Nvidia Vs. Apple: How To Analyze These Two Stocks
Summary
- Apple is the most prominent company of the technology bellwethers. It boasts a highly strategic services segment ecosystem.
- Nvidia is one of the leading semiconductor stocks for 2021. It has greatly enhanced its software suite to protect its hardware leadership.
- We help readers to think about how to go about analyzing these two behemoths in this article.
- We will also show our readers why we think one of them is at a buy point now.
- I do much more than just articles at Ultimate Growth Investing: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
Davidepj/iStock Editorial via Getty Images
Investment Thesis
Nvidia (NASDAQ:NVDA) and Apple (NASDAQ:AAPL) are top-rated stocks with retail investors. In addition, they have often been regarded as bellwether stocks by many large investors. Apple's CEO Tim Cook recently celebrated his tenth year in charge. Under his competent leadership, AAPL reached the apogee as the world's most valuable company.
Nvidia has also scaled new heights under CEO and co-founder Jensen Huang's capable leadership. Ever since the previous semiconductor downcycle in 2018/19, Nvidia has recovered strongly. As a result, it has become one of the leading stocks in the semiconductor industry.
In this article, we will help readers to think about how to analyze these two behemoths. We will highlight the essential considerations driving their business models. We will also share our opinion on their valuations and whether investors should add them now.
NVDA Stock and AAPL Stock YTD Performance
NVDA stock Vs. AAPL stock YTD performance (as of 29 Sep 21).
NVDA stock has outperformed Invesco QQQ ETF (QQQ) and AAPL stock this year with a YTD return of 60.4%. On the other hand, AAPL stock has been struggling to gain momentum the whole year. It currently trails QQQ (16.1% YTD) with a 9.3% YTD gain. Therefore AAPL stock has underperformed the market in 2021.
Apple Has Built a Formidable iOS Services Ecosystem
AAPL revenue by product. Data source: Company filings
The iPhone is the most critical revenue driver for the company. From FQ1-FQ3 of FY21, iPhone accounted for 54.2% of the company's revenue. It's slightly more than FY20's contribution. iPhone accounted for about 50.2% of FY20 revenue. Therefore the 5G ramp has indeed underpinned iPhone's remarkable performance. For example, Apple's iPhone revenue for the first three quarters of this year has already exceeded FY19 and FY20 numbers. Moreover, iPhone 13 is also expected to carry on the momentum from iPhone 12's 5G upgrade impetus. According to Counterpoint Research, "Apple's iPhone 12 and upcoming 13 series devices are set to spike Q4 2021 global 5G shipments to nearly 200m units, helping grow 2021 total shipments to 605m." As a result, AAPL is expected to capture 33% of the total 5G global shipment in 2021, up from 24% last year.
The 5G ramp has certainly benefited AAPL's iPhone sales in 2021. However, even with its strong momentum, growth is likely to slow to a crawl in 2022. According to FactSet estimates, iPhone sales are likely to reach $194.2B in 2021. That would be a significant increase from 2019 and 2020. On a two-year CAGR basis, iPhone sales would have gone up by 16.8% from FY19 to FY21. It's an incredible feat. However, iPhone sales are expected to come in at $194.6B in 2022. That would mean that iPhone sales growth is expected to be flat YoY for 2022. Thus it would be critical for its services segment to drive growth moving forward as iPhone sales growth slows significantly.
Apple's services segment consists of sales "from the Company's advertising, AppleCare®, digital content, and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud storage and Apple TV+SM services, which are bundled in the sales price of certain products." Apple's services segment has seen pretty remarkable growth. The segment posted a CAGR of 19.6% from FY18 to FY20. Its lucrative App store is the most crucial sub-segment. It was reported that the App Store had an operating margin of 78% in 2019. If we consider AAPL's LTM operating margin of 28.8%, it's clear why the App Store is Apple's highly-prized jewel.
Apple intends to continue strengthening its highly profitable ecosystem. For example, in a recent article on Digital Turbine (APPS), we shared that iOS has a global market share of 26.3%. That would give Apple an estimated global iOS installed base of 1.63B units by 2021. Therefore, even if iPhone sales growth is flattening in 2022, the company could still monetize its massive base of growing iOS users.
The recent spate of regulatory actions might have been a dampener to Apple's ambitions for its App Store. At the moment, it's still uncertain whether other regulatory authorities would follow the South Korean parliament's actions. It approved the bill to prevent app store operators from charging commissions on in-app purchases. The ramifications could be profound if it reverberates globally. Therefore it sets up undesirable regulatory precedence that Apple investors must seriously consider.
