An Old Company Has A Face Lift

Christopher Dodson

If you’re an avid gamer, I’m sure ou’vye heard all the buzz around Virtual Reality. From Facebook’s Oculus Rift, Samsung’s Gear to Sony’s PlayStation VR, the market will be flooded with all of this high tech gear by Q2 2016. Pretty soon, Virtual Reality will be the “virtual reality” of gaming. Regardless of who gets the biggest slice of the VR pie, one common and indispensable link is that they all require the most powerful graphics cards to work properly. We like NVIDIA because they are the only one in the market to meet the high performance standards.

At the end of 2014, NVIDIA made a significant breakthrough in their main product, their Graphics Processing Units (GPUs). This allowed the company to establish total dominance over AMD, their largest competitor.  In the meantime, Intel’s conventional CPU alone cannot handle the next generation performance demands of graphics tasks. Intel had to sign a $1.5 billion dollar contract with NVIDIA to use their patented technology. This brought in an extra 6% revenue growth a year for the company.

The bottom line is that as AMD was marginalized to a $3 penny stock coupled with compromising Intel causing NVIDIA’s market share jump from 60% to 83% in just last two years.  NVIDIA becomes a virtual monopoly in the graphics cards industry.

Another cool thing is that NVIDIA is one of the major “drivers” behind the self-driving car industry. They have already made over 50 key partnerships including Audi, Porsche and Bentley. From touch screen navigation to digital instrument clusters, NVIDIA’s GPUs power the visuals in these cars. We estimate that the visuals alone will generate $100 million, or 2% a year topline growth over the next 5 ears.

However, I don’t want to trivialize NVIDIA’s role in the self-driving car industry for just that. They provide the “the brain” to control these cars. This brain must analyze huge amounts of data from cameras and other sensors every second before providing a decision. Analyzing 1 GB/s of visual data while still being power efficient and compact is something only NVIDIA can do. We like the fact that NVIDIA is poised to potentially capture $13 billion out of the $87 billion dollar self-driving car market by 2030.  We estimate that NVIDIA’s automobile processing segment alone will grow more than 40% a year through 2017.

But the real story is that NVIDIA can, and will keep this technological dominance very easily. The company’s mid-range GTX 760 GPU, at a 250$ price range, was outperforming AMD’s higher end R9 290 with a $400 price tag in every benchmark test.  Another compelling piece of evidence is that while PC sales have dropped 9 % in last two years, NVIDIA’s revenue, bucking the trend, has grown 11% during the same period.  For the last three years, NVIDA has seen an impressive annual 10% revenue growth, outpacing the industry’s 5% growth.  For 2015-2017, we are very optimistic that NVIDIA can deliver a 15% year over year top line growth.

Just like the Apple right before the launch of IPhone in 2007, we believe that the 25-year old NVIDIA is at the same exciting turning point.  With a near 15% undervaluation and an expected return of 8%, we predict that NVDA has an upside over 20% in 2016.




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