NVDA - 2nd thoughts, or maybe 3rd

Investment Analysis Clubs Saul’s Investing Discussions
1

Infected by all the enthusiasm for Nividia, I took a tiny think-about-it position in mid-May, and then sold out three days later when I actually thought about it (chip maker, hardware, no recurrent revenue, relying at least a good part on orders from huge companies, revenue flattening out in past three quarters [$2.00 billion, $2.17 billion, $1.94 billion], earnings flattening out in last three quarters [94, 113, 85], etc etc).

I’d be curious how others who are invested in Nividia overcame these objections, or do you just feel that AI will be so big that the rest doesn’t matter?

Saul

14 Likes
2

My thesis behind NVDA is their Autonomous Driving computer chips. TSLA puts them in every car coming off their production line soon to be 500 000 to 1mill per year. That is a lot of $5000 chips. (I believe Tesla charges $8K for full functionality.)

When other car manufacturers start putting them in all high end models, this could be a huge market.

Just my thoughts.

Justin

3 Likes
3

Saul,
I did almost exactly the same thing you did at just about the same time for the same reasons. Maybe I’m beginning to learn your game - a little.

Friday, I took a big hit, apx 4%. I’m sure I was not alone, most everyone tech heavy had to suffer. My wife was kind of upset about it. I pointed out that in one day we lost the gains of the previous week . . .

3 Likes
4

I’d be curious how others who are invested in Nividia overcame these objections, or do you just feel that AI will be so big that the rest doesn’t matter?

Saul,

I didn’t look that hard. What I saw was a triple in revenue year over year with the market cap tracking the change in revenue.

Also, when I watched the long conference on Nvidia, the link is somewhere on another thread. I saw not only a company riding the wave of AI, but Big Data and server centers. I was extremely impressed with the new chip. It is able to reduce the white boxes needed in a server center by at least 80 percent for the same computing power, along with the reduction in AC and electricity and backup power.

While Nvidia is not a one customer company, there were some notable absences from the customer base that Nvidia has.

At this time Nvidia is executing. They may not in the future, but today they are. What is more, if you say the company was fairly valued a year ago, it is still fairly valued.

However, the charts have a gap. Gaps fill. I have the stomach for a 30 percent decline in price and will add at 110 a share if the market puts up a blue light special.

Cheers
Qazulight

4 Likes
5

Infected by all the enthusiasm for Nividia, I took a tiny think-about-it position in mid-May, and then sold out three days later when I actually thought about it (chip maker, hardware, no recurrent revenue, relying at least a good part on orders from huge companies, revenue flattening out in past three quarters [$2.00 billion, $2.17 billion, $1.94 billion], earnings flattening out in last three quarters [94, 113, 85], etc etc).

I’d be curious how others who are invested in Nividia overcame these objections, or do you just feel that AI will be so big that the rest doesn’t matter?

Saul,

I do believe that there was a little recurring revenue model introduced this year. I did not understand it completely and even if I did and though it was the greatest thing since sliced cheese, it would be a tiny portion of the business at this time and for the foreseeable future.

Cheers
Qazulight (Just being OCD.)

1 Like
6

Hi Saul.

I agree that recurring revenue – especially as defined in the software space – is an admirable attribute. However, it is not the be-all and end-all, or the only business model that can succeed. For example, neither (most) drug companies nor (most) food companies have recurring revenues in the sense that you use the term, but they have very stable revenues because the underlying demand for their product is relatively stable.

Currently, NVIDIA has a technological edge over its primary competitor, Advanced Micro Devices. That may not last forever, but NVDA has had an edge most of the time over the past fifteen years or so (no references - this is my opinion, but I think it is a widely-held one). I suspect that NVDA could crush AMD, but has not done so for fear of anti-trust enforcement. For example, look how quickly NVDA responded to Google’s tensor-based processor threat. Intel has massive resources, but they’ve not really had success breaking into the GPU market.

