Nvidia (NVDA - Free Report) invented the world’s first Graphics Processing Unit (GPU) in 1999, forever changing the world of PC gaming. Today Nvidia is the global leader in the GPU market and has pushed its capabilities beyond just gaming. Nvidia’s GPU technology is now being used to develop machine learning and AI. The duopoly between AMD (AMD - Free Report) and Nvidia has been driving GPU innovation to revolutionary levels. I discuss Nvidia and AMD’s duopoly in more detail in my article Nvidia vs. AMD: The Future of The GPU Space.
Nvidia has invested over $17 billion into its R&D department since the company’s inception with its R&D budget remaining around 20% of revenues. Nvidia’s GPUs are progressively being used as the ‘brain’ of computers, powering VR, and simulated human intelligence.
Nvidia is releasing its Q2 earnings after the bell on Thursday, August 15th. Analysts are estimating an EPS of $1.15 on $2.55 billion of revenue, which would represent a year-over-year decline of 40.7% and 18.5% respectively.
NVDA has been trading in line with the semiconductor industry which is in the midst of a projected slowdown. With crypto-mining and smartphone sales declining, this industry is investing in its R&D waiting for the next wave of demand to hit.
NVDA is close to 50% off its all-time high which it hit in October of last year due to lowered management guidance but its continued growth in data center GPUs, as well as advancements in PC GPUs, should drive its stock price back up as demand in the space returns. Below is a 52-week performance chart comparing NVDA (blue) and the S&P 500 (red).
Roughly half of Nvidia’s topline is being driven by its gaming segment with the remaining drivers coming from data centers, professional visualization, automotive and other, in that respective order. Below is a segment breakdown.
Like cloud computing is the future of business data and analytics, cloud gaming is the future of gaming. Nvidia is making a big bet in this field with their cloud platform GeForce NOW. This platform allows gamers to use their Macs or PCs for gaming anywhere with the high-speed, low-latency technology of Nvidia’s GPUs without needing Nvidia’s hardware locally.
Nvidia is teaming up with telecommunication providers “to expand and improve the cloud gaming experience globally.” Getting in front of the 5G wave to be prepared with a ‘turnkey solution’ once 5G is widely available.
GeForce Now is currently in the beta stage, but gaming forums are already calling this the best cloud-based gaming platform. The anticipated price of this subscription-based service is $10 monthly.
Subscription-based revenue is king in the tech-space today with a consistent stream of sales that grow quarter-over-quarter. This new topline driver may be just what Nvidia needs to take its share price to new highs.
Google (GOOGL - Free Report) and Microsoft (MSFT - Free Report) are working on their own cloud gaming services though I believe that Nvidia and its PC gaming community are niche enough not to lose much market share in their space.
Nvidia is amid a cyclical decline in the volatility semiconductor market. NVDA’s forward P/E has traded between 53x and 20x since the beginning of 2018, and is currently sitting at 24.55x. This stock could be trading at a discount, but these rocky equity market waters that we have been in gives me some short-term concerns about this high-beta stock. As a long-term play, I am confident that Nvidia will remain the world leader in GPU technology as it expands functionality across the tech-space.
In Thursday’s earnings report look for color in management’s plan to monetizing its cloud gaming platform, GeForce Now. Keep your eyes peeled for GPU demand pickup and new products in Nvidia’s pipeline that could spur demand.
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