I’ve been constantly tempted to get back into a position in NVDA because it obviously has its market all sewed up. I just can’t see it growing the way the others are growing because of
A. its size,
B. the price of chips constantly come down,
C. being hardware, the only way it can grow revenue 60% is to sell next year all it sold this year and 60% more. To do that for the next 3 years it would have to quadruple its chip sales. To do it for 4 years would require well more than a sextuple (655% actually). I think that is simply unlikely, while for one of our little SaaS companies it is much less unlikely, because last year’s sales stick there and don’t have to be redone. In fact they grow almost on their own. And, as far as multiplying stock price by six, it’s a lot easier for a company with a market cap of $5 million than for one with a market cap of $165 million; a LOT easier!
Hi Saul,
For many companies the above would apply. NVDA is a bit different. How is it different?
Size: By size, I think you are referring to NVDA’s market cap of $165B. The law of large numbers. But size is really relative. We must ask how large are NVDA’s markets, its opportunity in those markets, and what percentage of those markets has it captured. NVDA plays in some enormous markets. Take the automotive transportation market for example. There are something like 280 companies partnering with NVDA in its autonomous business, but today NVDA has hardly any business in that segment relative to the segment’s size. In 2018, global car sales are projected to be 80 million units. Jenson said that he would expect to sell the “brain” for an autonomous car for about $2000. That would be a market of $160B in one year! I am not saying that all cars will get a brain and that NVDA will have 100% market share. NVDA’s TTM revenue for ALL of its segments was only $11.9B and less than $600M in automotive. Brains autonomous things is by no means limited to passenger cars; there are hundreds of use cases for putting a brain into a device that needs to control its movements, perceive its surroundings, and make decisions on its own in real-time. And autonomous for passenger cars has a market size greater than 10 times NVDA’s current annual revenue, it is only one of NVDA’s many markets. Therefore, NVDA has only scratched the surface. Compare that to Apple’s iPhone and you see a different picture Apple, which has a market cap 8x more than NVDA, is going to need to find some other enormous markets to sustain its growth rate.
Price constantly coming down: This is not always true. Just look at the recent price of NVDA’s new gaming GPU compared to the previous price. Look at what NVDA said about how much they can fetch for the passenger car brain (Xavier) that’s coming; he said $2000 ($1000 is more than $1000 for the high end gaming chip). That’s more that they are getting. Look at the price of some of NVDA’s data center products. Some cost in the tens of thousands of dollars. Yes the price of computing power has been dropping for decades and it will continue to do so. But the COGS drop and the volume of units sold explode. I think this will continue. We need to watch NVDA’s gross margins to see that they are maintaining their pricing power. So far they have been.
They are just selling hardware: They are selling hardware, but I think you may be implying that they are selling a commodity (i.e. undifferentiated meaning low margin) that can be sold by other companies. Clearly, NVDA is selling a highly differentiated product. They are not selling “hardware”. They are selling machine training, inferencing, brains that include hardware, software, connections to storage (e.g. storage offered by PSTG), connections to data transmitters (e.g. ANET switches and routers). The are selling all these things and the way they collect/realize the revenue is through an object that you can technically call “hardware” but it is much more than a commodity. If you could sell a human brain that can enable all sorts of things that customers want, would you call it a piece of flesh comprised of protein and fat? The second point that you made, which is that NVDA’s revenue is not recurring, is very valid. It is better to not have to sell the same amount as last year and then more the next year. It does get increasingly difficult.
However, I still see a very long runway of growth for NVDA. Just in its current markets of gaming and data center, which are already large, there is a lot of growth ahead. In the emerging opportunity of automotive there is a massive wave of revenue that will come in a couple of years. In the profession visualization industry, NVDA is about to reignite some serious growth. And we haven’t even talked about new areas (like NVDA’s CLARA for healthcare) that have virtually zero revenue today.
After earnings, when the shares were are $250, I decided to add a nice chunk of NVDA to my portfolio. I could see that the shares could easily (and IMO would probably) hit $300 by February. That would be a 20% increase in 6 months or 44% annualized. We are currently more than halfway there already after 2 weeks. I still think that NVDA shares will reach or exceed $300 by February. Sure, the whole market is going up, but NVDA is increasing faster than the market. I do agree that NVDA is probably not going to be my fastest grower and I have allocated accordingly, but I do think that NVDA has a good place in my portfolio. Of course, I realize that I may be wrong…but I place my bets on my opinions.
Chris
