NVDA

Investment Analysis Clubs Saul’s Investing Discussions
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We could get back to stock discussions with a look at NVDA. They reported some killer results and are up 27% at this time. And that’s on top of an already big run up in the stock price over the past 9 months or so.

I’ve been in the stock less than a year and it’s almost tripled for me, I just wish I had added to it along the way! But it had a pretty relentless run up with very few pullbacks to pick up additional positions on, and it always “seemed” expensive…lesson learned.

It started as just a small starter position, but has grown into a normal sized position for me.

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Pretty impressive quarter from NVDA. They accelerated sales growth from around 24% last quarter to 54%! That’s not a typo. EPS growth last quarter was 56% – this quarter it was 89%! Fantastic growth, but is it sustainable? The market seems to think so – it’s pricing in the faster growth on top and bottom lines. The company’s guidance seems to suggest that they will repeat revenue and EPS next quarter.

Looking sequentially it is just astounding. But I just don’t see how they keep it up. They were basically flat on revenue for the last 4 quarters:

1.31B
1.4B
1.31B
1.43B

and then this quarter 2.0B??? Just wow.

They’ve gone from being a $10B company to being a ~$60B company in less than two years. Incredible run. But this stock is truly priced for perfection now.

Bear

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Where she stops, nobody knows…

Good lord. PS (diluted) is over 12 now. Hard to imagine that now is the time to buy, but I would have said the same 2 weeks ago, and NVDA is up 30% since then!

They forecasted revenue to be up 5% sequentially in the Dec quarter, to 2.1B. Looks like they don’t provide guidance past the coming quarter, so the real question is, what will 2017 look like? Anyone know how much, if any, of their revenue is in some way recurring? Looks like the overwhelming majority of what they do is GPU, which is just hardware, correct?

Bear

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Looks like the overwhelming majority of what they do is GPU, which is just hardware, correct?

Bear, I believe GPU is hardware, but I could be wrong about that. NVDA is, however, involved in a lot more than just GPU. As I understand it, it is involved in virtual reality, artificial intelligence, and self-driving cars (Tesla, I believe). A recent article I read (through a paid MF subscription) indicates that these are the things that are driving NVDA’s great results. This all in addition to its graphics processors business doing very well. Sorry I don’t have more detail for you, but I thought this might help at least a bit.

az5speedy

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As I understand it, it is involved in virtual reality, artificial intelligence, and self-driving cars

My guess is that’s a reference to some of their customers, and the industries they serve.

Anyway, I think I’ll be on the sideline for the near future on this one. Just too pricey.

Bear

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NVDA is a case study in Mr. Market waking up to possibilities people in the industry have known for years, and then over-reacting. I bought 200 shares in 2009, so this is a (small) ten-bagger for me.

Yes, Nvidia makes GPUs (Graphical Processing Units). Years ago, those were mostly used to perform 2D and 3D calculations to display images. Pretty special purpose stuff, and intended for the gaming market. But, that was a long time ago and the world shifted away from computers running game software to high powered consoles like PlaySations and XBoxes. But even that is now a long time ago.

For over two decades now, computer programmers have realized that some non-graphical data processing can be programmed into GPUs, which by their very nature have many cores. Nvidia’s chip architecture has always been massively parallel, and so any CPU intensive calculation that had to be repeated many times could be programmed to run on the GPU board instead of on the general purpose CPU to provide better performance. It got to the point where FPA (Floating Point Arrays) were no longer needed - the GPU had better floating point performance than dedicated FPAs. But, programming the GPU has traditionally been harder since you don’t usually get high-level languages for them.

Here’s an article on Nvidia’s site showing medical, air traffic control, and other applications: http://www.nvidia.com/object/cuda_home_new.html Nvidia doubled down on their parallel architecture, provided high level development tools, and eventually Moore’s law enabled the hardware to get faster and cheap enough to hit new markets.

But it was not a smooth ride. This is a good history How AMD and Nvidia lost the mobile GPU chip business to Apple — with help from Samsung and Google: http://appleinsider.com/articles/15/01/23/how-amd-and-nvidia…

In my view, which by no means is universal, what has happened is that some specific applications which are best done on an NVIDIA massively parallel architecture, rather than an ARM general purpose RISC architecture have taken off: Two are AI and Autonomous Driving. Nvidia is responding well, providing lots of application development support to help companies learn how to program their chips. BTW, note that Nvidia’s general purpose SOCs (eg, the Tegra line) use ARM central cores, but the real differentiator is their additional special GPU that can be leveraged for specific applications. No-one comes close to Nvidia in GPUs.

