Nvidia NVDA is the top designer of discrete graphics processing units that enhance the visual experience on computing platforms. Its chips are used in a variety of end markets, including PC gaming and data centers. Traditional GPU uses include professional visualization applications that require realistic rendering, including computer-aided design, video editing, and special effects. More recently, Nvidia has experienced success in focusing its GPUs in burgeoning markets such as artificial intelligence (deep learning) and self-driving vehicles. Hyperscale cloud vendors have leveraged GPUs in training neural networks for uses such as image and speech recognition, large language models like ChatGPT, and other forms of generative AI.
Key Morningstar Metrics for Nvidia
- Fair Value Estimate: US$200
- Star Rating: 2 Stars
- Economic Moat Rating: Wide
- Moat Trend Rating: Positive
Economic Moat Rating
We believe Nvidia possesses a wide economic moat stemming from its intangible assets related to the design of graphics processing units. The company is the originator of and leader in discrete graphics, having captured the lion’s share of the market from longtime rival AMD. We think the market has significant barriers to entry in the form of advanced intellectual property. Even chip leader Intel was unable to develop its own discrete GPUs, despite its vast resources, and ultimately needed to license IP from Nvidia to integrate GPUs into its PC chipsets (though more recently Intel is vying to develop its own discrete GPU). To stay at the cutting edge of GPU technology, Nvidia has a large research and development budget relative to AMD and smaller GPU suppliers, which allows it to continuously innovate and fuel a virtuous cycle for its high-margin chips.
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Fair Value Estimate for Nvidia Stock
Our $200 fair value estimate assumes a forward adjusted price/earnings ratio of 46 times. We project revenue will increase at a 16% compound annual rate through fiscal 2028 as the company continues to diversify its revenue sources into areas of strong potential. Fiscal 2020 was challenging for Nvidia, as gaming revenue fell due to a cryptocurrency mining-related hangover and excess channel inventories, but sales grew 53% in fiscal 2021 and 61% in fiscal 2022, thanks to the acquisition of Mellanox and gaming, data center, and crypto mining strength. Nvidia experienced a similar crypto-related downturn in fiscal 2023, recording flat sales for the year, with gaming GPU weakness offset by data center strength. We expect a return to growth in fiscal 2024, with ongoing momentum in the data center segment partially offset by continued weakness in gaming.
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Risk and Uncertainty
Nvidia has benefited from strong PC gaming momentum in recent years. However, many of the most popular games are competitive multiplayer online games that require low-end discrete GPUs for latency reasons versus high-end GPUs—like Nvidia’s—for cutting-edge graphics. In addition, a shift to mobile gaming virtual reality over PC VR could curb the company’s opportunities, as Nvidia’s GPUs aren’t formidable in smartphones. Leveraging GPUs in deep-learning applications, among other areas, mostly occurred because of a lack of better alternatives. As alternatives arise, Nvidia’s recent explosive growth could be difficult to maintain. Perhaps the greatest risk, however, is the potential scarcity of experienced chip design talent in the industry.
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Nvidia Bulls Say
- The proliferation of the AI and deep-learning phenomena that rely on Nvidia’s graphics chips presents the company with a massive growth opportunity.
- The company has a first-mover advantage in the autonomous driving market that could lead to widespread adoption of its Drive PX self-driving platform.
- The increasing complexity of graphics processors provides a barrier to entry for most potential rivals, as it would be difficult to match Nvidia’s large R&D budget.
Nvidia Bears Say
- The AI opportunity remains nascent, and it is not a foregone conclusion that Nvidia’s GPUs will dominate.
- Nvidia’s automotive endeavors face plenty of competition, as numerous chipmakers are targeting the market.
- A large portion of sales comes from the maturing PC industry via PC gaming.
