I have been bullish on NVIDIA (NVDA, Financial) for a long time. NVIDIA was a standout performer in 2015. However things have been a lot different this year as the stock has already lost more than 13% of its value. Despite the pullback, NVIDIA’s stock is not cheap by any means. NVIDIA is currently trading at 26x trailing earnings, and the upside may be limited. However, the company’s business is in a strong position.
PC gaming market is still strong
A major portion of Intel’s (INTC, Financial) revenue comes from the sales of PCs. Intel consists of numerous products displaying an entire range of PCs, starting from very cheap “netbook” like PC and moving upwards to the tremendously high-performance gaming systems.
However, NVIDIA is the leading company in the graphics card business. NVIDIA’s graphics card segment revenue accounts for a majority of the company’s overall revenue. Also a majority of graphics card-related revenue arises from retailing products to PC gamers.
The company still has a weak presence in the PC market, as it takes a long time to upgrade a device, and the majority of computing jobs have shifted to devices like tablets and smartphones, but the gaming market is still intact and doing really well.
As a matter of fact, Intel’s management reported on its earnings call that both its top end Core i7 processors as well as its unlocked, PC gaming grounded "K" series parts set all-time volume records.
The gaming segment accounts for the most upgradable segment. Therefore, the strength of this segment clearly specifies that a huge portion of the company’s graphics card business should remain relatively strong, even if the overall PC market fades out.
New architecture
It is vital for the graphics card manufacturing companies to introduce new products to maintain its position in the market. Therefore, NVIDIA is likely to introduce a new line of graphic processors grounded on its latest Pascal architecture this year.
According to a report from the company, Pascal will be grounded on Taiwan Semiconductor manufacturing company’s popular 16-nanometer FinFET plus manufacturing technology. NVIDIA claims that Pascal will be the company’s first great performance GPU to offer mixed precision floating point compute FP16, which is necessary for low power devices such as smartphones and tablets.
For many computing applications, mixed precision is even more advantageous from a power efficiency point of view. It is mainly useful for computing applications that do not firmly need higher precision FP32 or FP64 computers that would profit significantly from this addition.
In the first half of the previous year, Intel was supposed to introduce systems based on Knights Landing, grounded on its 14-nanometer chip manufacturing technology. Intel introduced few devices based on Knights Landing silicon and expects to make the devices available in the market this year.
All in all, it looks like the PC gaming market will remain strong even if the overall PC shipments continue declining, and this presents a long-term opportunity for NVIDA.
Conclusion
While NVIDIA is strongly positioned to benefit from the PC gaming market, the stock is a little overvalued. Although NVIDIA has pulled back considerably in 2016, investors should wait for a better entry point. At 26x trailing earnings, investors have already baked in a lot of NVIDIA’s future growth into its current share price. Consequently, investors should wait for the stock to pull back a little further before buying it.
