NVDA Q319

Investment Analysis Clubs Saul’s Investing Discussions
#11

What leads you to the prediction of a double in 3 years, though?

Hi FlyingCircus,
That is a great question and one that everyone needs to think through. I always take predictions with a grain of salt because nobody is really good predicting the future out for any amount of time but here are my thoughts and in 3 years we will see if I am right. I will keep this post on my NVDA writeups to measure NVDA against.

NVDA is sitting at $164.43 and it’s marketcap is $99.973B. It’s P/S is 8.42 and it’s P/E is 23.97.

Right now they are growing at 21% and this was a terrible quarter, In order for them to double in 3 years they have to have a Compound Annual Growth Rate (CAGR) of 25.9%. So for my prediction they have to grow 4.9% faster than last quarter. They have been growing the revenue reliably since the Q217 quarter at 24% and then accelerating. Let me show you the Revenue Growth numbers.


Q117    Q217    Q317    Q417    Q118    Q218    Q318    Q418    Q119    Q219    Q319
13.04%  24.35%  53.85%  55%     49.23%  55.94%  32%     34.10%  65.46%  39.91%  20.45%

Now this is backward looking but in 2017 they had an average cagr of 36.5%. In 2018 they had an average Cagr of 42.82% and in 2019 I am going to give Q419 a growth rate of 20% so the average growth rate for 2019 will be 36.75%. After the Q419 quarter I expect them to start accelerating because the gaming inventory glut will have been worked through. The new Turing card with ray tracing will be the gaming card everyone will want, because more games will support it.

They have the new Turing card for the Data center’s which should start growing because in their conference call they claimed the Turing T4 cloud GPU has received the fastest GPU adoption of any server GPU. They also announced an upgrade on their TensorRT stack which will allow multiple models and frameworks to be run.

They launched a new NVDA RTX server for the Professional Visual team which will take market share from the dominating CPU server business. This will be a small increase that shouldn’t be looked on as a huge business.

They launched Rapids, which is for data science and machine learning. I think this will be a bigger (trying not to be to excited) revenue increase and is a new business they are going into.

Finally, automotive is starting to ramp up with their new level 2 system which over the next 3 years should be growing to probably a level 3 system and maybe a level 4 system.

So flying circus that is why I think they can double in 3 years, and also I can’t even imagine what other business’s they will find for the use of their chips. I think everyone has to remember one thing. In the Gaming business it was the middle of the road Graphic chip that is having problems due to over supply and cost conscious gamers. The Upper high-end chips did fine. Also, with the Data Centers, and why they were light. They had a new chip coming out and I think it just took a breather. If anyone thinks AMD is taking market away from NVDA on the High end market I would like to hear their thoughts. But with the new Turing card, and NVDA providing that card to the middle market probably by the end of this quarter, I think AMD will be hurting again in the gaming market.

Andy
If anyone has problems with my thoughts or with any of my math please speak up. Also I am not trying to convince anyone of staying or getting into this stocks, just enjoy the discussion of companies and stocks.

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#12

Hi Bulwnkl,

Although I believe in holding companies as long as possible, I don’t believe in holding companies that have a high probability of short term pain and an unclear future. I realize that many Fools believe in holding through anything, which will probably work in this case. I will be hopping on the sidelines and watching. I might re-enter after a quarter or two. Although market timing does not work, avoiding a period of pain for an individual stock often does. I share everyone’s pain. Best of luck to longs.

I can’t fault you for doing this but I just see this company as a great company. The loss has already been taken and although next quarter will probably be flat to slightly up, I am not sure what the market will think about that but it could go down further. Normally I would probably move on also but I think this company will double in 3 years so I want to hold this company. Any company I can get a Cagr of 25% on YoY is something I just hold and tuck away. But don’t worry I will watch it for you and let you know when might be a great time to get back in :).

Andy
That is what these boards are for.

8 Likes
#13

Andy,

If anyone has problems with my thoughts or with any of my math please speak up.

My only problem is that you are using about 26% CAGR for the next three years (the necessary number for double in 3 years). They have been growing at 33% to 35%. If you visualize that 2018 just sucked revenue out of 2019 the result is 33 to 35. Use 33% CAGR and your double could come a quarter sooner.

KC

1 Like
#14

Hi KC,

My only problem is that you are using about 26% CAGR for the next three years (the necessary number for double in 3 years). They have been growing at 33% to 35%. If you visualize that 2018 just sucked revenue out of 2019 the result is 33 to 35. Use 33% CAGR and your double could come a quarter sooner.

After listening to all these conference calls over the years I thought the game was to predict low and then when you beat the prediction you get a big up side in the price of the stock :slight_smile:

But in reality the future is still unknown and anything could happen to ruin my prediction. If we go into a recession I think I will be very happy to double in 3 years.

Andy

#15

Andy,
Like you I continue to hold Nvidia. In May after the Q management told us that crypto was just a 10% business. Yet they had very high inventory (>>10%) at the end of each Q. Could crypto have been >10% of their business? This makes me wonder if gaming is really a $1.7B/Q business or something smaller say 1.4B/Q. One analyst asked that question, i.e. next Q your gaming will be about $1.1-1.2B, so will you start to grow from that base or not but management deflected. Other than that I believe DC, auto, visual will continue to grow and this company should have a double digit CAGR over the next 10y.

