Nvidia (NVDA, Financial) has seen immense success over the last several years, with a consistent surge in revenue and earnings leading to a surge in stock price. Yet it has suffered in recent months, in line with the overall chip industry’s decline.
Growing R&D spending favorable for the company
As the semiconductor industry battles out the pessimism owing to forecasts of falling chip prices, Nvidia is upping its expenses on R&D to leverage the tech industry’s growing demand for Artificial Intelligence. Moreover, with cloud data centers and 5G taking over the world, the chip industry is bound to see a northward movement in demand.
In the last two years, between 2016 and 2018, the company has boosted R&D spending by about 35%. Moreover, in the first half of the current fiscal year, Nvidia has already spent about $1.1 billion on R&D, up approximately 36% from the year-ago period. Also, it is interesting that despite R&D expenses increasing, the R&D expense-to-revenue ratio has been declining, indicating successful research is getting converted to business.
AI research center in Tel Aviv
Another development in Nvidia’s growing focus on AI is its recent effort to start a research center in Tel Aviv, Israel, to bank on the country’s growing success in the field. The center will be headed by Prof. Gal Chechik, a former senior official at Google’s AI division who will recruit a team of senior researchers and focus only on AI research.
Nvidia has been active in Israel for quite a few years now, be it through the sale of its products, its research facility or successful investments in local startups. Hence, it is be safe to say that senior company executives are quite bullish on the potential outcome from its investment in the research facility being set up.
Recent fall not indicative of future value
Given the recent developments in the stock, along with successful earnings and top-line beat in the previous quarters, micro-level fundamentals do not justify the massive 16.3% fall for Nvidia in the past month alone. The stock price was driven down by concerns surrounding the overall industry.
While concerns such as falling demand from China and reduced bitcoin mining did hit the bulls with a certain degree of pessimism, these factors are only going to cause short-term pain to the company. In the longer run, tech companies such as Nvidia will not be highly impacted, as increased automation will not let demand for Nvidia’s products get hampered.
With self-driving cars set to replace conventional driving in the coming years, Nvidia is bound to witness a surge in demand for its machine learning tools. Nvidia is also bullish on its gaming unit, as the industry sees a shift to e-sports, and new titles in the pipeline are expected to garner a larger customer base.
To conclude
Nvidia is set to report its earnings results for the third quarter on Nov. 15. Wall Street is expecting earnings per share of $1.71, up 28.6%, and revenue of $3.24 billion up 22.9%.
While the company’s forward price-earnings ratio of 23.64 is a bit higher than the industry median of 18.55, the shares' recent fall has made the stock look appealing to investors. Moreover, Nvidia’s fundamentals are quite interesting, with the operating margin currently at 37.21% compared with the industry median of 6.76% and the three-year revenue growth rate at 22.7% compared with the industry median of 3.7%.
Disclosure: I do not own any of the stocks mentioned.