NVDA’s main market is enabling/enhancing the presentation of video games. I’m told that gaming is undergoing a resurgence with younger generations (I’m a cusp geezer, depending on your definition) due to the popularity of e-gaming. So its core market has a bit of a tailwind. I’m told that it is difficult to find GPUs in online stores at present due to gaming’s popularity. The new Nintendo device, which contains NVDA chips, is popular. So, despite the lack of officially recurring revenues, I’m not very worried about NVDA’s ability to convert inventory to cash.

Selling into the AI market is “gravy” at this point, but could become the “meat” down the road. I like the company’s future prospects.

I am not going to argue that NVDA – the stock – represents good value at this point. I really haven’t analyzed it with that in mind, and it is difficult to accurately model the growth rates of nascent markets. The current valuation – even after Friday’s decline – looks stretched to me, but there’s an element of price-anchoring at play there, I think.

Anyway, one thing I keep asking myself about chip companies is: Five or ten years from now, are there going to be more chips in the world, or fewer. I always answer, “More. A whole lot more.” The real question is, whose chips? I like NVDA’s chances of being among the winners.

Thanks and best wishes,
TMFDatabaseBob (long: GOOG/L, INTC, NVDA; NVDA is my largest individual stock position, but that is through long-term growth rather than through multiple purchases – I’ve held since early 2004)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

34 Likes
7

On one hand having your product be commodities is bad, on the other hand it means your product is selling so much it is becoming a commodity. Smart phones are now a commodity but AAPL has done well over the years before developing any significant recurring revenue. I think NVDA is sufficiently diversified that they are not beholden to one customer and far enough ahead of the game that they will be the dominant player in multiple fields. Their founder/CEO has the vision to aggressively leverage existing technology into new fields (GPU into AI/Neural networks).

Maybe Tinker can better explain their API which will help create an ecosystem and maintain customers.

So in short I see NVDA as more like early 90s INTC.

1 Like
8

one thing I keep asking myself about chip companies is: Five or ten years from now, are there going to be more chips in the world, or fewer. I always answer, “More. A whole lot more.” The real question is, whose chips? I like NVDA’s chances of being among the winners.

I agree with that really, but could one have asked this thirty years ago in 1987:

one thing I keep asking myself about computer companies is: Five or ten years from now, are there going to be more computers in the world, or fewer. I always answer, “More. A whole lot more.” The real question is, whose computers? I like IBM’s chances of being among the winners.

:wink:

Saul

4 Likes
9

I saw not only a company riding the wave of AI, but Big Data and server centers.

The current state of the art of AI is synonymous with Big Data and processing power. The processing power of NVDA chips might be taken advantage of by non-AI server processes as well. Not all AI processing will reside on servers, some applications, like self driving, cannot depend on, rely on, Internet latency and must be done at the edge, not at the core. NVDA has both edge and core chips.

NVDA has a terrific head-start. Whether it can retain it is to be determined. It’s not so much the chip hardware which can be reverse engineered but the software architecture that drives it. The NVDA software is where I would focus my NVDA research.

Denny Schlesinger

5 Likes
10

I think this is not about flattening or non recurrent revenue. This is about the next and what could it be.

they were in gaming and hit a growth spur in datacenters and now in self driving cars. They will participate the next spur with their AI accelerator. The hope is that 5 or 10 years down the road, you will see the flattening revenue just as small pause before that growth spur hit.

There are definitely risks and so many things could happen but I don’t think the revenue is flattening when you look a bit forward.

tj

1 Like
11

Anyone that hasn’t seen the presentation by CEO Jensen Huang is unaware of the power of this company. When he shows you an actual piece of hardware that replaces 400 servers and solicits orders from the audience with pricing and delivery commitments, you’ll come away a believer. If you believe Tesla, you may be involved in snake oil, but here, the actual hardware and open software are there for you to see.
Which tech stocks have declined the most on Friday and today? The profitless ones or the profitable ones?
Art

Long, but worthwhile:
"http://www.ustream.tv/gpu-technology-conference?mkt_tok=eyJp…

3 Likes
12

“I like IBM’s chances of being among the winners.”

Good one, Saul.

