Nvidia a Virtual reality play

botwomanWe like NVIDIA as a Virtual reality play.

It’s an appealing founder-led and investor-friendly company with a strong and long-lasting leadership in a niche that has become more important (graphics and video processing), and they’ve made a real effort to diversify the business, mostly in data center processing and automotive.

Gaming is still the lion’s share of their business, as it has been since their first GE-Force graphics cards enabled the rise of much more advanced desktop gaming about 15 years ago, and it’s also still growing — with Virtual Reality as a part of that, including their new GameWorks resources for VR developers, so despite the diversification efforts gaming remains the real driver on the bottom line, and that will probably be true for the foreseeable future.

 

Nvidia (NVDA) chips are not necessarily in the virtual reality headsets, but those headsets are not stand-alone devices in most cases, they’re getting their computing power from the machine they’re connected to — and that’s more often than not going to have  NVIDIA graphics processor, at least for higher-end applications. Those are not the $27.50 ones, of course — that’s about what an entry level graphics card for a desktop PC will cost you, the fancier new ones that they’re selling now, like their latest TITAN graphics card, top out at something like $650.

 

From what we can tell after doing just a little browsing, the concerns that analysts have are mostly about gaming — they are worried that gaming revenue is not going to continue to be a big growth driver as it has been this year, presumably because new consoles and mobile devices continue to supplant PC gaming to some degree (and even if NVDA processors make it into some of those devices or consoles, the margins may be much lower than for high-end desktop gaming equipment)… and gaming has been both the biggest segment and the growth engine for NVDA for most of their history. Despite the fact that they are making inroads in data center processing and automotive and other areas, those just aren’t big enough yet (or growing fast enough) to make up for any real shortfall from GE-Force and gaming. If such a shortfall appears. So that appears to be the risk: Their growth areas are still dominated by gaming, and investors worry gaming may not carry the load in the future.

 

Still, they are making strong inroads into automotive processors and in-car entertainment systems, and they do make a compelling argument that their processing acceleration will be the next wave forward for increasing processing power and speed as chips hit a “can’t make them smaller and faster anymore” physical limit. And they do pay a small dividend and buy back a lot of stock.

 

NVIDIA is also selling a “sort of” competitor to the Xbox, their SHIELD performance tablet designed for gamers, and TV “box” that’s like a more gaming-friendly Apple TV — neither of those is likely to be a big revenue driver, given the size and dominance of the competition, but you never know.

 

So as a stock, this is really another mismatch: Do you buy the big future potential from as-yet non-material businesses like virtual reality, and embrace their technological leadership in visual processing, or do you worry about the somewhat slower-growth immediate future if gaming growth slows a little in the next few quarters?

 

 

Here is the deal:

Either the valuation is a bit too high at ~18X next year’s earnings (ex cash), or the growth expectations from analysts are a bit too low at 5% a year to 2020 — We think making a bet that it’s the latter isn’t a bad play.

The stock has come a long way in the last 30 days. But don’t let that scare you.  A buy this moment may not suit some conservative investors but this is a name you need to know now.  We feel Virtual Reality will be the white hot in the next 2 years not to mention autonomous driving and data centers.   We want to be in the names before the hype fills up your Twitter stream.  NVDA will be one of those names.

 

Stay Nimble

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