Why We Increased Our Valuation For Nvidia By Over 20%
With a more than 200% increase in its stock price in the last one year, Nvidia (NASDAQ:NVDA) has been one of the top performing stocks on Nasdaq. Fiscal 2017 was a good year for the company as it saw a solid 38% growth in revenue and a staggering 171% improvement in net income. The company’s business model based on driving GPU compute platforms into highly targeted markets, is clearly paying off and is enabling Nvidia to extend its leadership across business segments. The strong growth momentum is expected to continue this year and beyond.
Based on the consistent strong growth delivered by Nvidia last year, we have revised our valuation for the company by over 20%, to $90. While we believe in the company’s growth potential, and have factored the same in our model, we believe that the stock is currently trading at a significant premium to its intrinsic value.
Note – If you feel that the Trefis estimates are conservative given the growth prospects you can change the relevant drivers in our Nvidia model to see what the resultant change in valuation will be.
See our complete analysis for Nvidia
The main factor for the increase in our price estimate for Nvidia was the increase in valuation for the Pro Graphics and the Tegra divisions. While the company continues to derive a significant portion of its revenue from PCs, it has managed to carve out solid growth by leveraging its GPU in the data center and automotive space. In our old model the revenue from the data center business was spread across the various GPU segments. In the updated model we report the data center revenue as part of the Pro Graphics Cards business and thus the significant jump in our revenue forecast for the division. We have increased our revenue forecast for the above mentioned businesses.
Expansion Of Deep Learning & AI Will Drive Strong Growth In The Data Center Business
Nvidia’s data center business marked its seventh consecutive quarter of sequential improvement, with revenue increasing a staggering 186% year-on-year, in Q1 2018. Growth in the business is being driven by strong demand from cloud service providers and enterprises building training clusters for web services, gains in high-performance computing, GRID graphics virtualization, and the DGX-1 AI super-computer.
Major cloud-based service providers such as Amazon Web Services, Microsoft Azure, and Alibaba Cloud are deploying Nvidia’s GPUs as coprocessors in their data centers to equip them with AI, data analytics, and parallel computing. The company is expanding its deep learning platform beyond training to speed up AI inferencing production workloads in hyper-scale data centers. Interest in deep learning is surging as industries and basic researchers increasingly seek to harness this revolutionary technology. Being at the forefront of the technology, Nvidia is poised to gain from the growth.
Strong Automotive Growth Will Drive Nvidia’s Tegra Business
Nvidia continues to expand its partnerships with companies using AI to address the complex problems of autonomous driving. In Q1 2018, it partnered with Bosch, the world’s largest auto supplier, and PACCAR, one of the largest truck makers, to develop self-driving solutions. In just a year since its launch, the DRIVE PX 2 AI car platform has been deployed by over 225 car and truck makers, suppliers, research organizations, and startups, with more than 50% growth in Q1 2018 alone. Given the exponential growth potential in the market and solid progress Nvidia has made in this segment in the last few years, growth is likely to continue. We have increased our revenue projection for the Tegra division, and now estimate the same to cross $3 billion as compared to our earlier estimate of $2.5 billion.
Additionally, last year the company announced that its Tegra processor will power Nintendo’s new game console, the Switch. The Switch hit the market in March this year and Nintendo expects to sell 10 million Switches in the current fiscal year. It reported solid March sales of 2.74 million units, beating the company’s initial sales estimate of two million units for the month. [1]
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Notes:- Nintendo upbeat on outlook on strong Switch sales, Market Watch, April 27, 2017 [↩]