Nvidia is Building Up Its Gaming and Enterprise AI Ecosystem
NVDA revenue segments. Data source: Company filings
NVDA revenue segments YoY growth. Data source: Company filings
NVDA's revenue growth has been gangbusters. The company's business model can capture the secular growth drivers in both the consumer and enterprise space. The company has an unrivaled lead in the discrete GPU [d-GPU] market. It even increased its market share to 83% against Advanced Micro Devices (AMD) 17% share in FQ2'22. Intel would also soon enter the d-GPU market. Intel (INTC) could prove to be a competitive entrant against NVDA's dominance. While it's still early, initial specifications suggest that Intel's offerings are likely to be competitive. If Intel's charge is successful, it could create a significant dent in Nvidia's d-GPU armor. With an 83% market share, Nvidia has much to lose.
Moreover, gaming has been a critical driver of revenue growth for Nvidia. In FQ2'22, gaming accounted for 47% of the company's revenue. It's the largest revenue segment for Nvidia. Its recent YoY growth has even eclipsed Nvidia's data center growth. Notably, Nvidia's growth in its data center business has slowed down markedly. In FQ2'22, gaming revenue grew 85% YoY. It followed FQ1'22's phenomenal momentum of 106% YoY growth. In contrast, data center revenue only grew 35% YoY in FQ2'22. Compared to the increase in its previous quarters, its growth rate has slowed down tremendously.
Therefore, Nvidia has long recognized the need to create a robust and self-sustaining ecosystem to protect its gaming leadership. Notably, its Geforce NOW cloud gaming service has been gaining strong momentum. The company highlighted in April that it had surpassed 10M subscribers. Newzoo estimates that the cloud gaming market could be worth $1.6B by 2021 and $6.5B by 2024. That gives it a stellar CAGR of 59.6%. Therefore, there are enormous opportunities for Nvidia to capitalize. It would allow the company to build a solid ecosystem to protect its gaming leadership. Nvidia's strategic blueprint has always been to move towards a full-stack tech ecosystem company. Nvidia already has a considerable lead in cloud gaming. Despite Intel's determined foray into its prized market, Nvidia has already moved a few steps ahead.
Nvidia has undoubtedly made the most of its leadership in the data center GPU market. By dominating this market, it has allowed Nvidia to make significant investments to strengthen its leadership. It will soon introduce its Arm-based Grace CPU. Coupled with its Bluefield SoC IP from its Mellanox acquisition, Nvidia looks to cement its dominance in this segment. If the Arm acquisition goes through, it could potentially unlock even more opportunities. On this, Nvidia CFO Colette Kress emphasized:
Well, we don't have to acquire Arm. We want to acquire Arm. Arm is a great company. Arm gives us an opportunity to address a much larger opportunity. It also gives us an opportunity to assist Arm on many different markets and workloads that they would like to get into. We want to see if we can expand Arm's IP licensing opportunities that allow us to offer NVIDIA's technology in large end markets, including PCs, including mobile, but also allow us to help R&D road map at Arm and turbocharge that investment...We have the ability to reach more and more developers, developers on CUDA or otherwise, to the more than 15 million developers that are available at Arm as well. (from Citi 2021 Global Technology Virtual Conference)
There's little doubt that acquiring Arm would give Nvidia a competitive advantage with Arm's IP. In addition, it would significantly enhance its R&D roadmap. Nvidia certainly wants to integrate Arm's IP into its current stack. Given the highly competitive nature of this industry, it's understood that Nvidia's rivals were duly concerned. While we think Arm's IP is beneficial, we believe Nvidia is thinking even bigger. It wants to strengthen its developers' ecosystem. Kress clearly emphasized it.
Nvidia emphasized that it has over 2.5M developers in its ecosystem. The company has repeatedly communicated that it's now a full-stack AI company. Hence, it's no longer just your typical GPU semiconductor hardware company. It now boasts a formidable three-pronged GPU-DPU-CPU stack to lead its hardware strategy. Importantly, its Nvidia AI Enterprise now offers its complete AI enterprise software suite to its customers. With the number of developers on its platform currently, we think its leadership is secure. The ecosystem will get even stronger over time as more developers come on board. If the company could pull through its Arm acquisition, we think there's no way that Intel or AMD could catch up.
The main problem right now is, Nvidia couldn't/isn't willing to put a timeline to when they would derive meaningful revenues from its software stack. Nvidia could only add: "But as I said, what I quoted to you for both NVIDIA enterprise as well as for Omniverse enterprise as being multibillion-dollar opportunities, we see these as very real opportunities, right?"