When they used to say, “No one ever got fired buying IBM”, I think they were referring to IT people buying the mainframes, not portfolio managers buying the shares.

:wink:

I hear you, but I think your argument would ring truer if you had chosen 35 years ago, 1982. By 1987, “Wintel” was already ascending.

Fool on!
Thanks and best wishes,
TMFDatabaseBob (I was given a few shares of IBM as a young child by a grandparent. They, along with a few shares of EK – also gifted by a grandparent – evolved into part of the down payment towards a 440 sqft studio apartment in Park Slope Brooklyn in the mid '80s. I haven’t owned shares of either company since, but I’m eternally grateful for the first-hand education that my grandparents gave me into what long-term stock holding can achieve.)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

2 Likes
13

Yes that putting $5000 ( actual price unknown) chips into every car may be Tesla’s biggest gamble . That means every car they sell costs thousands more than competitors unless AP is activated.

But they are also playing on the fact that very expensive to develop software costs nearly the same whether one copy or one million copies.

My guess , substantiated by polls, is that most gen 3 buyers will get AP.

14

IBM decided they would rather have corporate control than sell PC. Because they had no idea that PC sales would grow so much. Or that price sensitive individuals would buy them, they were depending on the IBM name and corporate sales rather than on price cutting and manufacturing efficiency.

Compaq was much the same. I can still remember being in their store when the salesman (dressed in a natty suit) would not sell me a keyboard without upper level corporate approval. Which he never got, they were out for a long martini soaked lunch.

1 Like
15

Saul’s neat analogy with IBM is also how Buffett discovered his original reservations about technology had been correct!

Tech. requires a different kind of investor; uncommitted, cynical, ready for rapid obsolescence and unexpected ambushes and inclined to ask ’ you’re asking me pay (italics) how many (close) years earnings for this?!’

16

Hi Saul,
Bob gave a great response and I would like to add a little more. First look at how they are growing in the Data centers. Tripling revenue for the last 3 quarters. Pretty impressive. The Gaming side of the business will give them a great foundation for earnings, especially with Nintendo’s Switch coming out and Nvdia’s GPU is the center of that console. Nintendo supposedly can’t keep up with the demand.

http://bgr.com/2017/05/01/nintendo-switch-sold-out-shipping/…

But what I am looking at is the future and what NVDA plans to do with their GPU cloud platform.

Perhaps the most vibrant environment is the $247 billion market for public cloud services. Alibaba, Amazon, Baidu, Facebook, Google, IBM, Microsoft and Tencent all use NVIDIA GPUs in their data centers.

To help innovators move seamlessly to cloud services such as these, at GTC we launched the NVIDIA GPU Cloud platform, which contains a registry of pre-configured and optimized stacks of every framework. Each layer of software and all of the combinations have been tuned, tested and packaged up into an NVDocker container. We will continuously enhance and maintain it. We fix every bug that comes up. It all just works.

https://blogs.nvidia.com/blog/2017/05/24/ai-revolution-eatin…

http://nvidianews.nvidia.com/news/nvidia-launches-gpu-cloud-…

You just have to look to the future and think where this company is going to be in 5 years. I think it will be huge.

Andy

8 Likes
17

Selling into the AI market is “gravy” at this point, but could become the “meat” down the road.

My understanding is very limited but thought AI is where the company is positioning itself. Listen to their CEO intereview on FT. I posted the link on another thread.

18

Hi Saul - I think most people have put their fingers on most of the points.

For me it was the very late realisation that Nvidia was not competing in commoditised ultra competitive markets like smart phones anymore but in high value and low competition segments: graphics/VR, crypto currency mining, servers and AI and that these weren’t niches any more but mega profitable segments.

Whilst I like recurring revenue not every company can do this and not many tech companies. ARM didn’t but had a great market position. Intel didn’t but had a monopoly anyway in PCs and Servers.

The other point I like about Nvidia is that it seems a clean cut vendor. Companies hate Intel as they screw them over on price and monopoly standards. Companies hate Qualcomm because they practice some kind of extortion racket on royalties. I never hear complaints about Nvidia’s practices or customer disapproval - maybe just treating customers well is a differentiator!

