There were many requests for me to take a look at Nvidia ($NVDA), so let’s dive into it.
Nvidia’s core business is designing and selling graphics processing unit chips (GPUs) and has traditionally been the space leader ahead of AMD ($AMD). GPUs have seen increased long-term demand in the past few years. They are critical for visual computing, such as video games, rendering, and augmented reality (AR).
In 2017, GPUs were also realized to be the optimal chip to mine cryptocurrencies. Finally and more importantly, GPUs were found to be the optimal chip to run artificial intelligence, machine learning, and neural net programs, given their ability to run lots of calculations simultaneously. Tesla ($TSLA) used Nvidia chips for their self-driving computers until they developed a proprietary one instead.
But how much do we have to pay for this quality asset?
Given all the significant tailwinds they have with growth in video gaming, AR, crypto, and machine learning, I believe in trend and business momentum long-term. They are expected to grow at about 20% per year going forward. Nvidia has a robust business with technological differentiation, which results in very high 65% gross margins and almost 50% EBITDA margins.
NVDA trades at 26x forward gross profit and 35.5x forward EBITDA. This valuation was only rivaled in 2018, when it traded for 25x gross profit and 42x EBITDA, after which the stock crashed 50%. Although I like the business, I cannot stomach buying an ultimately consumer-oriented tech company at 25x forward EBITDA without visibility on big cash flows from AI trends.
But let’s compare it to AMD, shall we? See my Two Cents below on the AMD/Xilinx acquisition.