Thoughts On NVIDIA Corp (NVDA)

I’ve admired NVIDIA Corp (NASDAQ:NVDA) for a long time. It’s a great company with great leadership and great companies are not typically cheap. Greatness comes at a premium. How much of a premium? That’s the key question and there’s no easy answer.

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Q2 2020 hedge fund letters, conferences and more

Unfortunately I’ve never invested in the company and I certainly regret it. NVIDIA Corp has a market cap just over $250 billion and is trading at an all-time high. The stock is up 80% year-to-date. Nvidia has $9 billion in net cash. Nvidia is not cheap. It’s trading at 22x sales and 60x EV/EBITDA. This suggest that the price might be ahead of its valuation. But Nvidia always traded traded at crazy multiples. The people buying Nvidia at these numbers believe the company will exceed expectations. Will Nvidia live up to the lofty expectations?

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Reason For Not Investing In NVIDIA Corp

I’ve pinned down two reasons for not investing in NVIDIA Corp in the past.

  1. Price
  2. Lack of understanding (circle of competence)

The first reason, price, is still valid. Despite how great the business and its future is, I just can’t get myself to justify paying this much. Of course I said the same thing when Nvidia has a market cap of less than $100 billion. Now the question is will Nvidia be a $500b company in the future?

The second reason is my mistake in labeling NVIDIA Corp as a “video game” company. Nvidia is famous for its graphic cards, the GeForce. A graphic card is commonly refereed to as graphic processing unit or GPUs. People that builds gaming rigs use Nvidia graphic cards for the best gaming experience. A good graphic card can cost $1000 and more. Prices are on the rise and the hardware gets outdated pretty quickly. AMD is their main competitor.

Then the cryptocurrency bubble happened and Nvidia became a “crypto” company. When the bubble popped Nvidia did fall but quickly recovered.

Reviewing Nvidia forced me to reframe what Nvidia really is. Labeling Nvidia as a “video game” or “crypto” company was a mistake. Nvidia is way more than that.

NVIDIA Corp was founded in 1993 by Jensen Huang. Huang is the current CEO. The main idea was to accelerate computing and video games was the first obvious application. But at the time there wasn’t really a market until Quake came out, a 3-D first person shooting game that demanded a lot of computing juice.

Now Nvidia has parlayed video game success into super-computing dominance and artificial intelligence (AI). These multi billion markets didn’t even exist back then. This year, Nvidia’s data center will generate more revenue than its gaming unit. Nvidia recently inked a new partnership with Mercedes-Benz for computing hardware, software, and services starting in 2024.

The Shift To And End-To-End Platform Company

Nvidia is becoming an end-to-end platform company. What does that mean? Nvidia is building the architecture, developing applications, and providing the software and hardware. Whereas a chip could go for a couple of hundred dollars, autonomous driving applications could go for several thousand dollars. Mercedes is going to design their cars with Nvidia in this partnership.

Labels can be misleading. Without trying to repeat the mistake of the past, Nvidia is more than just a chip company. Now the business model is the chip and the infrastructure for developing artificial intelligence. When you think Nvidia, you have to think accelerated computing (not videogames). Adding the accelerator to microprocessor became the GPU, well because it does graphic, but it does so much more.

Now scientific computing takes NVIDIA Corp into data centers. AI crunches a lot of data and needs a lot of muscle to accomplish that. Nvidia’s chip speeds up the algorithm to make the approach viable from months to days. Nvidia is a key component in the pick and shovel of AI, along with Intel, Amazon, and Microsoft among others.

Nvidia is tackling big markets, anything “smart”. Nvidia is at the center of AI, supercomputing, autonomous driving, 5G, virtual reality, gaming, medical, industrial and robotics. Each of these are multi-billion dollar market with a great future.

Now the main question is how much is this company worth? I’m not talking about next quarter numbers, but in five years when we had made progress in these big areas. I will keep an eye on NVIDIA Corp if the stock corrects.