Lastly it seems they are really getting out ahead of the curve on VR and AI which will be enormous.

Don’t get me wrong I hate the chip cycle and substitutability of chips - from IRF to Skyworks but I’ve also benefited from ARM and recognise that some companies can succeed in the right sweet spot - Intel in PCs is a case in point as well as ARM in mobile.

Ant

1 Like
19

I’d be curious how others who are invested in Nividia overcame these objections, or do you just feel that AI will be so big that the rest doesn’t matter?

Multiple Possible Futures: Gaming Graphics, Autonoumous cars (not just AI in cars either), Data Centers (not just AI in data centers) and AI. These last three are probably a tsunami that will continue for a few years. As Andy mentioned, they have some big and growing customers for data centers and they are starting to farm out their own for AI research.

Gaming seems like the most boring, but I saw a video game championship on ESPN a few months ago. Really?!?! Colleges actually have comptetive gaming teams. Really?!?! That crazy stuff is getting big, and the better the graphics chip, the better the game. Will they get into AR and VR? Possible? Will they be used for the extremely high processing needed for cybercurrency? AMD is, why not NVDA.

Fundies

Current Earnings
EPS Due Date 08/09/2017
EPS Rating 98
EPS % Chg (Last Qtr) 126%
Last 3 Qtrs Avg EPS Growth 132%

Qtrs of EPS Acceleration 0

EPS Est % Chg (Current Qtr) 68%
Estimate Revisions
Last Quarter % Earnings Surprise 19.7%

Annual Earnings
3 Yr EPS Growth Rate 44%
Consecutive Yrs of Annual EPS Growth 1
EPS Est % Chg for Current Year 20%
Sales, Margin, ROE
SMR Rating A
Sales % Chg (Last Qtr) 48%
3 Yr Sales Growth Rate 18%
Annual Pre-Tax Margin 27.6%
Annual ROE 32.6%
Debt/Equity Ratio 35%

% Change In Funds Owning Stock 3%
Qtrs Of Increasing Fund Ownership 8

Fundies seem pretty good to me, good growth and earnings surprises. not to say it should not correct, it should. It certianly seemed to be heading into a climax. It was growing far away from the 200dma, and that usually does not last long (looks like back when it started to correct from $120 range). Then after it jumped again Friday, the Citron call caused it to give back all its gains of the day and much more on huge volume. Not a sign of strong holders. All the newbies from the last week of buys were feeling pretty scared. Keep in mind, it was up almost 5x from its breakout last January. It has had a couple of pauses and a good one now is overdue.

That said, keep it on your watch list. I won’t be afraid to add more if it has a nice 20% correction and shows it is bottoming out.

3 Likes
20

Thanks Andy.

I agree with your additional points and would like to add two more that I forgot to mention. First, NVIDIA has developed a programming language called CUDA for developers trying to build AI applications on the NVIDIA platform. I’ve only heard positive things about CUDA in all the Seeking Alpha articles I’ve read about NVIDIA (and, BOY!, have there been a lot of them). Further, NVIDIA has been investing in training to increase the population of CUDA developers. So another intangible that benefits NVIDIA is support of the AI developer community. I think this ties in nicely with ant’s points, which are quite solid, as usual.

Saul, the second point is that you might want to take your revenue and earnings analysis back a few more years. There is a certain seasonality to NVIDIA’s results where you see a big jump in the October quarter, flattish results in January, a bit of a fall-off into April, July flat with April, and then another big jump in October. To look at four quarters’ results and call them flattening is to ignore the company’s seasonality. Over time, that seasonality may be weakening as the company becomes less reliant on gaming. But it is a reality of NVIDIA’s business right now.

Kingran, I agree that NVIDIA is positioning itself towards AI. As much as I think they’ll succeed with that, my wording was chosen to indicate that – as of today – that’s not a done deal.

Thanks and best wishes,
TMFDatabaseBob (long: NVDA)
See my holdings here: http://my.fool.com/profile/TMFDatabasebob/info.aspx
Peace on Earth

6 Likes