- NVIDIA has a nearly un-disruptable lead in AI and autonomous vehicles.
- It has a significant head start on competitors, and it will remain that way for a while.
- The problem is with NVDA stock valuations. Be cautious in your approach to investing in NVIDIA.
NVIDIA Corporation (NSDQ:NVDA) has lot of room for growth, as all of their segments except for one are growing at double-digit rates. But as a side effect of that growth, the NVDA stock price has gone through the roof, nearly tripling in the last two years. NVIDIA is now trading at more than 6 times sales and 40 times earnings.
In October 2014, NVIDIA’s stock price was trading around $18. From there it has jumped by more than 270% to hit the current $67 levels. The primary reason for the sudden spurt in stock price was the increase in quarterly revenue growth rates that have steadily moved upwards in the last four quarters.
In the first quarter of the current fiscal, quarterly growth has gone above 23.85%, and there are several factors at play which could allow the company to sustain the above-average growth rates well into this year. NVIDIA’s gaming segment has so far been the bread and butter segment for the company, with more than half of its overall revenues coming from this segment. So, ideally, NVIDIA's growth rate should mirror the growth in the gaming segment. But NVIDIA’s new growth drivers - the data center segment and automotive segment - are growing at a pace that will likely disturb their revenue distribution as early as next year.
Data Center Segment
NVIDIA is now the leader in the AI world, and most of the top tech companies use NVIDIA’s products to power their hyperscale projects. But for NVIDIA, these products aren’t new. They’ve been working on them long before cloud computing went mainstream - since 2007, actually, a year after Amazon launched its Amazon Web Services.
Today, the scenario is vastly different. More and more companies are moving towards the cloud, and, more importantly, all the tech majors are ramping up their artificial intelligence capabilities by using machine learning and deep learning, both of which are advanced components of AI.
There’s a tremendous amount of activity around artificial intelligence today. A few days ago Google launched Google Pixel, its self-branded smartphone, and Google Home smart speaker - both of which feature the new Google Assistant, powered by AI. But Google is just a late entrant to the party, which already has several players sweating on the dancefloor. Apple’s Siri, Microsoft’s Cortana, Amazon Echo’s Alexa are already in the AI-based digital assistant space, and underlying most of those is the hardware provided by NVIDIA.
As companies get more serious about artificial intelligence, the need for NVIDIA’s GPUs over traditional CPUs is growing, and the growth will continue unabated for the foreseeable future because AI is dependent on the cloud, and the cloud is dependent on data centers, and data centers are dependent on their processing power. Ergo, NVIDIA is perfectly positioned at the root of this major technological shift.
The Automotive world is also going through a huge shift. All the big players are working on autonomous technologies which, once again, require high levels of computing power. For NVIDIA, revenue from this segment more than doubled between 2014 and 2015, and in the first quarter, it grew by nearly 67%. Nobody knows how popular autonomous technology will be in the future, but auto companies can ill afford to sit and watch their competitors develop it and leave them behind.
The competition is forcing everyone to join the bandwagon, and NVIDIA’ s leadership in that segment is making sure that all of them keep flocking towards its products.
“At the end of fiscal 2016, NVIDIA's Tegra chips were in more than 10 million vehicles, up from about 7.5 million in fiscal 2015 (a gain of about 33% year over year). The company boasts an impressive list of customers including Mercedes-Benz, Audi, Porsche, Bentley, and Honda. And Tesla Motors (NASDAQ:TSLA) relies on NVIDIA's chips to power the infotainment system for its all-electric Model S sedan and its new Model X SUV. That's great news for NVIDIA, considering that the Model S was the best-selling luxury car in the U.S last year.” – Motley Fool
Wherever money goes, company’s have to follow. Both these segments are in the early adoption stage and have plenty of room to run before they level off. We are at the cusp of a huge transition into cloud, artificial intelligence, autonomous driving and related technologies. NVIDIA, having worked on these products for a long time, is taking advantage of the head start they are having over other companies.
Companies such as Intel have already made it clear that they intend to get in, but as a competitor to NVIDIA they have a long way to go. And NVIDIA isn’t going to let go of that huge lead they have in this space. The market knows that the growth numbers NVIDIA hit in the last few quarters are not a “one-off”. As such, it can sustain high levels of growth for several more quarters and possibly several more fiscals.
The end result of all this feverish activity is that it has inflated NVDA stock valuations. They have the lead and they’ve proven themselves over and over, but at 6.5 times sales, most of the upside has already been priced into NVIDIA stock price. Instead of buying a great company at a bad price, the best option is to wait for things to cool down a bit before jumping in. This is definitely a company you want in your portfolio for several decades, but be cautious if you want to start investing right now.
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