Intel's entry into the d-GPU space is coming soon. We think Nvidia's potential with its hardware and software strategy looks very promising. However, we are not sure whether investors have the patience to wait if hardware revenues start facing potential headwinds. Given Nvidia's expensive valuations, the potential for a valuation compression is very real.
Apple Stock Looks Fairly Valued, But Nvidia is Expensive
Since we published our neutral rating on AAPL in early September, the stock has fallen about 9.4%. We believed that while the stock was fairly valued then, we needed a higher margin of safety to consider a safer entry. We think the time has come for investors who have been waiting to add AAPL.
AAPL stock valuation comparison (P/EBIT). Source: FASTgraphs
NVDA stock valuation comparison (P/EBIT). Source: FASTgraphs
In contrast, NVDA stock continues to trade at an expensive valuation. It seems like the optimism in the stock has been significantly baked in. It's also running well ahead of what its EBIT suggests. NVDA stock has dropped about 4.9% since our last neutral rating in late August. However, the stock continues to look expensive. It was trading at about 20% above its EBITDA multiple mean back then. A lot of bulls continue to hold out for NVDA's bullish thesis. However, we don't encourage readers to add exposure to NVDA right now.
Therefore, we are upgrading our rating for AAPL stock to Buy. At the same time, we are maintaining our Neutral rating on NVDA stock due to its valuation.
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This article was written by
Ultimate Growth Investing, led by founder JR Wang of JR Research, helps investors better understand a range of investment sectors with a focus on technology. JR specializes in growth investments, utilizing a price action-based approach backed by actionable fundamental analysis. With a powerful toolkit, JR also provides insights into market sentiments, generating actionable market-leading indicators. In addition to tech and growth, JR also offers general stock analysis across a wide range of sectors and industries, with short- to medium-term stock analysis that includes a combination of long and short setups. Join the community today to improve your investment strategy and start experiencing the quality of our service.
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About JR: He was previously an Executive Director with a global financial services corporation and led company-wide, award-winning wealth management teams consistently ranked among the best in the company. He graduated with an Economics Degree from Asia's top-ranked National University of Singapore (NUS). NUS is also ranked among the top ten universities globally. I currently hold the rank of Major as a Commissioned Officer (Reservist) with the Singapore Armed Forces.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, NVDA, AMD, INTC, APPS either through stock ownership, options, or other derivatives. 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.
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Comments (35)
Apple is looking towards a great Xmas season.
Long AAPL
Long NVDA
NVDA’s GPUs are the future due to machine learning, AI, Autonomous vehicles, Edge computing etc. long NVDA.
Got into AAPL at 35$ and holding it though…they are cash rich and can buy anyone out…not sure if they figured out who though..Tim needs to retire.
"AAPL is a one-trick pony."Yes and that one trick is the global consumer market for software and devices.
AAPL is no longer growing…they need an out of the box thinker…not Cook for Pete’s sake
4 1/2 years ago. Not because of their leadership and dominance in graphic cards. I invested because of their track record / leadership and execution year after year.
A very fine-tuned organization that executes to near perfection crediting the founder Jensen Huang
I researched and studied many companies for the future of Artificial Intelligence the 4th industrial Revolution.
After my research I only felt comfortable with one company NVIDIA.
I have not sold single share whether it's tanked or the stock going sideways.
I'm retired my career was in Hardware software systems and peripherals.
Every year August and September are not kind to Nvidia. Every year in mid-October to early November Nvidia has their GTC technology conference with major introductions for the year in Hardware, Software platforms Artificial Intelligence software stacks for Data Centers, HPC and the Cloud.
This year GTC 2022 runs from November 8th through the 11th later than usual.https://www.nvidia.com/gtc/Nvidia has been a me too company.Nvidia has always been the Pioneer in new markets / new categories since 1999 when they released the world's first graphic card.This is when their stock pops after their major announcements.
The second pop occurs with Q3 financials release late November.I've been an investor for four and a half years. Their products of GPUs, DPUs, Bluefield NICs, Hardware, CUDA Software and software stacks has created a moat that has continuing to grow.
I am more comfortable with my ownership of Nvidia stock now than I was at any time in the last four and a half years.
Currently they have over 2.75 million developers all over the world.
Their Inception program for startups currently has over 8,500 early stage companies developing products and software in robotics autonomous driving medical smart cities 5G networks high performance computing and other broad new markets.
Nvidia announced a new Inception program in the UK. Currently 2000+ European startups have entered this program in the first year.
There is no discernible pattern that repeated in the past 3 years during those 3-4 months.Nevertheless, I agree with you general post. I especially liked the “I am more comfortable with my Nvidia ownership now than I was any time in the last four and a half years.”
Thx for your article
Have a great weekend