How Sustainable Is NVIDIA's Growth Momentum?
- By Sangara Narayanan
NVIDIA's (NVDA) growth in the last 12 months is jaw dropping, to say the least. Its quarterly growth rate has been speeding up since the fourth quarter of the last fiscal. If you look at its guidance numbers, NVIDIA is clearly expecting the momentum to accelerate in the second half of the current fiscal.
The stock has been on fire due to NVIDIA's astonishing top line results, and the company has returned more than 140% in the last year.
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The intrinsic value of NVDA
NVIDIA's top line results are dependent on three factors: How well it does in the gaming segment, which brings in more than half its top-line numbers; how much growth it can record in the datacenter segment, which is growing fast due to the increasing need for hyperscale computing power; and how the growth in the automotive segment, fueled by improvement in connected car and autonomous driving technology, plays out.
The first of these - gaming - is a mature yet growing industry that's going to be around for a long time. The gaming industry needs raw computing power and stunning visuals, and NVIDIA long ago positioned itself as the go-to player for the gaming market. The global gaming market is forecast to grow at 6.6% CAGR through 2019. As the world kept moving toward a mobile device-based world, PC sales consequently shrunk at an alarming pace. But fortunately for NVIDIA, serious gamers cannot and will not be happy playing on a smartphone, tablet or anything less than a high-spec system.
It is admittedly a small niche but one that has held its ground so far and will continue to do so in the future as well. As the visual aspects of gaming keep improving, the need for high-end graphics card and gaming gear only grows stronger each year, and NVIDIA is the performance leader in that market. This allows its PC-based income from gaming to keep expanding while the likes of Microsoft (MSFT) and Intel (INTC) continue to bear the brunt of an increasingly mobile world.
"The U.S. video game industry will grow 30% from $15 billion in 2014 to $19.6 billion in 2019, according to a broad media and entertainment forecast by accounting firm PwC. That's a mature compound annual growth rate of 5.5%." - Venturebeat
So it's not really a surprise, then, that NVIDIA's gaming segment revenues have grown from $527 million in the third quarter of 2015 to $781 million by the end of the second quarter of the current fiscal. The gaming segment accounted for nearly 57% of its revenue in the second quarter; with forecasts and market conditions in its favor, NVIDIA's growth story should continue for at least the next few years because the competition has not yet caught up with it.
If we look at things from a long-term perspective, things look even better for NVIDIA. The growth of cloud-based delivery systems has already started disrupting the traditional gaming market. Though that growth will accelerate things on the datacenter side instead of the gaming segment for NVIDIA, the company's positioning in both markets will ensure long-term security and growth.
"Technavio's market research analyst predicts the global cloud gaming market to grow exponentially at a CAGR of more than 29% during the forecast period (2016-2020).
"Reduction in the time for accessing games and cost of owning games is the primary growth driver for this market.
"Unlike gaming consoles, cloud gaming does not require physical copies, updates and backups of games as they are stored on a cloud platform. This substantially decreases the overall cost of gaming. Also, cloud gaming does not require downloading and can be played almost instantly."
Disclosure: I have no positions in the stocks mentioned above and no intention to initiate positions in the next 72 hours.
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This article first appeared on GuruFocus.
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The intrinsic value of NVDA
