“Chip king” NVIDIA: the pillar of metaverse

The writer is Ben Alaimo, a senior investment analyst

NVIDIA (NVDA) is a market leader in games, data center computing, visualization and automotive technology. The company was initially a chip manufacturer focusing on high-performance graphics cards, and later developed into a “computing platform company”. Now, they are taking advantage of the innovation and growth of disruptive technologies from automatic driving to artificial intelligence and even the meta world.

In this article, I will explore the company’s business model, finance, valuation and why they are the pillars of the yuan world.

01

Disruptive business model

NVIDIA has four business units; Games, data center computing, visualization and automotive technology.

1. Games

NVIDIA is a market leader in high-performance graphics cards or graphics processing units (GPUs). According to the Market Research Report, the global graphics processor (GPU) market will be worth US $22 billion in 2020. It is expected to grow at a compound annual growth rate (CAGR) of 31.87% by 2028, and the market valuation will reach US $165 billion.

NVIDIA is the second largest GPU supplier in the world, with a market share of 20%, followed by AMD (AMD), accounting for 18%, and Intel (INTC) leads with a market share of 62%.

NVIDIA and competitor GPU (JPR Research)

In depth study of data, there is an important difference. Intel typically sells “standard” GPUs, versions in lower specification PCs. NVIDIA and AMD focus on high-performance graphics cards for games, video editing and visualization. These include the popular geforce RTX series. If you have a high-specification laptop or PC, it may have an NVIDIA graphics card.

In the gold rush, the shell shovel

During the gold rush in California, most of the money making people were not those who were gold mining, but those shovel shovels. NVIDIA is the market leader in the “digital shovel” of encryption mining. They even released a GPU specially designed for mining, called “NVIDIA CPM”.

According to Jon Peddie research, the crypto mining industry purchased 25% of all GPUs in the first quarter of 2021. This means that the market value of about “700000 high-end and middle-end” graphics cards is close to $500 million.

NVIDIA encryption miner (techspot)

Cloud game

NVIDIA has a leading cloud game solution called geforce now, which can immediately turn any computer or mobile phone into a game platform. The company has announced more than 1200 games on the platform, such as fortress night and cyberpunk. In addition, they also work with at & amp; T (T) has established a huge partnership to integrate the game center on their TV through their 5g network and Samsung (OTC: ssnlf) (OTC: ssnnf).

According to global news wire, by 2026, the global 5g and game industry is expected to grow at a huge CAGR of 58.7% and 14.5%. Therefore, NVIDIA is ready to ride the wave of these two integration technology trends.

NVIDIA games

2. Data center

NVIDIA’s data center business is a leader in AI high-performance computing. According to the data of grand view research, by 2028, the global artificial intelligence is expected to compound at an amazing annual growth rate (CAGR) of 40.2%. Therefore, as a leader in AI support infrastructure, NVIDIA is ready to ride this disruptive wave.

The company is the backbone of meta (FB) (formerly Facebook), which announced the establishment of an artificial intelligence research super cluster with NVIDIA. This has the potential to provide amazing technologies for a group of people, such as real-time voice translation, even if each of them speaks a different language. This will enable them to easily collaborate on projects or play ar games together in the meta world.

Meta NVIDIA (Introduction to NVIDIA investors)

AI backbone technology is also widely used in manufacturing, financial services and even health care. For example, a team of researchers at Stanford University used NVIDIA Clara and Google deepvariant technology to set a world record for the fastest DNA sequencing of the human genome.

3. Visualization

NVIDIA is making full use of its professional visualization technology to provide free platforms, such as NVIDIA Omniverse for creators. This provides a realistic human avatar with facial expressions and even the physical characteristics of real objects.

I believe the plan to provide this platform for free is to create a creator ecosystem and an extensible platform for omiverse.

