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Bull of the Day: NVIDIA (NVDA)

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I last wrote about NVIDIA (NVDA - Free Report) as the Bull of the Day in late April after their annual GPU Tech Conference (GTC).

I started by addressing the elephant in the room: valuation. Here's some of what I wrote...

With a $380 billion market cap and projected revenues in 2022 of $25 billion, the stock trades at a 15X price-to-sales multiple -- quite rich for a semiconductor player.

But NVIDIA isn't just any chip maker. They lead the field in multiple areas, from gaming, machine learning, and autonomous driving technology to artificial intelligence, medical imaging, and hyperscale computing for scientific research.

In that April 29 report, I highlight how Gaming Drives GPU Innovation for NVIDIA and why that matters so much. I also raised my price target on NVDA shares, which were trading near $600, to $700 for this year and $750 in the next 12 months.

Since then -- and another stellar beat-and-raise quarter reported on May 26 -- the majority of Wall Street analysts have followed my lead.

Datacenter > Gaming

In this report, I want to focus on the shift that's going to occur as the Datacenter segment grows faster than Gaming. Last fall, Jefferies semiconductor analyst Mark Lipacis wrote a powerful research report where he described that the former is growing at 40% CAGR vs just 10% for the latter.

Based on that math, this is the year that Datacenter (DC) takes over Gaming in revenues. And based on his 5-year projections, Lipacis sees Gaming growing to a nearly $12 billion business while DC blows the doors off to $34 billion.

For perspective, this year's total revenue is only expected to be in the neighborhood of $25 billion.

To be clear, Lipacis was inspired to write this new report after NVIDIA announced it had an agreement to buy UK-based ARM Holdings for $40 billion. That deal remains controversial -- for everyone but NVDA -- and also uncertain in terms of the probability of actually closing any time soon.

The primary issues revolve around ARM's technology for mobile devices which is licensed to everyone from Apple (AAPL - Free Report) to Qualcomm (QCOM - Free Report) .

ARM also deals in CPUs (serial processing), which is part of what made it attractive to NVIDIA's GPU (parallel processing) expertise. I covered some of the issues here on Sep 17: NVIDIA Strikes an ARMs Deal to Take All the Chips.

NVDA Will Take All the Smart Chips

Believe it or not, even though I published the above-linked vlog within days after the Jefferies report from Lipacis that same week, I didn't read his full analysis until this week.

And it's a shame I didn't because I would have been buying every dip under $500 and not selling any shares since then!

Thankfully I added to our NVDA position under $540 (we bought near $200 during the Corona Crash last year) but here's what I am finally understanding from an analyst with deep technology-trend knowledge that allows him to make astonishingly bold forecasts...

Lipacis is modeling an adjacent category he calls Datacenter Ecosystem which will grow in tandem with the processor half -- also to hit $34 billion in 5 years at a 40% CAGR!

That's $67 billion in revenues -- under his bull case potential -- where NVIDIA tops $85 billion in total topline by 2026. Again, this is assuming the ARM deal goes through and gets past regulators and tech behemoth competitors on 3 continents.

Here's how he explains this growth and dominance...

"Consistent with the PC framework where Intel + Microsoft (MSFT - Free Report) capture 80% of the industry profits, we estimate that NVDA could capture and additional $34 billion from its ecosystem. We believe a similar concept is playing out in handsets today."

I assume in that second sentence that Lipacis is referring to the dominance of Apple and Samsung. In another part of his September report, he explains the forecast...

"Using the Wintel PC framework, which shows that the processor accounts for 50% of the ecosystem value and the software accounts for the other 50%, we estimate that NVDA could capture another $34bn in revenues from the rest of its ecosystem, including CUDA, cuDNN and vertical market software it has created like CLARA, DRIVE, ISAAC, MERLIN and JARVIS."

It's easy to look at Amazon (AMZN - Free Report) and Microsoft dominating the world of the cloud. But NVIDIA has the stack to make all that data storage meaningful with the best tools for mining and modeling.

Plus, the trends in industrial automation and robotics virtually guarantee that NVIDIA's tools will be in high demand for the factory floor of the future. Why? Because they make a workbench for developers that is highly efficient, productive and irresistible.

This is why software developers love NVIDIA and never want to leave their tech funhouse of tools.

NVIDIA Storms Into Q2 with Guidance 14% Above the Street

NVDA reported solid beats on May 26, and more importantly, current quarter sales guidance of $6.3 billion when the consensus was $5.5B.

Here's what I wrote to my TAZR Trader members, where we hold NVDA shares...

The only reason the beats weren't bigger is because Jensen gave such clear pre-announce guides at GTC last month. Now, it's all about a slow & steady climb to 3X datacenter revs in the next 5 years, as DC overtakes gaming with a higher CAGR.

As GTC got rolling, I wrote to you on April 13 that "NVDA Lights the Way." Well, now we know more about the core manufacturing laser-based technology -- photolithography from ASML -- that let's NVDA dive into the "nanocosm."

Thus, connecting NVDA to ASML is easy. It's all about Taiwan Semi as the premier foundry that uses ASML photolithography to get NVDA circuitry down to 5nm. You'll see all the Semi Ecosystem connections in my recent article and video Bitcoin Investing vs. Invisible Hardware of the Nanocosm.

Immediately after the NVDA report, we saw lots of price target bumps for NVDA over $700 by several analysts and I share a few of the i-bank notes here...

NVIDIA price target raised to $775 from $700 at KeyBanc: Analyst John Vinh commented that NVDA's strong beat and raise results were consistent with the company's positive preannouncement at its analyst day. Upside in the quarter was due to strength in hyperscale data center demand, gaming, and crypto. In Q2, all segments are expected to grow quarter-over-quarter, with the majority of growth led by crypto, data center, and gaming.

NVIDIA price target raised to $740 from $680 at Jefferies: Analyst Mark Lipacis upgraded his outlook after the company's April quarter EPS and its July quarter EPS outlook both beat consensus forecasts. Data center revenues are expected to accelerate in the the second half and he thinks the probability of "a bust" in gaming revenues is mitigated by the RTX product cycle. Lipacis also thinks the risk to Nvidia's gaming GPU business from crypto-miners is lower today than in 2018.

NVIDIA price target raised to $750 from $675 at Evercore ISI: Analyst C.J. Muse observed the company once again posted a strong beat and raise with its quarterly report, led by strength across its data center and gaming segments. He is less worried around a "crypto fall-off" in the gaming segment through the year and thinks such fears are overdone. On the data center side, Muse believes Nvidia's commentary was "exceptionally positive."

NVIDIA price target raised to $768 from $700 at Truist: Analyst William Stein noted the company posted a good Q1 but its guidance for Q2 was even more impressive,  adding that while its crypto upside portends some future volatility, he is "embracing" Nvidia's broadening datacenter growth trends.

Stein is probably my favorite Semi analyst and he echoes what I talked about with Lipacis: datacenter is on pace to overtake gaming this year and grow much faster for the next 5 years.

It's why my PT for NVDA went to $750 in April after GTC and we added more shares under $540.

Disclosure: I own NVDA shares for the Zacks TAZR Trader portfolio.

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