Here Is Why We’re Revising Our Price Estimate For Nvidia By 40%

December 7th, 2016 by Trefis Team
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Nvidia (NYSE:NVDA) has seen a more than 150% increase in its stock price year to date. We recently increased our price estimate for the company by approximately 40%, to $61. The revision in our price estimate for Nvidia is mainly because of the upward revision in our forecasts for the company’s margins and its revenues. The company is seeing strong revenue growth due to an exceptional demand for its GPUs in new areas, while its operating costs have hardly increased. Furthermore, the company’s net cash position slightly improved in Q3’17, which also added to our increased price estimate. In addition, we fine-tuned our model in other ways, lowering both the effective tax rates and capital expenditure estimate, which further contributed to an increase in our valuation.

See our complete analysis for Nvidia

In the table below, we present the key metrics that we revised for the company, which resulted in a higher estimate for Nvidia’s stock price than our previous estimates:

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Extraordinary Growth In Gaming Revenues: One primary reason for the company’s strong overall revenue growth this year can be attributed to its extraordinary growth in gaming revenues. In Q3’17, Nvidia’s gaming revenues stood at $1.24 billion, increasing 63% year over year. Growth in gaming is being fueled by the anticipation of new blockbuster games, the rise of eSports, the emergence of new technologies such as virtual reality (VR) and the expansion in developing countries.

The company claims that it is seeing strong demand for its higher-end GPUs as gamers continue to upgrade to enjoy highly anticipated games such as Battlefield 1, Gears of War 3, Call of Duty: Infinite Warfare. Nvidia’s gaming platform has been growing at a >25% rate for the last two years. Since Nvidia has not fully penetrated the market, we believe that there is ample scope for further growth for the company in the segment.

Furthermore, the launch of Nvidia’s Mid-range GPUs, such as the GTX 1070 and 1060, have helped the company in effectively competing with AMD on price points. Also, the company’s expanding Pascal portfolio has helped it retain the growth momentum in the current quarter. We believe that the above factors should continue to drive growth for the company going ahead. (For more details Read: Factors That Led To The Surge In Nvidia’s Gaming Revenues In Q3)

Increase In Margins: Nvidia’s GPU segment operating margins increased from 32% to 39% year to date. In addition, the company’s Tegra processor segment’s operating income turned positive for the first time in the quarter. The primary factor underlying the strong improvement in Nvidia’s operating margin is that the company’s revenues have surged strongly over the last couple of years, while its operating costs hardly increased.

The company is witnessing an exceptional demand for its GPUs in new areas such as data centers and autonomous cars. This is due to the increasing application of GPUs in deep learning applications. Nvidia claims that it could foresee the huge deep learning opportunity five years ago. The company also claims that it has been investing heavily to build a platform for deep learning in its GPUs since then, and the performance improvements it has achieved is reflected in its current line of GPUs with Pascal architecture. (For more details check out: Factors Driving Higher Margins For Nvidia)

Reduced Effective Tax Rate: We initially believed that the tax rate for Nvidia is likely to increase to 20% in 2016, considering that the company had an effective tax rate of approximately 17.4 % in 2015.  However, now that the results of three out of four quarters for the calendar year 2016 are out, it seems unlikely that the effective tax rate for the company will increase. We now forecast the effective tax rate for Nvidia in 2016 to be approximately 16.3%. Nvidia’s tax rate for the first nine months has averaged around 16% only.

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