Company Overview: NVIDIA Corporation (NASDAQ: NVDA) is California based company which is engaged in designing GPUs for professional and gaming markets. The company is involved in selling products to QEMs and consumer electronics companies in the China, US, China, Taiwan and Asia-Pacific areas.  The company competes with Advanced Micro Devices, Xilinx and Intel in the integrated GPUs & discrete computing market. In automobiles, autonomous machines and gaming devices, Ambarella, Broadcom, Intel, Qualcomm, Texas Instruments, are few companies, that NVIDIA competes with.


NVDA Details
 

 
NVIDIA Rides on Robust Adoption of GPU in Data-centers & Gaming Markets: California-based NVIDIA Corporation (NASDAQ: NVDA) was founded in 1993 and is engaged in providing graphics chip processors & related software services for a broad range of visual computing platforms. NVDA is a behemoth in visual computing technologies and the manufacturer of the graphic processing units (GPUs). The company processors are utilized in products for digital content creation, industrial product planning as well as digital image editing.
 
NVIDIA has two key reportable segments namely GPU and Tegra Processor. In FY20, the company reported revenue of $10.92 billion. NVIDIA’s GPU Business mainly incorporates high-end GPUs that are used in desktop and notebook PCs. In FY20, the company’s GPU business generated ~87% of total revenue. Coming to the Tegra Processor Business, which mainly considers the Tegra product line, accounted for the remaining ~13% of FY20 revenue. The company mainly competes in end-markets, such as Professional Visualization, Gaming, Data-centers and Automotive.
 
Robust adoption of the company’s GPUs in the data-centers and gaming markets was the primary reason for NVDA’s revenue to get doubled along with its earnings which grew over three times in the last four fiscal years. The company’s revenues increased at a CAGR of 21.5% over the period of FY16-FY20. With every passing day, more companies are shifting to cloud-based businesses, which is leading to an increased need for data-centers. Amazon, Microsoft and Alphabet are growing their operations worldwide to meet the growing demand for data-centers, which, in turn, is pushing demand for GPUs. NVIDIA stands to benefit from this escalating demand. The company’s revenue from data-centers segment rose from a meager $339 million in FY16 to ~$3 billion in FY20.
 
Additionally, NVDA offers superior quality of visualization and speed, which is required for a breath-taking gaming experience, via its collection of Pascal architecture-based GPUs.Furthermore, better-than-expected demand for Gaming-as-a-Service (GaaS) & massively multiplayer online games (MMOG) concepts, is skyrocketing the demand for GPUs. This again is a key positive for the company. Markedly, revenues from gaming segment increased from $2.8 billion in FY15 to $5.5 billion in FY20, reflecting almost two-fold expansion.
 

Historical Financial Performance (Source: Company Reports)
 
Earnings & Revenues in 4QFY20 up year Over Year: During the period, the company reported non-GAAP earnings of $1.89 per share, which rose a whopping 136% year over year. The bottom-line also increased by 6% on a sequential basis. Revenue for the quarter was reported at $3,105 million, up 41% year over year. Top-line also grew by 3% quarter over quarter. In 4QFY20, revenues from GPU soared 40% year over year and came in at $2.77 billion.  Revenue from Tegra Processor business grew by 47% year over year and stood at $331 million.
 

4QFY20 Key Highlights(Source: Company Reports)
 

Segment-wise Revenue Break-up(Source: Company Reports)
 
Sneak Peek at Revenues by Market Platform: During the fourth quarter, revenues from gaming segment went up 56% on a year-over-year basis and came in at $1, 491 million, due to robust demand for GeForce desktop and notebook GPUs. Revenues from Data Center increased 43% year over year to $968 million, primarily driven by hyperscale and vertical industry end customers. Automotive revenues were almost flat year over year and stood at $163 million. Growth in Artificial intelligence cockpit solutions along with development services agreements led the segment. Revenue from Professional Visualization increased 13% year over year and came in at $331 million, on the back of strong demand in desktop workstations.  Revenues from OEM and Other soared 31% year over year, owing to expansion in entrance-level GPUs for PC OEMs.
 

Revenues by Market Platform (Source: Company Reports)
 
Operating Highlights: During the fourth quarter, non-GAAP gross margin stood at 65.4% and expanded 940 basis points (bps) year over year, indicating the improved impact of Data Center products and lower inventory charges in Gaming. Non-GAAP operating expenses for the quarter increased 7% year over year and stood at $810 million, owing to higher employee compensation expenses, higher headcount, and stock-based compensation along with higher infrastructure costs. Non-GAAP operating income improved a whopping 155% year over year and came in at $1.22 billion.
 