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#16

A short article specified that CEO Huang had recently sold $40 million worth of shares. Perhaps he did. However, on the insider roster on Yahoo, his last sale was at $166 for around $3 million. He has automatically been selling, periodically, all the way up, with “small” amounts such as that.

I did not see this great insider selling by Mr. Huang that a short article focused on as an aspect to aggravate the recently issues. Perhaps someone else has found it. It would need to be a large insider sale within that last 3 months, subsequent to the previous earnings call just prior to the one a few days ago.

I still think it seems difficult to believe (albeit, not impossible) that a $700 million miss ($29 million - relatively small, and happens from time to time) was in the data center, but the rest (and actually more as there was upside to other areas, was all in gaming.

True to form Nvidia did very well in the high end again with the new Turing chips, and this should only improve as more games come out, and in particular in 2020 when the next upgrade comes out to fully cement the new architecture.

I do not necessarily think that AMD was taking more market share and commoditizing the market. More likely that NVIDIA GPUs (I have the 1070, which is the minimum necessary to operate my VR system, and it was something like $500 less than moving up to the 1080 in regard to a Dell gaming desktop). That was not an insignificant difference, and for me the 1070 was find. Crypto miners were probably selling a lot of Nvidia chips as well.

The issue with Turing, if I understand it correctly, is the chip is clearly more powerful, but if one incorporates ray tracing in the software the FPS does not increase all that much. Which of course makes sense as ray tracing takes an incredible amount of computation, and has never before been enabled on a gaming desktop before because it is so computationally difficult to do. Nvidia has done it with a combination of hardware and software, including AI to literally think ahead to take some of the computational requirements off the chip.

Thus, from a consumer perspective, you need to start seeing the new games to show the clear advantages of using ray tracing in order to pay the premium. And to date the new high end Turing chips have quickly sold out. But apparently not at great enough volume to offset the mess that otherwise exists and it is remarkable that Nvidia had so little insight in regard…practically malpractice.

But I will get off that issue. Just wanted to get into this insider selling thing as it besmirches Mr. Huang if he suddenly made a much larger insider sale in the $40 million plus range at just the time the business was, temporarily at least, falling off a cliff in gaming chips. I did not see any such sale in Yahoo! Does not mean it does not exist, but it is not there anyways.

Tinker

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#17

A short article specified that CEO Huang had recently sold $40 million worth of shares. Perhaps he did. However, on the insider roster on Yahoo, his last sale was at $166 for around $3 million. He has automatically been selling, periodically, all the way up, with “small” amounts such as that.

Looks like about $11.2M sold between Sept. 19th and 21st (41,253 shares at an average price of $271.98):
http://d18rn0p25nwr6d.cloudfront.net/CIK-0001045810/f606569d…

https://investor.nvidia.com/financial-info/sec-filings/defau…

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#18

There goes any trust that Huang did not at least have a good idea of what was happening in the channel. Prior to this he had not regularly made large insider sales. Instead he made a few million here, a few million there, etc., in a systematic regular selling process.

Tinker

#19

Mr Ferragu from New Street Research came on CNBC this morning and stated that Crypto gave NVDA an additional $9 million dollars of additional revenue in the last 4 quarters but that $450 million dollars of inventory was stuck in the distribution channel for Crypto and that is what NVDA is trying to expel from the channel.

Andy

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#20

I think its hard to predict what growth rate NVDA can do, because we don’t know what the gaming growth rate was without Crypto, so we can’t use the past growth rate to predict. Management doesn’t know either.

At the 2nd Quarter conference call they said inventory was fine, they were not going to plan for the $100M of crypto sales going forward. Turns out the crypto sales were much higher than that and part of the gaming sales where going to crypto and they lower their forecast next Q by $700 M.

So now we have the growth rate going from 40%—>21%----> to -7% next quarter.

Here are the questions I’m asking myself on NVDA.

If management just missed their gaming center demand by $700 M last quarter, how confident can I be that they have the inventory problem solved at the end of this quarter and it won’t carry forward?

Data center demand missed forecasts. Is that caused by crypto also?

What is the real growth rate for gaming, and the company, without crypto?

When is the auto business going to kick in and become another growth driver?

I can’t answer any of the questions above, so I can’t determine how likely it is that they grow 25%+ going forward.

NVDA is clearly a great company, with a management team that has been great in the past but just stubbed their toe pretty bad.

Jim

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#21

Andy,

but that $450 million dollars of inventory was stuck in the distribution channel for Crypto

I think that this is what I essentially said in my post on NPI. The real growth was 33% or $9.290B versus $9.714B reported. Difference is $424 million. So if $9 million real crypto sales, then $415 million stuck there. So if gaming was really only $5.19B and there is $0.415 to $0.45B stuck there, how long to clear it. These were for desktop gaming. Don’t know what % of gaming that is. And again, the unknown AMD inventory.

