Nanalyze

NVIDIA Stock Price Hits a 52-Week Low – Buy More?

For those of you fortunate enough not to be tainted by a career in finance, you may be surprised to hear how the sausage gets made. Let’s take a stock like NVIDIA Corporation (NVDA). There are analysts out there who are paid to “cover” NVIDIA by issuing recommendations as to whether or not you ought to be buying or selling based on particular price targets. These sorts of people try and make themselves look as good as possible in the eyes of the public, and like to use lots of CYA terminology like “cautiously optimistic”. The reason these analysts feel comfortable about making stock price predictions is that they spend a majority of their lives putting together sophisticated spreadsheet models that justify their price targets. These price targets along with Earnings-Per-Share (EPS) estimates then become expectations that a publicly traded firm needs to live up to, or else.

NVIDIA’s Expectations

As a retail investor, you’re better off investing with a “set it and forget it” approach while taking note of any large price swings that signal good news or bad news. You can then gauge the severity of the newly-available information by doing a bit of due diligence. That way, you’re aware of any problems with your holdings and can continue sleeping well at night. Hopefully. In the case of NVIDIA, we’re long-term longs who were surprised to see shares tanking this morning to reach a new 52-week low of around $161 per share. To put this into perspective, the NVIDIA stock price reached a new high of $292 a share just a few months back and has since fallen nearly -43%.  Today’s drop of around -19% was attributed to the following reasons according to their CFO:

  • Gaming revenue was short of our expectations, and our fourth quarter outlook is impacted by excess channel inventory of midrange Pascal products.  We believe this is a near-term issue that will be corrected in one to two quarters, and remain confident in our competitive position and market opportunities.

  • OEM and IP revenue was $148 million, down 23 percent from a year ago, due to the absence of crypto-currency mining.

And here are the actual revenues over time broken down by category:

NVIDIA Quarterly Revenue Trend – Source: NVIDIA

In a nutshell, that’s the news which made the stock price fall so dramatically. NVIDIA didn’t sell as much as people expected them to in the last quarter, and they confirmed that this “weakness” will extend into the remainder of the year. What we need to ask ourselves is if the fundamental investment thesis has changed. Does NVIDIA still provide a way for retail investors to get exposure to the growth of artificial intelligence?

NVIDIA and Artificial Intelligence

The use of artificial intelligence across all NVIDIA’s business segments is rife, from the Deep Learning Super Sampling (DLSS) they use in their gaming hardware to the “Jetson AGX and Isaac” platform they’ve developed in their autonomous driving segment which uses AI to make robots smarter. However, the category which contains NVIDIA’s core artificial intelligence capabilities is the “Datacenter” category which is where those 3,000-plus artificial intelligence startups are turning to in order to train their AI algorithms, a number which exceeds 1 million developers. NVIDIA’s “the more you buy, the more you save” value proposition also appeals to larger companies that are looking to invest in large datacenters:

Nvidia's Accelerated Datacenter Value

NVIDIA’s Accelerated Datacenter Value – Source: NVIDIA

We’re primarily concerned with how the “Datacenter” category has been performing over time, so let’s dig into that a bit more.

NVIDIA’s Datacenter Revenues

In order to understand how NVIDIA’s revenue mix is changing over time, we put together a few tables. The table on the left shows the revenue growth by segment over the past year, and the table on the right shows the revenue composition by segment and how that has changed from one year ago:

NVIDIA Revenue Growth by Segment

NVIDIA Revenue Growth by Segment

As we can see above, Datacenter revenues have increased +58% in the past year, more so than any other segment. We would, therefore, expect that Datacenter revenues as a percentage of the whole have increased over time. Indeed, they have, with Datacenter revenues now making up 25% of NVIDIA’s revenues as opposed to just 19% a year ago. In order to predict how fast that percentage grows, we can look at the compound growth rate of Datacenter revenues over the last 8 quarters which is around +15%. If we extrapolate that number out until Q4 FY20, we see Datacenter revenues reaching around $1.6 billion a quarter which is just shy of where Gaming revenues are today:

NVIDIA Datacenter Revenues Forecast Estimate

NVIDIA Datacenter Revenues Forecast Estimate

The growth of Datacenter revenues is a simple metric we can use to see if the “picks and shovels” of artificial intelligence are growing as we expect them to grow over time. There are competing technologies out there as we’ve looked at before, so let’s just hope we don’t see the rates of technological obsolescence we recently observed in the crypto mining space.

Conclusions

It’s no surprise at all that a “sharp fall-off in cryptocurrency mining demand” inevitably hit NVIDIA. Earlier this year, we talked about how the crypto ship has already sailed for NVIDIA. Crypto miners have gone well beyond GPUs into something called Application-Specific Integrated Circuits (ASICs). It was something the company expected, as they tried warding off crypto mining customers in order to protect their gaming customers. This quarter’s “fall-off” shouldn’t come as a surprise to anyone who understands crypto mining hardware.

Then, we have the “near-term issue” in gaming revenues. All you MBAs out there might remember the bullwhip effect which you should have learned about in your Tuesday supply chain class that you always arrived to late and hungover. Short-term inventory issues happen, and they can easily be corrected over time. Our original investment thesis in NVIDIA has not changed a bit. We remain cautiously optimistic about the whole thing, and feel that this might be a good opportunity to open or add to a position in NVIDIA stock using dollar-cost-averaging.

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