Strong Balance Sheet: At the end 26 January 2020, the company’s cash, cash equivalents and marketable securities came in at $10,897 million, up from $7,422 million as at 27 January 2019. Total debt, at the end of the period, amounted to $1,991 million. In 4QFY20, cash flow from operating activities stood at $1.46 billion, up from $898 million reported in the year-ago period. Free cash flow during the quarter stood at $1.32 billion, up from $695 million in the year-ago period. Owing to the impending acquisition of Mellanox, NVIDIA did not make any share repurchase in 4QFY20. The company is likely to close the buyout in the early calendar-year 2020.
 

Balance Sheet Highlight (Source: Company Reports)
 
FY20 Operational Highlights: Revenues for the FY20 stood at $10,918 million, down 7% year over year. Non-GAAP earnings declined 13% year over year and came in at $5.79. Non-GAAP gross margin stood at 62.5%, up 80 bps year over year. Non-GAAP operating expenses increased 9% year over year and stood at $3,086 million. Non-GAAP operating income declined 15% year over year and came in at $3,735 million. Revenues from GPU business in FY20 stood at $9.47 billion, down 7% year over year, whereas Tegra Processors revenues were down 6% year over year. The company paid a dividend of $390 million in FY20.
 

FY20 Key Highlights (Source: Company Reports)
 
Recent Update:
On 6 March 2020, NVIDIA announced that it has acquired data storage software firm, SwiftStack. The move is a part of the company’s strategy to provide customers with improved AI and ultra-speed computing techniques. Financial terms of the purchase were kept under wrap. This buyout comes at a time when NVIDIA’s $6.9 billion purchase of Mellanox Technologies wait for a nod from China.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 33.33% of the total shareholding. The Vanguard Group, Inc. and Fidelity Management & Research Company hold the maximum interests in the company at 7.72% and 7.2%, respectively.

 
Top 10 Shareholders (Source: Thomson Reuters)
 
Key Metrics: The Company reported FY20 gross margin at 62% as compared to 61.2% in FY19. The EBITDA margin, during FY20, stood in at 30%, higher than the industry median of 18.8%. Operating margin during FY20 came in at 26.1%, higher than the industry median of 9.5%. Net margin, during the year, stood at 25.6%, higher than the industry median of 6.8%. FY20 Return on equity stood at 26%, higher than the industry median of 9.7%.
 

Key Metrics (Source: Thomson Reuters)
 
Outlook: The company’s GPUs are achieving robust traction with the rising demand for artificial intelligence. The growing utilization of AI techniques in automotive, data-centers, manufacturing industries, and healthcare industries is likely to drive demand for GPUs in the long-term. It is worth mentioning that NVIDIA is a leader in the data-centers market and enjoys a first-mover lead in the AI field.
 
For 1QFY21, the company expects revenue to be approximately $3 billion (+/-2%). This prediction includes a $100-million adverse impact of the coronavirus threat.  The company further expects data-centers to continue its growth impetus in the coming quarter. The company expects non-GAAP gross margin to be in the band of 65-65.4% (+/-50 bps) in 1QFY21, whereas, non-GAAP operating expenses are expected to be between $835 million and $1.05 billion for the same period. Capital expenditure is expected to be around $150-$170 in 1QFY20.

Nonetheless, seasonal weakness in notebooks and Switch gaming consoles may be a potential headwind. Further, macroeconomic risks, given the extremely volatile trade environment, continue to be a key concern.

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies-
 
Method 1: Price to Earnings Multiple Based Relative Valuation

Price to Earnings Based Valuation (Source: Thomson Reuters)
 
Method 2: P/CF Multiple Based Relative Valuation 

 
P/CF Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of NVDA closed at $202.82 with a market capitalization of $124.1 billion. The stock made a 52-week low and high of $132.60 and $316.32 and is currently trading below the average of its 52-week trading range. The stock has delivered a decent return of ~27.95% in the last one year. The business has delivered robust fourth-quarter results with both top-line and bottom-line increase on a year over year basis. NVIDIA remains on track to benefit from robust demand for its GPUs in the gaming desktops and notebooks. In addition, rise in demand for Hyperscale remains a tailwind for this chipmaker’s data-center business. Also, rise in demand for gaming, high-performance computing, AI and self-driving cars are key growth areas. Considering the above factors, we have valued the stock using two relative valuation methods, i.e., P/E and P/CF based multiples, and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose, we have taken peers like Intel Corp (NASDAQ: INTC), Texas Instruments Inc (NASDAQ: TXN), Advanced Micro Devices Inc (NASDAQ: AMD), to name few. Hence, we recommend a “Buy” rating on the stock at the current market price of $202.82, down 6.65% on 18 March 2020.
 

NVDA Daily Technical Chart (Source: Thomson Reuters)

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