Investors are still punishing Nvidia (NASDAQ:NVDA) after the company failed to allay fears over its elevated inventory levels and slowing data center sales. Investors digging deeper into Nvidia’s prospects will notice the company has two areas of strength. First, its graphics card refresh will eventually reverse the declining sales. Second, the company’s steady shift from graphics to the artificial intelligence market creates a long-term growth opportunity for the company.
After Nvidia stock rallied back to around $195 in April, it backed off to $145.50 recently. This values the stock at a forward price-to-earnings ratio of 20.5X and prices in no premium. If Nvidia succeeds in growing its business, the stock will easily trade back to previous highs.
Developing AI for Autonomous Driving
AI is at the heart of giving systems the “vision” to interpret what it sees. Training the AI to identify objects in a scene requires massive amounts of computing. Interpreting the input is software-driven and does not depend only on the hardware. Nvidia’s deep neural network processes all of that data and gives automobile systems redundancies. Dubbed OpenRoadNet, Nvidia’s solution does not stop at the technology in the car but includes the AI supercomputing in the back-end, too.
Markets ignore the prospects of its Nvidia Drive Platform, which runs the full software stack. It counts on Toyota Motor (NYSE:TM) using Nvidia’s technology and training its system on its data center. When Toyota eventually sells vehicles powered by Nvidia Drive, Nvidia will capitalize on the growth potential offered from autonomous vehicles.
$30 – $50 Billion Market Opportunity
NVDA said the total addressable market (TAM) for its technology in autonomous driving is $30 billion by 2025. Historically, the company entered the market through the development of infotainment. And as companies like Mercedes-Benz start offering advanced features like voice processing in the car, this market’s revenue contribution for Nvidia will grow.
Enterprise is another big area of potential growth for NVDA, but it must first work past the slowdown in data center. The unit grew 70% compounded over the last five years. Plus, the TAM for the HPC market is around $10 billion. Furthermore, cloud and cloud AI has a TAM of $20 billion; enterprise adds another $20 billion worth of potential revenue.
Near-Term Headwinds for NVDA
The downtrend in shares of Nvidia has yet to end, although the stock bounced back 7.4% last week. The market fretted over the company’s refusal to offer a full-year outlook. Even though the forward price-to-earnings ratio is favorable, the current P/E of 31X is still elevated. With full-year prospects unclear, investors are unwilling to pay too much for Nvidia stock. Still, when Ambarella (NASDAQ:AMBA) reported unexpectedly better earnings and revenue in the first quarter, chances are good that Nvidia will report better growth from automotive.
Growth in Graphics Chips
Nvidia is preparing for growth beyond the graphics market in gaming. With 1.2 million developers on its platform, the company may leverage the strong support for its CUDA platform. It is now on its fifth generation of AI hardware, with the rate of innovation showing no signs of slowing. On average, Nvidia introduces new architectures every 18 months. In AI, Nvidia is on its second-generation Tensor Core.
While Nvidia’s GPU powers AI and HPC, its investments in the software stack will drive adoption for its AI frameworks. By continually developing new versions of its libraries, the chip performance improves. For example, from 2018 to 2019, when it moved to Volta, Nvidia improved HPC by nearly two-fold.
Valuation and Your Takeaway
Nvidia enjoys plenty of Wall Street coverage; 29 analysts covering Nvidia stock have an average price target of $186. According to Tipranks, this represents an upside of 28%. Conversely, in a five-year DCF Growth Exit model, if the company’s perpetuity growth rate is 3.5%-4.5%, Nvidia’s fair value is at least $155 a share.
Nvidia may not trade back to the $280 yearly highs in the short-term due to slowing growth. But its long-term growth story is still unfolding. Investors who want exposure to the ever-growing AI and autonomous driving markets should consider investing in Nvidia.
As of this writing, Chris Lau did not hold a position in any of the aforementioned securities.