Now that Nvidia (NASDAQ:NVDA) is trading at close to its 52-week high, why might investors want to continue holding the stock? Valuations are unfavorable, so if the company issues any downside guidance, NVDA stock could fall.
The good news is that Nvidia’s fundamentals are favorable, driven by its Mellanox purchase and strong demand for gaming.
Mellanox Deal Approved
On April 16, China’s antitrust authority announced conditional approval for Nvidia’s acquisition of Mellanox. The deal, which is worth $6.9 billion, took over a year to complete. And the only condition it needs to meet is that it only needs “the companies to not add bundles or other ‘unreasonable’ requirements when selling devices in China.”
Mellanox itself recently acquired a security and network intelligence startup called Titan IC. Titan will give Mellanox “an engine high-speed complex pattern matching, real-time Internet traffic inspection and the detection of strings, keywords, and malware using regular expressions.”
Nvidia’s Mellanox acquisition will strengthen its play in the Supercomputing System Design and Performance space. And the scientific community’s need for researching Covid-19 only highlights the importance of this computing tool for humanity.
Nvidia Navigates Through Covid-19
Although Nvidia said the coronavirus will cost it $100 million in revenue, its overall business will grow. In a letter to employees, Nvidia said that “gaming is replacing other entertainment and hitting record levels. The shift from physical to digital will further accelerate cloud computing use.” The need for robotics will grow as a result of higher demand from automation services in the retail, cleaning, and warehouse logistics markets.
The demand for backend systems like data centers will likely grow at a faster rate than previously thought. As more employees work from home and corporations offload their computing needs to the cloud, Nvidia’s business will continue getting bigger. Even though NVDA stock bounced back sharply from the March 2020 low of $180- $200, investors should continue holding it.
In the gaming segment, Nvidia is set to unveil the new Ampere-based GeForce RTX 3080 and GeForce RTX 3070 on May 14 virtually on YouTube. At that event, expect the company to use Tesla or Quadro parts. The Ampere GPU will offer performance that is 40% faster, in the case of the GA 102 chip compared to the RTX 2080 Ti. Further, the GA100 will have the following specifications:
- 8192 CUDA cores @ 2GHz (2.2GHz boost)
- 1024 Tensor Cores
- 130 RT Cores
- 48GB of HBM2e memory @ 1.2GHz
- 300W TDP
- TSMC 7nm+
- 36 TFLOPs peak output
(Data Courtesy of Tweaktown)
Nvidia’s GA104 will have 8 or 16 gigabytes of GDDR6 memory. By comparison, Advanced Micro Devices’ (NASDAQ:AMD) RDNA 2 has a 7-nanometer node and hardware ray tracing support.
In the fourth quarter, Nvidia posted revenue growing 56% from last year, driven by the gaming unit. The company is optimistic with the outlook for the year. It said that, “our gaming lineup was exceptionally well positioned for the holidays, with the unique ray tracing capabilities of our RTX GPUs and incredible performance at every price point. From the Singles Day shopping event in China, through the Christmas season in the West, channel demand was strong for our entire stack.”
The Valuation for NVDA Stock
Conservative investors may want to assign a terminal revenue multiple of below 10 times in a 10-year discounted cash flow revenue exit model. In this scenario, NVDA stock has a fair value of below $300. These are the assumptions:
| Metrics | Range | Conclusion |
| Discount Rate | 9.0% – 7.0% | 8.00% |
| Terminal Revenue Multiple | 9.2x – 10.2x | 9.7x |
| Fair Value | $251.84 – $317.20 | $282.50 |
(Data courtesy of finbox.io)
Similarly, on Stock Rover, the site calculates a fair value of $339.45. This is based on one of many scores such as quality and value. Its growth score of 89 is significantly higher than that of the industry average of 55:
| NVDA | Industry | S&P 500 | |
| Growth Score | 89 | 55 | 76 |
| Sales Growth Next Year | 16.10% | 6.20% | 11.30% |
| Sales 1‑Year Chg (%) | -6.60% | -2.90% | 15.20% |
| Sales 3‑Year Avg (%) | 16.50% | 5.00% | 13.90% |
(Data Courtesy of Stock Rover)
Chances are good that NVDA stock will trade above the $300 level in 2020 as the company continues to beat investor expectations. Data center revenue is growing and the demand for high-end gaming hardware is healthy.
Chris Lau, contributing author for InvestorPlace.com and numerous other financial sites. Chris has over 20 years of investing experience in the stock market and runs the Do-It-Yourself Value Investing Marketplace on Seeking Alpha. He shares his stock picks so readers get original insight that helps improve investment returns. As of this writing, the author did not hold a position in any of the aforementioned securities.
