expired1 but their revenue for the rest of the other markets seems to be improving.

Total revenue of FY 17 has already made slight more than ½ of revenue made in FY 16. There is a strong possibility that final FY 17 revenue might be better than FY 162

Note:-

  1. Intel licensing revenues (Final $200 million payment will be received in Jan 2016 which will be recognizing the revenue in the 1st Quarter of the fiscal year 2018)
  2. Assuming that next 2 quarter for FY 17 will be the same or even better based on the last 2 FY (FY 15 and FY 16), their last 2 quarters of revenue is always higher than their first 2 quarters.

5. Market Share

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Source: Mercury Research (22 August 2016)

Although, NVIDIA dominated both markets (Desktop and Mobile Discrete Graphic Cards) for the last 6 quarters but in the 2nd quarter of 2016, AMD seems to be gaining some market shares in both markets. (+2.5% in Desktop and +0.5% in Mobile).

6. Key Financial Information

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Since AMD and NVIDIA are the 2 biggest companies that deal in the discrete GPU market, we will compare their financial standing based on the 2 tables above. Generally, NVIDIA beaten AMD hand-down in all aspect since the end of 2012.

Based on the recent history (in terms of Inventory Turnover), NVIDIA seems to be slightly more efficient in selling their inventory as compared to AMD.

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7. Recent News

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8. Positive and Potential Risk on NVIDIA

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9. My Personal View

My personal view for NVIDIA is a great company but there are 3 events which might impact in its loss of financial results:-

  1. Loss of Intel licensing
  2. Intel entering into the gaming market
  3. Lawsuit pay-out for GTX 970 False Advertising

Based on the current company financial, my valuation on the target buy price is $40.94 with the margin of safety of 10% or $36.39 with the margin of safety of 20%.

I will recommend that we should wait and monitor this company given that this company still have pretty good potential growth in future if it can excel in other market areas.

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cta

Edmund P.

Research Analyst, Mind Kinesis Value Investing Academy

Disclaimer: Please note that all information stated in this article is just for education purpose only and should not be used as any form of recommendation or advice.

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