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
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 
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
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.
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
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…
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
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
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
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
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.
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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
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.
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)
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.
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
Tinker I believe though I could be wrong that that particular sale that author wrote about was from last year like Sep-Nov timeframe.
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?
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
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
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
From the earnings release, they guided down 15% YoY.
No they didn’t they guided down 7.2% YoY and 15% sequentially Why the need to lie?
Andy
Andy - another in depth writeup, with solid insights into the real business operational details. That analysis makes a solid case for how it could double in 3 years. It also could be a rebound valuation play just based on the ugliness of the last few days.
I don’t do individual stock analysis and selection anymore, but your analysis is about as deep as it could get from the outside. Really well done.
My suggestion would be to set some benchmarks now that you’ll be looking for in the next two to four quarters of numbers to determine if they’re hitting numbers that support your valuation estimate; I wouldn’t wait to try to remember it or justify things 3 months from now. Just a suggestion, you likely already have that nailed down.