- NVIDIA will benefit from the improvement in PC demand.
- NVIDIA is well positioned for growth in great new markets including virtual-reality gaming, artificial intelligence, IoT, and robotics.
- The average target price of the top analysts is at $66.57, however, in my opinion, shares could go even higher.
On September 16, Intel (NSDQ:INTC) announced that third-quarter revenue is expected to be above the company's previous outlook. According to Intel, the increase in revenue is primarily driven by replenishment of PC supply chain inventory. The company is also seeing some signs of improving PC demand. As a result, Intel's shares climbed 3.12% on the same day to $37.67 their highest closing price in more than 18 months.
Improving PC demand is an excellent news also for NVIDIA (NSDQ:NVDA). Since NVIDIA's graphics processing unit (GPU) is used with the central processing unit to enhance graphics, GPU demand is strongly correlated with the market for PC. The GPU segment accounts for about 83% of the company's revenue. However, about only half of PC sales include GPUs. Using GPUs is more common to individual consumers than in enterprise computers, and in desktop than laptop PCs.
NVIDIA Growth Prospects
NVIDIA has recorded substantial growth in the last few years. The company's annual average sales growth over the last five years was 7.2%, and the average EPS growth was very high at 20.2%. The average annual estimated EPS growth for the next five years is also high at 23.7%.
According to the company, its strategy is to focus on creating the future where graphics, computer vision and artificial intelligence converge is fueling growth across its specialized platforms; Gaming, Pro Visualization, Datacenter, and Automotive.
Source: Fall 2016 Shareholder Meetings
As a consequence of its leading market share in visual computing, NVIDIA is well positioned for growth in great new markets including immersive virtual-reality gaming, artificial intelligence, internet of things, and robotics. NVIDIA launched earlier this year its new high-end Pascal GPUs, which represent a significant advance for gaming and immersive virtual reality experiences and promises to outperform the Maxwell architecture. According to the company, it is seeing a rising demand for its Pascal generation of GPUs across multiple platforms, from PC gaming to deep learning and other capabilities.
In addition to NVIDIA's GPU segment, Tegra processor segment is also poised to achieve substantial growth. Tegra segment includes its mobile application processor, Tegra, baseband, and radio frequency solutions, automotive, legacy game console, and other associated revenue. In the last few years, mobile computing has been the largest business for the company's Tegra business. However, the company affirmed that automotive and Shield (NVIDIA's gaming device) now represent the vast majority of its Tegra revenue. NVIDIA has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth.
NVIDIA Stock Performance
Year-to-date, the NVDA stock is already up 93.2% while the S&P 500 index has increased 4.7%, and the Nasdaq Composite Index has risen 4.5%. Moreover, since the beginning of 2012, NVDA's stock has gained an astounding 359%. In this period, the S&P 500 Index has increased 70.1%, and the Nasdaq Composite Index has gained 100.9%. According to TipRanks, the average target price of the top analysts is at $66.57, representing an upside of 4.6% from its September 19 close price, however, in my opinion, shares could go even higher.
Dividend and Share Repurchase
During the first half of fiscal 2017, NVIDIA paid $509 million in share repurchases and $124 million in cash dividends. The company spent $800 million in 2016, $1.0 billion in 2015, and $1.1 billion in 2014 to repurchase shares and pay dividends. NVIDIA pays a quarterly dividend of $0.115 per share. The present annual dividend yield is at 0.72%, and the payout ratio is only 26.4%. The annual rate of dividend growth over the past three years was very high at 74%.
According to its valuation metrics, the NVDA's stock is not cheap, but it is not very expensive either. The trailing P/E is 41.83, and the forward P/E is 33.51. The price to sales ratio is 6.26, and the price to book value is 7.60. Furthermore, the price to free cash flow ratio is 37.67, the Enterprise Value/EBITDA ratio is 21.10, and the PEG ratio is 1.39.
However, most of NVIDIA's Margins, Efficiency and Return on Capital parameters have been much better than its industry median, its sector median, and the S&P 500 median as shown in the tables below.
According to Portfolio123’s "All-Stars: Zweig" ranking system NVDA's stock is ranked first among all Russell 1000 stocks. The "All-Stars: Zweig" ranking system is based on investing principles of the well-known investor Martin Zweig. The 20 top-ranked Russell 1000 companies according to the ranking system are shown in the table below:
The ranking system is quite complex, and it is taking into account many factors like; EPS Growth, Sales Growth, Market Performance and Insiders activity. Back-testing over seventeen years has proved that this ranking system is very useful.
NVIDIA will benefit from the improvement in PC demand since demand for its products is strongly correlated with the market for PC. As a consequence of its leading market share in visual computing, NVIDIA is well positioned for growth in great new markets including immersive virtual-reality gaming, artificial intelligence, internet of things, and robotics. In addition to NVIDIA's GPU segment high growth prospects, Tegra processor segment is also poised to achieve substantial growth. The average target price of the top analysts is at $66.57, representing an upside of 4.6% for NVIDIA stock from its September 19 close price, however, in my opinion, shares could go even higher.