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I recently profiled NVIDIA (NVDA) for the Top Stock Picks video and after talking for over 9 minutes about the "Tesla of Semis" and all of its disruptive innovation, I quickly realized all the good stuff I forgot to say as my time expired.
So in this article, I will do greater justice to the company and its long-term growth trajectory, explaining why you can buy the dips looking for $700 this year and probably $750 next year.
I began the video addressing the elephant in the room: valuation. With a $380 billion market cap and projected revenues in 2022 of $25 billion, the stock trades at a 15X price-to-sales multiple -- quite rich for a semiconductor player.
But NVIDIA isn't just any chip maker. The lead the field in multiple areas, from gaming, machine learning, and autonomous driving technology to artificial intelligence, medical imaging, and hyperscale computing for scientific research.
Gaming Drives GPU Innovation
Speaking of gaming, that's one area I didn't talk much about in this week's video because all the other areas are so exciting to me. But as I profiled nearly 3 years ago in Who Cares NVIDIA Makes Great Gaming Graphics? the reason I've owned and recommended NVDA shares for several years is because their intense innovation with GPU architectures for gaming actually drives their R&D knowledge for machine learning, supercomputing, deep learning and, ultimately, AI.
CEO Jensen Huang gave computer gamers and developers more than they could ask for that August week of 2018 in Cologne, Germany at the Gamescom conference.
In fact, it's fair to say he stunned the crowd with amazing views, stats and demos on NVIDIA's record-breaking new "deep learning" architecture called Turing, featuring RTX image and light reconstruction/simulation powers that enable computers to teach themselves to do in real-time what it takes a Hollywood CGI studio months to do.
The world beyond gaming and CGI got to learn new phrases like "ray tracing" and "rasterization." And NVDA shares made an all-time high today, by only a quarter or so, above $269.
(end of excerpt from Aug 2018 vlog Who Cares NVIDIA Makes Great Gaming Graphics?)
Not a Fanatic Gamer, But Fanatic About Gaming Technology
In that video and article presentation linked above, you'll hear me talk about the power of the NVIDIA "stack" known as CUDA, which stands for Compute Unified Device Architecture. This is the Hardware+Software power-stack that allows global corporations and scientific research institutions to do deep data mining that garners significant results.
We'll come back to "the stack" in a moment. First, let's flesh out the "gaming drives AI" thesis a bit more (in case you aren't convinced yet).
If you are not a gamer or NVDA investor, you might find it hard to care about all this. While I am not a gamer, I am an NVDA investor, and I'm here to give you the same two big reasons to care that I've given my followers since 2017...
1) NVIDIA gaming graphics R&D is giving them deep knowledge about the next frontier of human evolution: AI
2) AI is going to dramatically change the world as you know it
This is why we always buy the dips in NVDA, even if their Gaming segment remains the biggest source of revenues, with the Datacenter segment nipping at its heels.
Because that mix is about the shift dramatically over the next few years. Let's look at where the company is coming from with a review of their FY 2021 which just ended in January...
Gaming revenue for Q4 was a record $2.50 billion, up 10% from the previous quarter and up 67% from a year earlier. Full-year revenue was a record $7.76 billion, up 41%. NVIDIA also announced the company’s biggest-ever laptop launch, with 70+ new laptops for gamers and creators, powered by NVIDIA GeForce RTX™ 30 Series Laptop GPUs.
Datacenter Q4 revenue was a record $1.90 billion, slightly above the previous quarter and up 97% from a year earlier. Full-year revenue was a record $6.70 billion, up 124%. NVIDIA also announced that the world’s leading OEMs unveiled the first wave of NVIDIA-Certified Systems™ with NVIDIA A100 Tensor Core GPUs — the industry’s only accelerated servers tested for machine learning and data analytics workloads.
These two segments accounted for nearly 87% of the company's total revenue of $16.68 billion last year -- which was a 53% topline jump from the previous year!
Since the end of Q4 in January, analysts have steadily bumped EPS estimates for NVDA over 15% for both this year and next.
Datacenter > Gaming
But what I really want to note here is the shift that's going to occur as Datacenter grows faster than Gaming. Even before this blow-out quarter/year delivered on February 24 from NVIDA, Jefferies semiconductor analyst Mark Lipacis wrote a powerful research report in September that the former is growing at 40% CAGR vs just 10% for the latter.
Based on that math, this is the year that Datacenter (DC) takes over Gaming in revenues. And based on his 5-year projections, Lipacis sees Gaming growing to a nearly $12 billion business while DC blows the doors off to $34 billion.
