Nvidia (NVDA, Financial) is a market leader in gaming, data center computing, visualization and automotive technologies. The company started as a chip manufacturer which specialized in high performance graphics cards before branching out to become a "ccomputing platform company." Now they are taking advantage of innovation and growth across disruptive technologies from autonomous driving to artificial intelligence and even the Metaverse.
In this article, I'm going to dive into the company's business model, financials and valuation to demonstrate why it is such as high-growth powerhouse.
Business segments
Nvidia has four business segments: gaming, data center computing, visualization and automotive technologies.
The firm is the market leader in high-performance graphics cards, or graphical processing units (GPUs). According to a Market Study report, the global GPU market was worth $22 billion in 2020 and is expected to grow at a compounded annual growth rate (CAGR) of 31.87% through 2028, reaching a market valuation of $165 billion.
Nvidia even released a specially designed GPU for Crypto mining called the "Nvidia CPM." According to Jon Peddie Research, the crypto-mining industry purchased 25% of all GPUs in Q1 of 2021.
Nvidia's data center business is a leader in high-performance computing for artificial intelligence. One of the company's major customers is Meta Platforms (FB, Financial), formerly Facebook, which announced an AI Research SuperCluster with Nvidia.
The firm has redesigned data center technology with the ground-breaking data processing unit (DPU), which is specifically designed for artificial intellgience applications. In an interview on my investing podcast Motivation2Invest, the Senior Vice President of Nvidia stated:
"The CPU isn't good at running artificial intelligence as the CPU can't handle large data processing. Whereas the DPU allows AI to be run a scale...
Businesses that don't adopt AI will be left behind, as their competitors adopt the technology."
Nvidia is also taking full advantage of their professional visualization technologies to offer free platforms such as Nvidia Omniverse for Creators.
The automotive segment of Nvidia offers the backbone technology to enable autonomous driving for auto manufacturers. The company's customers in this segment include Mercedes (FRA:MBG, Financial), Jaguar Land Rover, NIO Inc. (NIO, Financial) and XPeng Inc. (XPEV, Financial).
Powerful financials
Nvidia's financials are strong, with the company producing an annual revenue of $26.91 billion in its most recent fiscal year, up a meteoric 61% year-over-year, with GAAP earnings per share (diluted) up 123% to $3.85 from $1.73 a year ago.
The company also has a fantastic gross margin of 65% and operating margin of 45%. This is higher than all their competitors, including Advanced Micro Devices (AMD, Financial) and Intel (INTC, Financial).
The company has a high return on capital of 25%, which suggests their investments are paying off well so far.
Is Nvidia undervalued?
I have plugged Nvidia's latest financial numbers into my valuation model, which uses a discounted cash flow method of valuation.
For revenue projections, I have used analyst estimates for 19% growth next year and 30% for the next two to five years. The company grew revenues 61% in the most recent year, so I think this is reasonable. I expect operating margins to stay stable at 45% with a potential slight decrease due to inflation.
From these figures, I get a fair value estimate of $234 per share for Nvidia stock. The stock is currently trading at around these levels and thus is fairly valued in my view. The company's price-sales ratio shows it's close to the low end of the median over the past two years.
Conclusion
Nvidia is a fantastic company which is poised to ride the wave of multiple growing technologies that are converging together, from gaming to AI, 5G, autonomous driving and even the Metaverse.
The company has strong financials with higher margins than the industry medians, high revenue growth and strong returns on capital. The company's valuation relative to competitors is high, but I believe this is worth it given the company's higher growth and margins.
The company will need to continually innovate and expand their technologies in order to stay ahead of the curve. The stock is fairly valued right now but not exactly cheap. Thus, value-focused investors who are interested in the stock may want to wait for a pullback.
