Nvidia's Share Of The Mega Cake Is Getting Bigger And Bigger

Summary

• After the first sell-off, the market rushes to NVIDIA. The outperformance is an extremely bullish signal for the post COVID-19 time.
• NVIDIA continues to work hard to shape the future despite the current volatility.
• The company will probably emerge as a winner from the current crisis.

Introduction

NVIDIA (NASDAQ:NVDA) could outperform the broader market in the next few years. While the business world continues to feel the impact of COVID-19, the company is shaping the future of the way we live, work, and move forward (literally and figuratively). The market also seems to assume this, as the company has finally turned its back on the short cryptocurrency turbulence. We will probably not return to these price ranges.

(Source: Seeking Alpha Premium)

The market does not seem to attach any importance to COVID-19

Compared to its peer group, NVIDIA has best withstood the volatility of COVID-19. At the time I am writing this article, the share price is even slightly up. This means that the company has outperformed the broader market. The S&P 500 (-14.6 percent) and the Dow Jones (-21 percent) performed much worse in this respect.

Data by YCharts

The longer the COVID-19 crisis lasts, the more important is the pricing behavior of companies. Thus, two phases can be identified in the above picture. It is easy to see that the companies, as well as the broader market, crashed relatively synchronously into the second half of March. These are typical market developments that occur in such crashes. Investors try to build up liquidity or secure profits and then simply sell everything they have, which triggers such price falls. However, the market realized relatively quickly that there would also be winners. There will also be companies that have excellent prospects for the future and are, therefore, worth an investment despite volatility. It also plays a role that a large amount of money from the central banks and the unprecedented state aid programs have so far been able to give the market-specific stability.

Core businesses become even more important

So far, NVIDIA's business has been built on two main foundations (GPU and Tegra Processor). Both are connected. NVIDIA's "GPU product brands are aimed at specialized markets including GeForce for gamers; Quadro for designers; Tesla and DGX for AI data scientists and big data researchers; and GRID for cloud-based visual computing users."

The Tegra Processor unit "integrates an entire computer onto a single chip, and incorporates GPUs and multi-core CPUs to drive supercomputing for autonomous robots, drones, and cars, as well as for game consoles and mobile gaming and entertainment devices."

With these two business segments, NVIDIA creates platforms by offering solutions for complex problems and supplying both hardware and software. This leads to several effects. Such platform solutions under one roof lead to lock-in effects. Users of such solutions have less incentive or fewer opportunities to rely on other suppliers for individual components. This secures and even strengthens NVIDIA's market position. With this technological basis, the company addresses mega markets:

• Gaming
• Professional Visualization
• Data Center
• Automotive.

NVIDIA is also backing the right horse here with its GPU solutions. It becomes more and more apparent that GPU architecture is superior to CPU solutions for many applications. This applies, in particular, to the "High-Performance Computing" ("HPC") business. GPU solutions will more and more dominate the HCP sector.

(Source: Investor presentation)

With this in mind, the data center business, in particular, has enormous prospects, and NVIDIA, as one of the biggest providers of data center solutions, will benefit from this development. As I said before and according to NVIDIA, each GPU-accelerated server replaces dozens of commodity CPU servers, delivering a dramatic boost in application throughput and cost-saving.

(Source: NVIDIA's High-Performance Computing opportunity)

So not only is the cake expected to get bigger but so is the share that NVIDIA will have in it.

Growth will continue

In its forecast, NVIDIA assumes that growth will probably flatten out somewhat in 2020. In particular, margins and operating income are expected to fall in 2020. However, 2019 has been an extremely successful year (with a strong 4th quarter), and COVID-19 will continue to impact NVIDIA, of course. Customers are holding back on new orders, and consumers may also postpone the purchase of new computers for now.

(Source: Investor presentation)

In the long term and especially post COVID-19, however, growth will accelerate again. Meanwhile, NVIDIA continues to strengthen its position. To that end, the company has acquired Mellanox and Cumulus Networks. With the new business unit - consisting of Cumulus Networks and Mellanox - NVIDIA intends to deepen its strong growth in the data center segment.

NVIDIA is not cheap

NVIDIA is traditionally a company with extreme multiples. The current P/E ratio is in the three-digit range. And also, the forward P/E ratio with 40 is relatively high. However, the entire sector is relatively highly valued (see AMD (AMD)). However, when it comes to long-term multiples, NVIDIA is still within its multi-year range. Only the time window in which NVIDIA was almost a "bargain" has closed. Investors who had taken advantage of the crash in February and March can be pleased.

The Price to FCF ratio is now back again within the range of its 3-Year median.

Data by YCharts

The same applies to NVIDIA's Price to book ratio.

Data by YCharts

However, NVIDIA has an outstanding cash balance and a stable balance sheet. At the end of the 2019 financial year, cash and cash equivalents amounted to USD 10 billion. This was countered by total long-term debt below USD 2 billion and total liabilities of USD 5.1 billion. With a Debt/Adjusted EBITDA ratio of 0.5, NVIDIA is in an excellent position to survive one or two weak years due to COVID-19.

Conclusion

2020 will probably not be as strong for NVIDIA as 2019, and we'll get the first glimpse of this in May when NVIDIA publishes the figures for 1Q 2020. Then, we'll also learn more about how COVID-19 has impacted the business.

However, the market is trading the future and is already looking to the post-COVID-19 era. NVIDIA will be a significant force in shaping that future.

If you enjoyed this article and wish to receive other long-term investment proposals or updates on my latest portfolio research, click "Follow" next to my name at the top of this article or join the discussion on the TEV blog.

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.