Nvidia Corporation (Ticker: NVDA) - Brief Breakdown

In our Brief Breakdowns, we pick a stock and take opposite sides – one of us presents the bullish argument and the other presents the bearish argument.

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Company Description

Nvidia Corporation is a visual computing company that designs graphics processing units (GPUs) for gaming and professional markets, as well as system on a chip units (SoCs) for the mobile computing and automotive markets. The GPU segment offers processors, which include GeForce for PC gaming and mainstream PCs; GeForce NOW for cloud-based gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, Tesla for artificial intelligence (AI) utilizing deep learning, accelerated computing, general purpose computing, and much more. NVIDIA sells their products directly to manufacturers and system builders and is one of the leaders in the chip manufacturing industry. 

Quantitative Analysis

At the time of this writing (10/10/2021), NVDA is trading at $208.31 with a 52 week range of $115.66 - $230.43 and a market cap of $519.11B. In Q2 of their fiscal year 2022, NVDA’s revenue was $6.51 billion, up 68% year over year. NVIDIA’s gaming revenue grew 85% year over year to $3.06 billion. The data center revenue grew 35% year over year to $2.37 billion. Return of equity (ROE: Net Income / Total Equity *100) of NVDA is 39.25% and net margin (net income / revenue) is 32.33%. The price to earnings (price per share / earnings per share) ratio was 74.61 and the debt to equities ratio (total liabilities / total equity) is 0.83. This financial analysis was done using financialstockdata.com (become a beta tester here). You can view NVDA’s 2022 Q2 earnings here and their 2021 Annual Report  here

Qualitative Analysis

Nvidia is a global leader in the growing industry of computer chip manufacturers and supplies major companies such as Amazon, Facebook, and Google. The COVID pandemic brought a massive increase in demand for computer chips and supply simply could not keep up, leading to the ongoing chip shortage around the world. The impact of the chip shortage is particularly evident in the automotive industry, where new car manufacturing has fallen dramatically and prices of both new and used vehicles continue to hit all time highs month after month. Outside of traditional computing usages, Nvidia has a unique opportunity to integrate into the emerging cryptocurrency industry.  In order to mine Bitcoin and other cryptocurrencies, computers and mining processors need chips similar to what Nvidia creates. There are countless other uses for chips and potentially other uses of chips that have yet to be discovered. With the increasing need and the backing of a large investment from Nancy Pelosi, there’s positive momentum behind one of the global leaders in chip manufacturing.

Bullish Thesis 

Here are three points to support the bullish thesis:

  • Backing of Nancy Pelosi Investment:  Nancy Pelosi’s investment activity has gained a lot of traction and attention, a Twitter account has even been created that now has over 114k followers to track her investments. As mentioned in the qualitative analysis above, Pelosi has a significant investment of $6.5 million in Nvidia. As outlined in the article, Pelosi has had extreme success and retail traders who have shadowed Pelosi have also seen incredible returns. Although this isn’t a bullish point based on the fundamentals of the company, you cannot ignore the success of Pelosi’s investments. 

  • Increasing Demand: There are more and more products in need of chips. With increasing artificial intelligence in automotive vehicles and chips being placed in everyday products, the need for Nvidia’s products will continue to increase. With more and more uses for chips and Nvidia’s position as one of the leaders in the industry, it is difficult to see a spot where Nvidia fails. 

  • Major Suppliers: Nvidia supplies chips to major companies such as Amazon, NIO the automated car manufacturer, Facebook, Google, and Tesla currently use Nvidia’s graphics chips. With major companies using their chips, it provides a safety net for sales of Nvidia’s products. This will allow Nvidia to be integrated into some of the largest companies in the world and provide capital to expand into other markets or into other companies because of the reputation that comes from working with these major companies and the access to capital it provides. 

Bearish Thesis

Here are three points to support the bearish thesis:

  • Competition: There are a number of other major chip manufacturing companies that offer NVDA stiff competition. Although Nvidia holds a strong position in chip market share, investors should keep a close eye on several other chip manufacturers. Advanced Micro Devices (AMD) recently won contracts for major gaming systems PlayStation and Xbox and announced last year that they will work with Hewlett Packard Enterprises on the El Capitan Project, powering the world’s fastest supercomputer. In addition to AMD, NVDA must compete with the likes of Intel (INTC), who boasted a 69% market share of PC GPUs in 2020, Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), and Qualcomm Inc (QCOM). 

  • Short-term supply chain issues for semiconductors: The demand for semiconductor chips skyrocketed during the pandemic, leaving many manufacturers unable to keep up. This has been particularly evident in the automotive market, where the chip shortage is estimated to cost auto makers ~210B dollars. Worse still, some have estimated that the chip shortage could continue into 2022 and even 2023. It’s apparent that chip manufacturing companies have had a hard time scaling production, likely due to a number of supply-chain and other COVID-related issues. With demand likely to remain steady, NVDA will be pressured to scale up production and increase supply - time will tell how successful they are in doing so. 

  • Automakers designing their own chips: The cost of the global chip shortage has been massive for the automotive industry. As noted above, some analysts report that the shortage has cost automakers in excess of $200B. The chip shortage has caused new car production - and thus supply and sales - to plummet over the last year. Because of the low supply, both new and used car prices have skyrocketed to record highs. Rather than simply wait for chip manufacturing companies to catch up, some automakers have started to consider designing and manufacturing chips internally. For example, Tesla has already begun making their own chips and one of GM’s China joint ventures announced in September that they would begin designing their own chips. If chip manufacturing companies are unable to meet demand, expect more large companies with R&D funds to follow Tesla and GM.   

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If you’re new to stock investing, check out our introduction to stock investing series:

  1. What is Investing and Why Should I Do it?

  2. How to get Started in Stock Investing

  3. Stock Investing Basics

  4. Overview of Stock Investing Strategies

  5. How to Develop a Thesis for a Company

  6. When to Sell a Stock

Have a great week everyone, 

Brandon & Daniel 

Disclosure: The article was written by Daniel Kuhman and Brandon Keys, and it expresses the author's own opinions. They are not receiving compensation for it. They have no business relationships with any company whose stock is mentioned in this article. The information presented in this article is for informational purposes only and in no way should be construed as financial advice or recommendation to buy or sell any stock. Brandon and Daniel are not financial advisors. We encourage all readers to do further research and do your own due diligence before making any investments.