Nvidia: Fundamental Excellence Does Not Need Cryptocurrency Hype

Summary

• From 2016 to 2018, Nvidia shares rallied. That rally correlated significantly with the success of crypto currencies.
• Especially in the HPC area you can see that Nvidia is pursuing a long-term strategy.
• This strategy counts much more than short-term success waves like the rally in the wake of crypto currencies.
• Although the expectations associated with this are also reflected by a correspondingly high P/E ratio, I consider the high valuation to be absolutely justified in view of the fundamental development.

Shareholders of Nvidia (NASDAQ:NVDA) can look back on moving years. From 2016 to 2018, a rally has established itself that correlated significantly with the success of crypto currencies. Nvidia GPUs were generally considered ideal for degrading emerging crypto currencies. In some cases there were delivery bottlenecks and dealers were encouraged to sell Nvidia's powerful graphics cards to gamers rather than crypto miners. The problem, however, was the following: On the one side, if a digital currency becomes large, someone will build an application-specific integrated circuit to degrade it, and others will increasingly follow, making GPUs in part less important. One the other side, when the Bitcoin lost value and the demand for GPU's decreased, the possibility to earn money with "mining" decreased. Like a boomerang, the trend turned around. This could also be seen on the chart:

Data by YCharts

However, prices have risen recently and there are good reasons for this. For a short time the market was completely blinded and based on the completely wrong investment thesis for Nvidia. But the recent rally is (rightly) supported by fundamental reasons. It should therefore be much more sustainable and provide for further growth.

Analysis

Regardless of the question of whether crypto currencies will remain successful in the long term, assert themselves or disappear completely, for Nvidia chips remain the future. The fields of application of such chips are also becoming wider and wider. Two such areas in particular are Artificial Intelligence and High-Performance Computing ("HPC"). Especially in the HPC area you can see that Nvidia is pursuing a long-term strategy. This strategy counts much more than short-term success waves like the rally in the wake of crypto currencies. HPC can be described by the following definition:

The HPCtechnology provides excellent computing power and enhanced performance for running advanced applications. It uses parallel supercomputers and clusters of computers where aggregation of computing power is needed for delivering higher performance. The increasing number of complex applications, in each and every business process and research, is significantly boosting the demand for HPC.

Put simply, HPC carries the foundation for extremely many applications away from the CPU to GPU. According to Nvidia, each GPU-accelerated server replaces dozens of commodity CPU servers, delivering a dramatic boost in application throughput and cost savings:

(Source: The time for GPU's has begun)

The HPC market is expected to grow accordingly. The HPC related market was valued at USD 33.45 billion in 2018 but is expected to reach a value of almost USD 40 billion by 2023:

(Source: Revenue from broader high performance computing, by segment)

Nvidia is excellently positioned here. On the one hand, this is due to one's own past. Nvidia is the pioneer of GPU-accelerated computing with an excellent track record. In addition, Nvidia identified potential applications of HPC and AI at a very early stage and created an extensive ecosystem of platforms:

(Source: SC 19 Presentation, Jensen Huang - November)

This ecosystem is constantly being expanded by smaller or mid-sized acquisitions. For example, the company has purchased all issued and outstanding common shares of network equipment company Mellanox for USD 125 per share (totaling USD 6.9 billion). Intel (INT), xilinx and Microsoft (MSFT) also wanted to take over the company. According to Nvidia, Nvidia's computing platform and Mellanox’s interconnects power over 250 of the world’s TOP 500 supercomputers and have as customers every major cloud service provider and computer maker.

These long-term orientated efforts are matched by strong fundamental numbers. The company generates extremely high cash flow and is a cash machine.

Data by YCharts

Although the declining profitability, lower earnings per share and lower net income look like a poor performance, this is mainly due to the downturn in crypto currencies:

Data by YCharts

Fundamentally and operationally, however, Nvidia is definitely on the right track. The market seems to have recognized this by starting a new rally. Although the expectations associated with this are also reflected by a correspondingly high P/E ratio, I consider the high valuation to be absolutely justified in view of the fundamental development. Compared to AMD, the main competitor in the GPU sector, Nvidia is also rated much lower. As it concerns AMD, like I said before, AMD is as well a company with excellent future prospects and good management. However, investors must bear in mind that the share price already reflects much of this (furthermore, there has been some news that Amazon (AMZN) is developing a second chip of its own for its data centers). From this perspective, therefore, Nvidia seems to be priced somewhat more reasonable:

Data by YCharts

This assessment is somewhat put into perspective if you look at the forward P/E ratio. On the other hand, this is mainly due to the fact that expectations are particularly high for AMD.

Data by YCharts

Overall, we are only at the beginning of a development and I am convinced that Nvidia's holistic approach will give investors a lot of pleasure. The high valuation and the meager dividend yield may deter some investors. But there are promising prospects for success.

Conclusion

Compared to Intel, Nvidia is rated higher and pays a lower dividend. However, Nvidia clearly has the momentum on its side here, because the trend clearly goes in the direction of GPU's and here Nvidia is extremely well positioned. Investors should not let themselves be negatively influenced by the dip in turnover and profit, as only extraordinary developments in connection with crypto currencies have left their mark here.

If you enjoyed this article and wish to receive updates on my latest research, click "Follow" next to my name at the top of this article, and check "Get email alerts".

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.