Nvidia: After the Arm Failure

Nvidia (NASDAQ:NVDA) is not going to become a full big brother to Advanced Micro Devices (NASDAQ:AMD). It is also not going to be buying microprocessor designer ARM Holdings. NVDA stock is currently down 12% year-to-date (YTD).

Nvidia (NVDA) logo displayed on phone screen
Source: rafapress / Shutterstock.com

I write it this way so investors will understand that, despite the market’s initial positive reaction to the news, this is a blow. When Nvidia announced the deal in September 2020, shares were trading around $131. The stock has fallen recently as investors anticipated the cancellation. The recent rise is what happens when you stop hitting yourself over the head.

Had the deal gone through, Nvidia would have led AMD in graphics by a country mile and become highly competitive in general microprocessors. Now, it just leads in graphics, but that is enough.

Graphics Are Where it is At

If you bought Nvidia long before the merger announcement, as I did, you’re still in the money. Graphics processors, originally developed for video machines, are at the heart of artificial intelligence (AI). They’re also at the heart of what is called the metaverse, powering a giant AI research supercomputer for Meta Platforms (NASDAQ:FB).

Nvidia’s base business is doing great. It grew by over 50% in fiscal 2021, which ends in January. It is expected to grow even faster in fiscal 2022, which will be reported February 15. Analysts expect revenues of $7.4 billion for the quarter, putting the year’s total over $26 billion. It did just $16.7 billion in business last year.

More importantly, this is profitable growth. Net income last year grew right in line with revenue. Profits are still growing. It is important to note that they’re not growing as fast this year as last year, but margins are still about 26%.

But at the stock’s October peak, people were overpaying. Even now, with the stock opening at $259.16 today, you’re paying 77 times earnings, and 24 times revenue for Nvidia. There is such a thing as too high a price even for the best investments. I still like it, but when I say “look for your buy point”  I mean consider how long you want to hold it. If it is five years, jump in. If it is one month, maybe wait until after earnings.

The Next Steps for NVDA Stock

Nvidia might have fallen further if investors thought it would remain supply-constrained. But the chip shortage is ending. Its manufacturing partner, Taiwan Semiconductor (NYSE:TSM), is putting $44 billion into capital spending this year. Intel (NASDAQ:INTC), which is drawing big headlines and needs government help, is only spending $25 – 28 billion this year.

What this means for Nvidia is lower margins looking forward, but bigger sales, thus bigger profits. That is the way Moore’s Law is supposed to work. TSM and Intel are taking the hit from what I call “Moore’s Second Law,” the rising costs of complexity. Nvidia is not.

This also means big things for the tech market generally. It means there will be plenty of chips for new applications, like virtual reality (VR) headsets and haptic suits. There will be plenty of chips for cars and plenty for the metaverse everyone is talking about. Plenty for servers and plenty for clients.

The Bottom Line on NVDA Stock

Past chip cycles were demand-based. Business would slow down as supplies increased, while profits would increase when production slowed.

I think that today we are looking at the reverse. New application spaces open as chip supplies increase, increasing profits. It is when supplies are constrained, as they are now, that the bottom of the cycle is reached.

Mine is not the conventional wisdom. But I’ve been studying the effects of Moore’s Law for over 40 years now. As chip densities improve, change accelerates. It accelerates in every direction, touching software, communications, science, and opening new application spaces.

A lot of things are going to get better from here.

On the date of publication, Dana Blankenhorn held long positions in NVDA, INTC and TSM. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack.

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