Via SeekingAlpha.com

Negative headlines against the high-flying tech firms tend to draw the ire of holders in the comment section, so I want to start by acknowledging that I love Nvidia (NVDA) as a company. I wish I’d have picked it up last year when it was undervalued. I even wish I would have picked some up this past March during the COVID-19 crash when prices briefly dipped below $200. Alas, I did not.

ChartData by YCharts

Chart: NVDA 52-week price chart

I continue to watch the firm, and I follow the space quite closely. I believe the valuation is merely getting too rich, however, and I am waiting for another pullback before further considering a long-term investment. In short, I am bullish on the stock and the company as a whole, but we will, no doubt, see better entry points in the future.

In this article, I would like to explore what Nvidia does, how it stacks up to competitors, and how the metrics look.

Why Nvidia Is A Powerhouse

About NVIDIA Corporation | NVIDIA

Image: Nvidia GPUs from Nvidia.com

The company’s primary role in the marketplace is designing graphics processing units (GPUs), and system on chip (SoC) units that are used for mobile purposes. Both are critical to the ever-growing digital world we find ourselves living in.

Across these three spaces, Nvidia runs into some reasonably big named competition (which we’ll compare them to shortly). Names like Intel (INTC), Advanced Micro Devices (AMD), Qualcomm (QCOM) and Texas Instruments (TXN) could all be considered peers at some point along the supply chain.

It seems that every few years, Nvidia finds itself at the center of a computing trend. A few years back, when crypto-currencies were flying high, Nvidia’s GeForce GPUs were the miner of choice. More recently, big data, deep learning, and AI have become the hottest topics in the computing world, and again GeForce GPUs are at the center of the data centers dealing with these problems.

GPUs are the tool of choice for these activities over CPUs thanks to their ability to run calculations in a parallel manner versus CPUs that run a little more sequentially. For any CompSci wizards reading, I realize I am generalizing massively, but this article is not a focus of GPU vs. CPU.

So, while a handful of companies make these GPUs, one would be considered the pinnacle: Nvidia. Competitors like AMD are hot on Nvidia’s tails, but also have a broader focus on chipsets as a whole, while Nvidia has an almost laser-like focus on GPUs and their contribution to the AI/deep-learning space.

The Deep Learning Market

It is worth a brief exploration of the deep learning/AI market in this piece, at least to sum up how big the pie Nvidia is choosing to eat from will become.

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Almost every industry will be affected by AI over the coming decade. Perhaps the largest area of growth will come from self-driving vehicles (or at least a significant improvement in vehicle safety, if not fully autonomous). Nvidia is one of many companies working on autonomous cars with its “NVIDIA DRIVE AV” software, which uses Nvidia hardware to perform the millions of calculations needed per second to keep a passenger safe. This video offers a look at the technology in action:

More recently, Nvidia CEO Jensen Huang, from his kitchen, discussed how Nvidia’s GPUs offer 5x the price-performance on Spark (Apache’s big data processing engine) versus CPUs:

The list of opportunities for AI is endless. From medicine to augmented reality to self-driving vehicles and robotics. Nvidia is currently the tool of choice, and the company’s continued focus on expanding its offerings demonstrates that the future is more than bright.

Estimates on the size of the AI market by 2025 have quite the standard deviation. Some, like Grand View Research, believe the market will be worth $390B. Others like Fortune Business Insights put the price tag at just shy of $200B. One thing these researchers show is that growth will be massive.

Competitors

AMD is the closest competitor to Nvidia in the graphics space, and graphics is really where we should focus. There are several other manufacturers, including companies like Intel, GIGABYTE, or Zotac, but it would be an anomaly for one of these firms to sell a high-end GPU to someone who knows what they’re looking for.

To have more comparisons, however, I will include Intel. Intel, like Nvidia, is involved in the sale of chipsets to data centers, and could also sell its CPUs for the use in connected vehicles.

First, let’s take a look at margins:

Company Gross Margin Net Margin
Nvidia 61.99% 25.61%
AMD 43.69% 6.72%
Intel 59.51% 30.02%

As we can see, Nvidia performs admirably here. It performs better than the closest peer, AMD, but is a slight underperformer to industry titan Intel.

Intel winning in those metrics is quite telling. Why does a firm like that trade at 10.5x TTM earnings while Nvidia is at 59x (and AMD at 71x). I believe it’s a combination of buzzwords and growth differences.