NVIDIA Omniverse (NVIDIA investor report)

4. Car

NVIDIA’s automotive sector provides automotive manufacturers with the backbone technology to support autonomous driving. NVIDIA drive Orin can be used in vehicles of China’s leading EV manufacturers, such as NiO (NiO) and xpeng (xpev). In addition, they have recently established a partnership with Jaguar Land Rover to develop autonomous driving for all vehicles from 2025.

The company also launched the ISAAC autonomous mobile robot platform, which supports robot applications in the logistics industry.

02

Led by the founder

The company is led by founder Huang Renxun, who still holds 3.37% of the shares of the company. Investing in companies where founders “participate” is a strategy that I and many great investors are using, such as Nick sleep, a former hedge fund manager whose fund has returned 20.8% in 12 years.

03

Strong financial position

NVIDIA has a strong financial position, with annual revenue of US $26.91 billion, an increase of 61% year-on-year, and GAAP earnings per share (diluted) increased 123% to US $3.85 from US $1.73 a year ago.

The company also has an excellent gross profit margin of 65% and an operating profit margin of 45%. This is higher than all competitors, including AMD and Intel.

04

NVIDIA higher profits

NVIDIA higher profits

The high profit margin shows that the company has a strong brand and pricing power for its products. This is a competitive advantage, especially in the high inflation environment.

NVIDIA high profit (NVIDIA investor report)

The company has a high return on capital of 25% (TSM has a roc of 21%), which shows that their investment has achieved good returns so far.

In addition, NVIDIA has a robust balance sheet, with up to $21 billion in cash and little interest bearing short-term debt, so their quick ratio is 6 (anything over 2 is good).

Arm transaction is the only black mark in NVIDIA’s finance. Because the acquisition failed due to “major regulatory challenges”, the operating expenses in the first quarter of fiscal 2023 were $1.36 billion.

05

Is NVIDIA underestimated?

I have inserted the latest financial data into my valuation model, which uses the discounted cash flow valuation method. This is an advanced model. I even consider R & D costs and options.

For the revenue forecast, I used the analyst’s estimate of 19% next year and 30% in the next two to five years. The company’s revenue increased by 61% in previous years. Due to inflation, I expect the operating profit margin to stabilize at 45% and decline slightly. From these figures, I get that the fair value of NVIDIA shares is $234 / share. The stock is currently traded at these levels and is therefore fair in nature.

Valuing the company with competitors who provide similar services but differ in some aspects, it is obvious that NVIDIA is the most expensive and Intel is the cheapest in terms of historical valuation indicators. Of course, many people will think that this reflects NVIDIA’s “growth potential” and makes it a real growth stock.

06

Risk statement

I noticed a lot of insider trading from directors and board members. These amounts are relatively large relative to their compensation scheme, indicating that they will encounter adverse factors in the future. Companies such as NVIDIA must continue to innovate in order to be ahead of competitors such as AMD. For example, Intel, which has manufacturing problems and chip delays, lost to TSMC in 2020. NVIDIA may have a similar situation.

In addition, metaverse hype is also noteworthy. Despite economic forecasts and headlines, “metaverse” is likely to be heavily hyped and may take more years to really reach its scale. Declining interest in new technologies may affect NVIDIA’s revenue.

07

Last thought

NVIDIA is a great company that is ready to harness a variety of evolving technologies that are converging from games to artificial intelligence, 5g, autonomous driving and even the meta world.

The company has a strong financial position, higher profit margin than the industry, high revenue growth and high return on capital. The valuation of the company is higher than that of its competitors, but given the company’s high growth and profit margin, I think it is worth it. The failure to acquire arm was a major disaster and resulted in a huge expenditure of $1.36 billion. I think NVIDIA can better protect itself from such a large cost, but I know that overcoming regulatory challenges is a problem.

The company will be required to continuously innovate and expand its technology to maintain a leading position. The current valuation of the stock is reasonable, but it is not completely cheap, so you may need to wait for a correction before entering as a long-term investment.

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