After it handily beat consensus estimates, Nvidia Corporation (NASDAQ:NVDA) stock sold off and has yet to recover. NVDA stock did stage a rally on Dec. 18, but needs more buying volume to sustain a $200/share close. However, Nvidia has a few fundamental tailwinds that justify higher valuations ahead.
Though GPU (graphics) chips are the bread and butter of Nvidia’s revenue, the company is branching into artificial intelligence (AI), a significant growth market. The chip giant also has a moat in this sector, thanks to its early entry and its willingness to spend in R&D to keep ahead of its competitors. Nvidia has deep pockets too, and may easily raise its spending to stay ahead.
In the third quarter, NVDA earned $1.33 a share, up 60% from last year. Due to growth across all its platforms, Nvidia ended the quarter with $6.3 billion in cash. Cash is so plentiful that Nvidia raised its dividend, so it will pay out $250 million for the nine months of fiscal 2018. In that period, Nvidia increased shareholder value by buying back $909 million in outstanding company shares. For fiscal 2019, Nvidia will return $1.25 billion to investors through dividends and share buybacks.
Competitors in AI
Nvidia may consider Alphabet Inc. (NASDAQ:GOOGL, NASDAQ:GOOG) as its only threat in the AI space. The search-engine company is investing in its own chips. Apple Inc. (NASDAQ:AAPL) is also making its own chips. Still, those two only make chips for specific applications. Google’s TPU (Tensor Processing Unit) cannot be used for other AI frameworks. Conversely, Nvidia’s AI chips are open-source ASIC. This gives its users the ability to change the chip according to their needs. Furthermore, demand for processing is so high that AI needs GPU chips, which is Nvidia’s specialty.
The AI, or deep learning, market is diverse. Investors should not expect the sector to be a single-winner-take-all scenario. The more competition and players developing AI solutions, the better it is for everyone. The TAM (total addressable market) will only get bigger as more companies innovate in this space. Nvidia has already found success here, so that trend should not change in the near term.
AI GPU Card
To continue its lead in high-end GPUs, Nvidia launched the Titan V video card. At $2,999, the hardware is clearly not targeting gamers. In using the next-generation Volta technology, it will have at least 21.1 billion transitions and will supply 110 teraflops of computing power. The Tensor Cores will cater to processing deep learning.
Though Titan V sounds like it will target only the AI market, it has a wider application area than that. The hardware may support deep learning neural networks that scientists and researches use for data mining. NLP and intelligent agents are only some of the other applications that will make use of Titan V’s power.
NVDA Stock Valuation
In a 5-year DCF Growth Exit Model, NVDA stock is trading at a slight discount to fair value. This assumed revenue growth fluctuates between 35-38%, but then surges by fiscal 2022 due to growth from AI and deep learning.
The revenue multiple and EBITDA multiple models from finbox.io imply lower fair values since other chip stocks trade at steeper discounts. Intel Corporation (NASDAQ:INTC) trades at a 16 price-earnings ratio, compared to ~50 for NVDA stock. Texas Instruments Incorporated (NASDAQ:TXN), which ia at yearly highs, trades at a P/E ratio below 25.
Takeaway on NVDA Stock
Nvidia’s uptrend broke down in December but the correction may end. As the Nasdaq makes new highs and investors search for growth, Nvidia is a good company to watch.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities. Follow the author on Twitter at @chrispycrunch.