The danger here is that these sexy new markets for GPU intensive applications won’t grow quickly enough to satisfy the recent run-up in the stock price. I feel that Mr Market was behind the curve and now is way in front. NVDA was too low in 2012-2014, but seems too high right now. I could be wrong. In Silicon Valley you see Nvidia’s self driving test cars on Hwy 280, because the vision processing necessary to support autonomous driving is right up Nvidia’s chipset alley. But, is that really going to translate into big profits in time to satisfy Mr. Market? NVDA is a momo stock right now, but can reality sustain that? I know people that sold in the $80s and $90s that are kicking themselves right now.

What’s interesting to me right now is that we all here (and in TMF in general) spend a lot of time discussing how to identify break-out stocks. What we don’t discuss nearly enough is how to handle them when the break-out occurs. We have all sorts of strategies for buying in thirds, buying more on better value points, identifying trends and moats, etc. But, what we don’t have is how to not sell too soon nor too late. And rarely do we discuss how to protect profits we have made.

It’s like we spend all our time talking about how to get down the field to inside the 20 yard line, but don’t discuss red-zone strategies to actually make the touchdown. And ironically, due to defense compression, it’s actually sometimes easier to get a big 50 yard play from your own territory than it is to get those last 10 yards to the goal line.

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I definitely agree with you. I myself am a five bagger on this and I am extremely challenged by what to do. I personally feel the market is overextended on this. That being said the market is often irrational and with several investment firms reiterating a buy even at this level suggest we could see much higher prices. Timing the top, paying taxes and then hoping to re-purchase at the bottom for the next ride up is extremely challenging and I am wondering how best to approach this.

Smorgasbord, I am wondering if you have any insight into how you think you will approach the next several months with NVDA. THANKS.

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Sounds like a good strategy would be to take some off the table and continue holding some in case things continue to go up. Percentage to lighten would be dependent on your situation and your thoughts on the company’s prospects going forward, and whether you’re holding for short or long term.

I also have some NVDA and that is my plan, to lighten once this latest “run” seems to top out. The part “held” would be for the long term and to keep me watching the company so that I could add when and if the opportunity presents itself.

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http://invest.kleinnet.com/bmw1/stats16/NVDA.html

That trend is not likely to last forever IMO.

Its current PE is twice its 5 year average and the highest going back to 2008:

http://beta.morningstar.com/stocks/xnas/nvda/quote.html

Congratulations on your gains but…

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Look at the ratios that Saul uses to buy stocks, if you find one that is a more compelling value, sell so of the Nividia and buy it. Always buy the better deal.

This is the secret of 100 percent investment. You don’t worry about undersold, oversold, weak chart strong chart.

You just buy the better deal.

Cheers
Qazulight

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I wouldn’t be surprised if the last bit of gain is yearend window dressing by funds.

https://www.google.com/search?client=safari&rls=en&q…

Denny Schlesinger

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I love the new GPUs and they are now expanding shipping complete $100,000 systems
desinged for AI and machine learning applications. This is a big new and growing market but only
about 35% of their market compared to the PC video gaming.
The competitor AMD has been trailing big time until recently. AMD’s new FirePro
GPU are suddenly the new leader according to the few that have managed to get early
samples. Google just announced they are building their Machine Learning Cloud with the new AMD devices.
http://www.forbes.com/sites/aarontilley/2016/11/15/google-ta…

Company Short % of Float (as of Nov 30, 2016)
NVDA 16.43%
AMD 12.71%
INTL 1.65%
AAPL 1.06%
AMZN 1.69%
MSFT 0.68%

My leanings would be to avoid the potential risk take a nice profit and get out at what may be a peak. On the other hand my conservative observation may be just what you need to reinforce a buy.
RAM

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What’s interesting to me right now is that we all here (and in TMF in general) spend a lot of time discussing how to identify break-out stocks. What we don’t discuss nearly enough is how to handle them when the break-out occurs. We have all sorts of strategies for buying in thirds, buying more on better value points, identifying trends and moats, etc. But, what we don’t have is how to not sell too soon nor too late. And rarely do we discuss how to protect profits we have made.

