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Nvidia Stock Looks Poised to Gain From More Diversified Revenue

Faisal Humayun

Nvidia (NASDAQ:NVDA) stock has been sideways since about mid November 2018. In the last nine months, the stock has attempted to break out on the upside, but the rally has been followed by the stock trending lower.

Nvidia Stock Looks Poised to Gain From More Diversified Revenue

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I am of the opinion that Nvidia is in an accumulation zone in the range of $130 to $150. Further, I believe that besides trading opportunities (amidst stock volatility), Nvidia stock can be considered with a three- to five-year investment horizon.

This article will discuss the factors that make Nvidia a portfolio stock.

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Spreading Its Wings

Currently, gamers — namely the graphics processing units (GPUs) that power them — are the key revenue and EBITDA driver for Nvidia. However, this is likely to change significantly in the next three to five years as Nvidia looks beyond GPUs or being a data center operator.

When I last discussed Nvidia, I elaborated on the opportunities the company is exploring in the autonomous car market. The company has already made inroads in that segment and it promises to be big in the coming years. Nvidia expects autonomous cars to be a $30 billion market opportunity by 2025.

Nvidia is also deploying machine learning and AI in the health care industry. As an example, the company has developed Clara, which is being used in the medical imaging industry.

In terms of partnerships and collaborations:

  • French start-up Therapixel is also using the company’s technology to improve the accuracy of breast cancer diagnosis.
  • Nvidia has also teamed up with American College of Radiology for using AI for diagnostics.
  • Fujifilm will also be using the company’s DGX-2 AI supercomputer to accelerate the development of artificial intelligence in industries like health care and highly functional materials.

According to Abdul Hamid Halabi, Nvidia’s health care and life sciences global lead: “AI applications will help doctors diagnose diseases more quickly, freeing up resources to spend more time with more patients. It will make harmless procedures like MRI scans faster, allowing doctors to use them more often for more accurate diagnosis.”

Clearly, there is a big market potential in the medical industry and Nvidia is one of the first movers. To put things into perspective, AI in health care is likely to grow to $27.6 billion by 2025.

Another area where Nvidia is focusing is the high-performance computing (HPC). Opportunities in data science will increase the addressable market with the HPC market likely to be worth $59.65 billion by 2025.

What’s clear is that Nvidia has multiple expansion opportunities with a total addressable market of over $100 billion (autonomous cars, health care and HPC) by 2025.

NVDA grabbing just a 10% market share in these segments would imply incremental revenue of $10 billion.

To be sure, Nvidia is well-positioned to capitalize on the above themes, as pointed out by Loup Ventures’ Gene Munster and Zheng Li. In their recent analysis of NVDA’s potential in the same three-to-five year horizon, it’s less that Nvidia has to worry about Intel (NASDAQ:INTC) than those bright, shiny things in the rearview mirror.

What should be of concern are the “well-funded custom silicon startups that pose a new threat” to Nvidia’s dominance, they wrote. “Since Nvidia’s GPUs were never designed to just handle machine learning algorithms, there is room for new silicon design startups … to come up with original architectures.”

Final Words on Nvidia Stock

As of April 2019, Nvidia reported $2.7 billion in cash and $5.0 billion in short-term marketable securities. With a total liquidity buffer of $7.7 billion, Nvidia is well positioned to invest in R&D, which is the company’s growth driver.

In addition, the company has been active on the inorganic growth front. That will help Nvidia accelerate growth in the high performance computing, healthcare and autonomous car segment.

It’s worth noting that the company’s operating margin has improved from 22% in FY16 to 38% in FY19. In the same period, the free cash flow increased from $1.1 billion to $3.1 billion.

Therefore, with expanding margins and cash flows, financial headroom are all likely to remain robust.

This allows Nvidia to aggressively pursue inorganic growth in addition to investment big in R&D.

Nvidia will be reporting second quarter results on Aug. 15, 2019 after the market’s close. When the company reported first quarter numbers, the stock surged on gaming segment recovery. The recovery is likely to continue in the coming quarter and NVDA stock can possibly trend higher after the recent correction to $154 from a near-term high of $179.

For long-term investors, Nvidia stock remains attractive for exposure in the range of $130 to $150.

As of this writing, the author did not hold a position in any of the aforementioned securities.

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