Company Revenue Growth (YoY) Revenue Growth 5yr CAGR
Nvidia -6.81% 18.45%
AMD 18.77% 7.11%
Intel 6.90% 6.27%

As we can see, Intel provides significantly smaller revenue growth to investors (although it is a lot more consistent). It is here where my feelings turn from super bullish on Nvidia and its prospects to a little more neutral, thus my title. We’re paying 59x past earnings for a company that saw declining revenues over the last year and is forecast to grow at 10% over the next year. That’s a significant risk to take, in my opinion.

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Analysts

I’ve started providing a little snapshot of what analysts think into my articles. For Nvidia, they believe, at least based on recent forecasts, that things are getting a little top-heavy.

Out of 21 analysts that I could find covering the stock, the average price came out to be $318. That’s roughly 6% lower than the price is at the time of writing ($339). There’s a $360 price target on the high end, while the low-end sees a $230 (David Wong of Nomura).

Four analysts have updated their opinions in the last month, here they are:

Analyst Firm Opinion Price Target
Weston Twigg KeyBanc Hold $289.59
Ivan Feinseth Tigress Financial Buy N/A
Timothy Arcuri UBS Buy $330.00
Richard Shannon Craig-Hallum Hold $300.00

Insider Transactions

Insiders are also a little cold on the stock at these high prices. Going back to March, four insiders have sold stock worth just over $41M, or roughly 158,000 shares. While this is not necessarily a bad thing, and I don’t claim to know the situations these insiders find themselves in, it’s not a good sign for investors. We would, generally, want to see balance here, but we see repetitive sales from some execs.

Name Position Buy/Sell Shares Price
Mark Stevens Director Sell 10,000 $263.87
Mark Stevens Director Sell 100,000 $264.32
James Gaither Director Sell 15,669 $269.41
Mark Stevens Director Sell 11,125 $271.76
Robert Burgess Director Sell 20,000 $222.33
Colette Kress EVP & CFO Sell 2,000 $270.50

Potential Headwinds

There are three headwinds that I consider significant enough to warrant discussion: China, AMD, and COVID-19.

On the China front, the company is safe, for now. There is, however, no telling how a potential trade war between the United States and China might pan out. A few days before writing this article, China was considering adding firms like Apple (AAPL), Qualcomm, Cisco (CSCO), and Boeing (BA) to its “unreliable entity” list.

With regards to AMD, Nvidia’s closest competitor has been picking up steam, and fast, in the video game market. AMD chips powered the PS4 and Xbox One. They’ll also power the PS5 and Xbox Series X. If AMD can continue to pick up larger and larger segments of the graphics market, its GPUs could be seen as “superior” by buyers in the AI and data center markets.

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Finally, on the note of data centers, there’s the COVID-19 risk. One would expect that people moving digital could increase data center spending, but this is not a guarantee. Reduced spending from some data center occupants or a reopening of the economy (with recovery money spent elsewhere) could present a significant near-term headwind.

Hideaway Scores

In the Hideaway Score, that you can read more about here, Nvidia and Intel both score A+ ratings on the composite score. As expected, Nvidia gets an ‘F’ rating in price due to recent high runs, but that also earned the firm an ‘A+’ rating in the momentum scores.

Company Price Grade Quality Grade Momentum Grade Short-Term Momentum Composite Grade
NVDA F A+ A+ A+ A+
AMD F B A+ A A
INTC C A B A A+

High-Quality Hideaway is my new Seeking Alpha marketplace launching June 1st. As a subscriber, you will receive unfettered access to the Hideaway Scores for more than 4,000 actively traded companies. Highly rated Hideaway firms beat the market as a whole and help you rest easy at night, knowing your investments are well-positioned.

Also, you’ll get a more in-depth analysis of quality firms and access to more quantitative measures than you can shake a stick at (Piotroski, Altman, Ohlson, Beneish and more as I add them).

If you’d like to learn more about the Hideaway Score, see this blog post.

Concluding Remarks

This A+ rated Hideaway firm is getting a bit too big for its britches, at this time. I think that Nvidia is a fantastic company, run by incredible people, in a market that is growing leaps and bounds, but I cannot justify its current price in this macro climate.

Where would I be a buyer? At prices under $250. Anything under that and the valuation begins to make a little more sense. The risk/reward ratio becomes a lot more balanced in the long-term investor’s favor. We may never get there again, but I’m not chasing, and I would recommend the reader not chase either. There are plenty more fish in the sea, and there will be countless opportunities to play the AI game going forward.

If Nvidia falls back to a price I like, or my thesis fundamentally changes, I will be sure to write again.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.