It’s like we spend all our time talking about how to get down the field to inside the 20 yard line, but don’t discuss red-zone strategies to actually make the touchdown. And ironically, due to defense compression, it’s actually sometimes easier to get a big 50 yard play from your own territory than it is to get those last 10 yards to the goal line.

Couple small thoughts - just to share views:

*this isn’t football. You don’t need to get that last 10 years, especially is the risk.reward is skewed.

*you strike me as a person who knows what they are doing, and you seem like you know the NVDA story well. You invested early and have held it and you have a strong opinion on what it did and why it did it and why it might or might not be too high or not. If I owned NVDA, I’d want to ask you what to do, and you just described a situation where you ought to pair it down significantly, right? Not sell all of it, but pair it down.

you said this:

The danger here is that these sexy new markets for GPU intensive applications won’t grow quickly enough to satisfy the recent run-up in the stock price. I feel that Mr Market was behind the curve and now is way in front. NVDA was too low in 2012-2014, but seems too high right now. I could be wrong. In Silicon Valley you see Nvidia’s self driving test cars on Hwy 280, because the vision processing necessary to support autonomous driving is right up Nvidia’s chipset alley. But, is that really going to translate into big profits in time to satisfy Mr. Market? NVDA is a momo stock right now, but can reality sustain that?

Stocks fluctuate, and we in a bull market, and NVDA could go higher (of course - already has) and higher, but you are laying a case for caution. I have zero idea if you are right (you aren’t sure either), but you’ve been right so far. If you sell here and what you think happens happens, would you feel you made the right decision? If you sell and what you think happens doesn’t happen and the stock does well, would you feel you made the right decision? You seem to know the company, so staying around for 10 yards - why bother? If you have a strong conviction this is an overshoot, then that’s a logical reason to pair it. How much is up to you - you know best.

Money can find a home elsewhere. The same skillset that you used to buy this stock can be used to buy another stock, or buy NVDA when it fluctuates (and if you are wrong you can buy it higher - the stock doesn’t take offense at this).

You are the sum of your investment decisions. You’ve made a great one.

And rarely do we discuss how to protect profits we have made.

you just did…

I ALWAYS sell too early - it is a fault, but money can find a home elsewhere. There are lots and lots and lots and lots of stocks. The trick is to get done right with what you own. You’ve done that.

just 2c

(I know zip about NVADA - just reading your note)

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“If you have a strong conviction this is an overshoot, then that’s a logical reason to pair it.”

sorry, quoting myself - this assumes you have a read on how successful your previous convictions have been and you are calculating your returns. No need to act on convictions unless they tend to be correct, though evaluating convictions has more to do with process than result (though a bad result is hard to explain away unless we are just pure froth or fear).

Still, that’s why we all need to document all our investment decisions at the time we make them.

Obvious stuff, but sometimes i have looked at my trades and wondered why I did what I did. Usually it involves some stupid reason for doing what I did. Putting things on paper won’t make you smart but at least it puts the brakes on and can be read later on (“I did this?”)

Dumbest move by me - I sold Google a couple years ago cause I was worried about ad blocking even though they had just reported a +20% revenue quarter. Not smart. Got in a hurry. Did something stupid. Hopefully won’t do it again! Hopefully?

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Dumbest move by me - I sold Google a couple years ago cause I was worried about ad blocking even though they had just reported a +20% revenue quarter. Not smart. Got in a hurry. Did something stupid. Hopefully won’t do it again! Hopefully?

Let’s assume you sold GOOGL in mid-2014 around $600/share. It’s 800 now, so up roughly 35%. That’s the last 10 yards. Or the most recent 10 yards, at least.

But if you’d bought NVDA with the GOOGL proceeds back in 2014, say around $19/share, you’d be up roughly 500% on that.

It ain’t selling before the absolute peak that you’ll regret. You’ll regret not redeploying into something with much higher potential.

Just sayin’.