KC

1 Like
#22

A short article specified that CEO Huang had recently sold $40 million worth of shares. Perhaps he did. However, on the insider roster on Yahoo, his last sale was at $166 for around $3 million. He has automatically been selling, periodically, all the way up, with “small” amounts such as that.
--------------------------------------------------------------------------------------------------------------------

Looks like about $11.2M sold between Sept. 19th and 21st (41,253 shares at an average price of $271.98):

That was a very useful link you included, linking to the SEC form 4. Based on that form he has over 20 million shares in total in various accounts, and he sold all of 41 thousand, which comes to about 1/500th of his total, or a massive 00.2% of his position.

Now, I’m not invested in Nvidia at present, but if you are a stockholder, I think getting all worked up about that insider trade is silly on the face of it.

Saul

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#23

That was a very useful link you included, linking to the SEC form 4. Based on that form he has over 20 million shares in total in various accounts, and he sold all of 41 thousand, which comes to about 1/500th of his total, or a massive 00.2% of his position.

Now, I’m not invested in Nvidia at present, but if you are a stockholder, I think getting all worked up about that insider trade is silly on the face of it.

Saul

Agreed.

Huang’s paper net worth (only including his NVDA share holdings) has dropped from a peak of ~$5.8 billion in August down to about $3 billion at present, so his interests are definitely aligned with a high NVidia share price.

-volfan84
still long NVDA ($17.52/share cost basis)

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#24

Now, I’m not invested in Nvidia at present, but if you are a stockholder, I think getting all worked up about that insider trade is silly on the face of it.

Saul

Insiders sell shares for a variety of reasons. IMO it is usually of no consequence. It is when insiders buy shares that my interest is piqued.

#25

Hi KC,

The real growth was 33% or $9.290B versus $9.714B reported. Difference is $424 million. So if $9 million real crypto sales, then $415 million stuck there. So if gaming was really only $5.19B and there is $0.415 to $0.45B stuck there, how long to clear it. These were for desktop gaming. Don’t know what % of gaming that is. And again, the unknown AMD inventory.

Thanks for the confirmation KC. I think another thing you have to calculate is that this are the mid range video cards so how much of sales do they make up? Here is a pricing of video cards and a comment how cheap they are.

https://www.pcgamer.com/best-graphics-card-deals-today/

you can pick up the rtx 2070 for about $500 dollars and it has ray tracing. So maybe everyone jumps over all the inventory and NVDA has to eat most of it. Unless they just sell it all of to the desktop’s where nobody cares about video just price. So they have to sell at 50% off and they get $225 million for the $450 million in inventory.

Andy

1 Like
#26

Tinker I believe though I could be wrong that that particular sale that author wrote about was from last year like Sep-Nov timeframe.

#27

The backward looking growth couldn’t be less relevant if they are going from +21% growth to negative -15%.

Why on earth would product sales from 10 Quarters ago be worth anything in today’s analysis?

4 Likes
#28

Hi NajdorfSicilian,

Why on earth would product sales from 10 Quarters ago be worth anything in today’s analysis?

Because it shows a direction in which growth has been heading and how it’s different divisions have been doing. I would like to see your analysis of this stock so I can evaluate what I am doing wrong. Also what numbers are you using to show growth going to negative 15%? I have it at -7%.

Andy

1 Like
#29

What is going to matter to gaming growth is how well received Turing is. There have been many technological leaps that turned out to not give enough in utility gains to be successful in the end.

If Turing turns out to be revolutionary and changes what games are (will start from the high end and then move down) then the upgrade cycle for gaming cards will be huge for Nvidia. Something like 85% of users have old cards, and the market is growing as well.

Only Turing can provide ray tracing and the benefits to be derived therefrom.

The question becomes is ray tracing a sufficient upgrade to entice gamers to upgrade more rapidly than they have in the past? Will it become must have not only in the high end but the middle end as well? If so Nvidia will benefit from a strong multi-year upgrade cycle that should produce good growth. Not the 60% that Nvidia had for a quarter or two, but it will get back to normal and by this time next year (assuming the games come out and consumers find that it is worth upgrading in order to play in the ray tracing mode) double digit growth should return to the gaming side of things.

So it is not so much the numbers to examine, but rather, the marginal utility that ray tracing brings vs. the status quo. If the benefit is large enough the growth will come. On the other hand I just bought a MacBook that is like 1.3 mghz of speed (but with “boost” to 3 mghz). I mean this is way underpowered by any modern standards. And yet, with the way it is optimized, as long as I am not doing high level graphics, this MacBook allows me to run my business equally as well, with no difference in speed, as my MacBook Pro.

Analogous, if that were the case with the graphic chips, only those desiring the high end would want the Pro (pending relative pricing of course). Will Turing only be something the high end wants and everyone else can get by with the MacBook, or will we all need “MacBook Pros” to play the games we want?

I think that is really the issue to be resolved, as the numbers will then take care of themselves.

Tinker

4 Likes
#30

Also what numbers are you using to show growth going to negative 15%?

Certainly no need to take my word for it, I’m using Management’s forecast numbers:

https://investor.nvidia.com/financial-info/quarterly-results…

From the earnings release, they guided down 15% YoY.

Naj

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