For perspective, this year's total revenue is only expected to be in the neighborhood of $22.5 billion.
To be clear, Lipacis was inspired to write this new report after NVIDIA announced it had an agreement to buy UK-based ARM Holdings for $40 billion. That deal remains controversial -- for everyone but NVDA -- and also uncertain in terms of the probability of actually closing any time soon.
The primary issues revolve around ARM's technology for mobile devices which is licensed to everyone from Apple (AAPL) to Qualcomm (QCOM).
ARM also deals in CPUs (serial processing), which is part of what made it attractive to NVIDIA's GPU (parallel processing) expertise. I covered some of the issues here on Sep 17: NVIDIA Strikes an ARMs Deal to Take All the Chips.
NVDA Will Take All the Smart Chips
Believe it or not, even though I published the above-linked vlog within days after the Jefferies report from Lipacis that same week, I didn't read his full analysis until this week.
And it's a shame I didn't because I would have been buying every dip under $500 and not selling any shares since then!
Thankfully I added to our NVDA position under $540 (we bought near $200 during the Corona Crash last year) but here's what I am finally understanding from an analyst with deep technology trend knowledge that allows him to make astonishingly bold forecasts...
Lipacis is modeling an adjacent category he calls Datacenter Ecosystem which will grow in tandem with the processor half -- also to hit $34 billion in 5 years at a 40% CAGR!
That's $67 billion in revenues -- under his bull case potential -- where NVIDIA tops $85 billion in total topline by 2026. Again, this is assuming the ARM deal goes through and gets past regulators and tech behemoth competitors on 3 continents.
Here's how he explains this growth and dominance...
"Consistent with the PC framework where Intel + Microsoft (MSFT) capture 80% of the industry profits, we estimate that NVDA could capture and additional $34 billion from its ecosystem. We believe a similar concept is playing out in handsets today."
I assume in that second sentence that Lipacis is referring to the dominance of Apple and Samsung. In another part of his September report, he explains the forecast...
"Using the Wintel PC framework, which shows that the processor accounts for 50% of the ecosystem value and the software accounts for the other 50%, we estimate that NVDA could capture another $34bn in revenues from the rest of its ecosystem, including CUDA, cuDNN and vertical market software it has created like CLARA, DRIVE, ISAAC, MERLIN and JARVIS."
It's easy to look at Amazon (AMZN) and Microsoft dominating the world of the cloud. But NVIDIA has the stack to make all that data storage meaningful with the best tools for mining and modeling.
Plus, the trends in industrial automation and robotics virtually guarantee that NVIDIA's tools will be in high demand for the factory floor of the future. Why? Because they make a workbench for developers that is highly efficient, productive and irresistable. More on the developer faithful coming up.
Jensen = Elon
I often compare Jensen Huang and Elon Musk -- even if their companies are not always comparable -- for this very simple reason: they both surround themselves with the top engineering talent on the planet.
If you doubt my assertion, then subscribe yourself to the NVIDIA Newsroom for just one or two quarters and witness the flood of innovation coming from this technology powerhouse.
And scroll back in the feed a couple of weeks because if you are not aware, you just missed the premier event of the spring, their annual GPU Tech Conference (GTC) where Jensen & Co. always have stunning new developments.
Until then, absorb the density of innovation from his quarterly remarks in February...
“Q4 was another record quarter, capping a breakout year for NVIDIA’s computing platforms,” said Jensen Huang, founder and CEO of NVIDIA. “Our pioneering work in accelerated computing has led to gaming becoming the world’s most popular entertainment, to supercomputing being democratized for all researchers, and to AI emerging as the most important force in technology.
“Demand for GeForce RTX 30 Series GPUs is incredible. NVIDIA RTX has started a major upgrade cycle as gamers jump to ray tracing, DLSS and AI.
“Our A100 universal AI data center GPUs are ramping strongly across cloud-service providers and vertical industries. Thousands of companies across the world are applying NVIDIA AI to create cloud-connected products with AI services that will transform the world’s largest industries. We are seeing the smartphone moment for every industry."
Developers: "Dip" for the Chips
My final word (for now): part of the keys to success for Jensen and his battalion of engineers is that they understand Hardware+Software stacks and they "get" what developers want.
They build a buffet of platforms, tools, and capabilities for any industry that keeps an Orc army of developers happily building the next generation of technologies and innovations the world will use and benefit from for decades.
Disclosure: I own NVDA shares for the Zacks TAZR Trader portfolio.
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