Bear

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Hi Bear,

Sure, I wish I had done that - but the difference was I knew what I was doing with GOOG, had it as my largest position, and didn’t know zip about NVDA. I don’t care much about stocks I miss - only care about stocks I get. I can put together an imagined portfolio of a lot of names and get to incredible heights, but those are fantasy numbers.
As the immortal Bill Parcels said, you are what your record says you are.

This is Peter Lynch idea, and obviously out of line with Saul’s approach, but for many investors there is some logic in throwing in some stalwarts you can trade for 20 to 30% gains to moderate the chills and thrills that goes with a portfolio of fast growers. At least, for many people. As Lynch said, the key is always knowledgeable buying and selling.

If i matters, I’d rather make 30% in a stock where I have absolute conviction than 100% where my conviction is very low. In the first you can reasonably wager a huge amount; in the 2nd, you can only gamble a little unless you are comfortable with portfolio killing losses.

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“…but the difference was I knew what I was doing with GOOG…”

geez, I am a LIAR! I obviously DIDN’T know…(sorry, there’s that twisted view of reality thing at play)

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“…but the difference was I knew what I was doing with GOOG…”

geez, I am a LIAR! I obviously DIDN’T know…(sorry, there’s that twisted view of reality thing at play)

Precisely my point. Not that you’re a liar, ha, but that you DIDN’T feel comfortable with GOOG (or GOOGL) at the time.

The point was NOT where you actually put the money. Obviously you very well might have put it in something that didn’t do as well as GOOG has. But the point was simply that at the time GOOG was not the place for YOU.

That’s how I feel about NVDA now. Maybe it’s got some more juice in it in the short term, but I can’t see it right now.

Hat tip to Denny, though – I am looking at XSD. It’s major holdings look overvalued too, though (NVDA among them).

Bear

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Hat tip to Denny, though – I am looking at XSD.

Picking technology just got too difficult. Now I let XSD and PSCT do the work and the worrying. :wink:

It’s major holdings look overvalued too, though (NVDA among them).

I was going to write a post about that but never got around to doing it. The problem is that we are taught to determine value, more or less, like they used to do when Graham and Dodd started in 1934 which is fine for many stodgy companies but Mr. Market pays for growth which is much harder to figure out. What happens is that the P/E ratio expands with accelerating growth and contracts when growth slows. During the fast and furious growth segments these stocks all look too expensive and the P/E ratio will, in time contract. But the best ride is during the exciting too expensive part of the cycle.

Denny Schlesinger

PS: TMF shrunk the text edit box! Grrr…

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You are the sum of your investment decisions. You’ve made a great one.

Well, I lucked into it due to inaction on my part because I was too busy at work to actively manage what was/is a small percentage of my portfolio. It wasn’t until a co-worker told me how happy he was to have sold his NVDA at a nice profit that I even paid attention. And by then it had dropped off the recent high yet the buzz was good so I let it ride.

I take no credit other than for my initial investment back in 2009. Had I been paying attention I probably would have added because I knew about NVDA’s automotive push. I knew Qualcomm was failing in Automotive, and so actively avoided that stock, but I should have carried my analysis further and didn’t. Lesson learned.

For me, the real question is what is Mr Market expecting from NVDA’s Q4 results? If last quarter’s earnings were a one-time event, the stock is toast and we could see the 70s. If it’s a new trend, then even a good quarter might not meet expectations and the stock will drop despite doing better than last quarter (or equivalent quarter last year).

Remember, it’s not whether Nvidia will do well in the future (that’s just about guaranteed), it’s whether it’ll do better than Mr. Market is saying it’ll do - and Mr Market talks with stock prices. A couple of years ago, Mr. Market didn’t know or believe that Nvidia was going to do anything more than gaming devices, which most people saw as a declining market (like PCs). It’s been a perfect storm for NVDA as its existing business is booming and news stories about new businesses (such as a alliance with Tesla Motors) are all over.

Despite the hype with these new markets, it’s still “gaming” chips that make up the vast majority of current sales. That gaming sector could see competition with AMD hurt sales at any point in time, even right now.

I guess that if you regard NVDA as a 3D/AI/VR/Autonomous Driving play, then you should hold on, as victory there is still years away. Unless you’re good enough to call a temporary peak (as happened in early 2011), sell, and buy back after the pullback. This is feeling like a peak, but then it felt that way in the $90s just recently - I was just lucky enough to not be paying attention then.

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