Graphics and mobile computing specialist NVIDIA Corporation's (NASDAQ:NVDA) core gaming market continues to perform wonderfully, and its emerging markets are growing fast. The company has the potential to hitch a ride on the growth trains of many technologies widely expected to explode in the coming years, from virtual reality (VR) to driverless cars.
Reflecting its superb fiscal 2017 financial results and immense growth opportunities, NVIDIA's stock has returned a whopping 211% over the last year through Thursday.
Here are 10 reasons to buy NVIDIA stock and hold on for the long ride:
1. NVIDIA is in the right general business
Over the last few decades, technology has become an increasingly large part of our world. Numerous emerging technologies promise to further "tech up" the consumer and industrial spaces. This dynamic has led to increasingly strong sales in the semiconductor industry.
As to NVIDIA's specific business, the company operates in two main segments: graphics processing units (GPUs) and Tegra processors. In fiscal 2017, these businesses accounted for 84.3% and 11.9% of total revenue, respectively. (There's also a small "other" category.)
NVIDIA's flagship GPU segment's main processor product lines include the GeForce for gaming, Quadro for design professionals, and Tesla for cloud computing. End markets for the Tegra business, which produces processors that integrate a computer onto a single chip, are things that are mobile -- from consumer gadgets to autos and drones.
The company's four core market platforms are computer gaming, professional visualization, data center, and automotive.
2. It's led by a founder-CEO
NVIDIA gets high marks on leadership. CEO Jen-Hsun Huang is a co-founder of the company, so he knows it intimately. He also has a lot of skin in the game: he owned 1,751,179 million NVIDIA shares as of March 15, valued at $191.6 million based on Thursday's closing price of $109.40 per share. Huang, who has a master's degree in electrical engineering from Stanford, worked as a microprocessor designer at Advanced Micro Devices, or AMD, before founding NVIDIA in 1993.
Huang gets a thumbs up from 98% of the 588 Glassdoor ratings from current or former employees, with the company itself garnering 4.3 stars (out of a total of 5). Huang is 54 years old, so investors probably don't need to be concerned that he'll retire soon.
3. Its dominance in discrete GPUs
NVIDIA is the dominant player in discrete GPUs, which is its core business. In the calendar fourth quarter of 2016, NVIDIA held a 70.5% share of the market for discrete GPUs, with competitor AMD holding a 29.5% share, according to industry monitoring and analysis firm Jon Peddie Research.
4. Its financial performance proves it can execute
In fiscal 2017, which ended Jan. 29, NVIDIA's year-over-year revenue grew 38% to $6.91 billion, earnings per share based on generally accepted accounting principles (GAAP) soared 138% to $2.57, adjusted EPS jumped 83% to $3.06, and free cash flow rose 37.6% to $1.50 billion. Both segments grew, with GPU revenue increasing 39% to $5.82 billion and Tegra revenue rising 47% to $824 million. (There was $264 million of "other" revenue.)
NVIDIA's powerful growth in fiscal 2017 is especially impressive because it's a good-sized company with a market cap of $64 billion.
5. It's been whipping Wall Street's estimates
In the last two quarters, NVIDIA smashed Wall Street's EPS estimates by 46% (Q3) and 19% (Q4). This supports the belief among some, myself included, that analysts' future estimates will also prove too conservative.
If this premise proves true, the stock's valuation may not be as pricey as it seems at first glance.
6. Its great performance in its core computer gaming market
|Market Platform||Fiscal 2017 Revenue||Year-Over-Year Change|
|Computer gaming||$4.06 billion (58.8% of total revenue)||44%|
The company predicts continued solid growth in its core gaming market due to growth drivers like VR, eSports, and the adoption of broadband in emerging markets.
7. Its phenomenon growth in its data center and auto markets
|Market Platform||Fiscal 2017 Revenue||Year-Over-Year Change|
|Data centers||$830 million (12% of total revenue)||145%
|Automotive||$487 billion (7% of total revenue)||52%|
8. Its explosive growth opportunities
NVIDIA's products have applications in numerous hot tech spaces that are widely projected to explode in the years and decades ahead, including virtual reality, artificial intelligence, driverless cars, and cloud computing. (There's some overlap in these categories, as driverless cars and cloud computing are AI-driven apps.)
Laying out NVIDIA's current market sizes with the company's estimated total addressable market (TAM) sizes -- the annual revenue opportunity available for it to capture -- we can clearly see its phenomenal growth opportunities:
|Market||NVIDIA's Market Size in Fiscal 2017*||Total Addressable Market (TAM)**|
|Gaming||$4.06 billion||$20 billion|
|Professional visualization (includes virtual reality and augmented reality)||$835 million||$6.5 billion|
|Data center||$830 million||$5.0 bilion|
|Auto||$437 million||$8.0 billion|
NVIDIA's customer and partner list reads like a Who's Who of the corporate world. Here's just one example of its growth opportunities: Tesla Motors has long used NVIDIA's Tegra processors to power its vehicles' standout infotainment systems and instrument clusters. In October, Tesla began using NVIDIA's DRIVE PX 2 AI-computing platform to power its Autopilot on all new Model S and Model X vehicles. The more affordable Model 3, slated for release later this year, will be similarly equipped.
This isn't to say NVIDIA's road to growth in its various markets will be speed bump free. Tesla, for instance, had been working with Israeli company Mobileye on its Autopilot efforts before the companies' ugly public parting. In mid-March, chip giant Intel announced a $15.3 billion deal to buy Mobileye, so NVIDIA is in for some stiffer competition in the emerging driverless car market.
9. Its commitment to shareholders
NVIDIA's commitment to returning value to shareholders is evidenced by its dividend and stock buyback programs.
It's quite rare for fast-growing tech companies that have considerable growth opportunities to pay dividends. Granted, NVIDIA's dividend is modest, with a current yield of 0.52%. However, the dividend has grown 56% in approximately three years. The fact that NVIDIA pays a dividend at all suggests that management is extremely confident of the company's continued success and resultant strong FCF.
NVIDIA has been actively buying back its stock, which suggests that management doesn't view the stock as overvalued, or at least not significantly so.
In fiscal 2017, NVIDIA spent $739 million on share repurchases and paid $261 million in dividends, so it returned a total of $1.0 billion to shareholders. Since the restart of its capital return program in the fourth quarter of fiscal 2013, it's returned $4.02 billion to shareholders, representing 88% of its cumulative FCF for this four-year period.
10. Its valuation is palatable given its growth potential
NVIDIA stock's absolute valuations are high. At Tuesday's closing price of $107.30, it is trading at 42.4 times trailing-12-month earnings, 46.2 times trailing free cash flow, and 32.8 times projected forward earnings.
However, when we bring growth into the equation, the stock's valuation is more palatable. The forward PEG (P/E to forward projected earnings growth) of 1.18 is pricey, but far from outrageously so. Many factors come into play, but a rough rule of thumb is that a PEG of 1.0 implies that a stock is about fairly valued. Moreover, if you believe that analysts' forward earnings estimates are too conservative, then this PEG would be overstated.
Summing it up
Huang's statement in NVIDIA's Q4 earnings release provides a great summary of what I believe to be the primary bull case for NVIDIA stock:
Our GPU computing platform is enjoying rapid adoption in artificial intelligence, cloud computing, gaming, and autonomous vehicles. Deep learning on NVIDIA GPUs, a breakthrough approach to AI, is helping to tackle challenges such as self-driving cars, early cancer detection and weather prediction. We can now see that GPU-based deep learning will revolutionize major industries, from consumer internet and transportation to healthcare and manufacturing.