NVIDIA (NASDAQ: NVDA)
Hello readers! Case in point:
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Skip this part if you're just interested in the analysis
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Some of you might have heard of NVIDIA corporation, if you don't, you probably should. I recently become vested in Nvidia and while it might not seem much, this moment bears a huge significance in my investing journey.
When I bought my first stock 4 years ago, I knew absolutely nothing about investing, it was a rather thrilling moment - I am a shareholder! From then on I became much more interested in financials, clinging on to the principles of Benjamin Graham and Warren Buffett amidst the turbulent times of the China stock market crash, Brexit, and some other less volatile events.
But this isn't really a post for that so basically, I have always been strongly rooted in value investing. This means that I seek out stocks that have been:
-Unjustly oversold, usually due to a one-time adverse event like the Swiber incident with DBS
-Walloped together with the market, usually due to regional or even global incidents like the China stock market crash & Brexit
-Any other reasons a supposedly stable company falling in share prices
Note that these 3 factors are highly judgemental and I probably make the wrong decisions more times than I'd like, but it's better than blindly tossing your cash. Taking these factors into consideration, it it then subjected to my personal criteria of COMPETITIVE DURABLE ADVANTAGE, as mentioned by WB. Typically I would also buy into companies that pay a fair yield of dividends since given the volatility of the stock market, returns from capital gains doesn't seems that reliable.
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Alas, comes NVIDIA.
It is probably one of the most overpriced stock I have ever purchased, with a P/E ratio of ~70+ at the time of purchase. Its dividends is next to nothing (partly due to the overvaluation) and it is in an industry that didn't exactly exist a few years back.
Frankly speaking this is a investment which I barely did any qualitative analysis in. I did not dig 10 years of annual reports, plan CAGRs, compare ratios, charts or do outlook projections etc. This is a purchase based purely off an educated guess. But wait! Before you call this article out on being a load of b/s. The point here is in 'educated'. Here are the reasons that led me to the decision:
1) NVDA's market share.
At a market cap of about $130 billion, and holding a market share of over 70% among the fields they're competing in (vs AMD in GPU), it is extremely difficult if not impossible to shake the hold they have. Not to mention the vast intellectual capital putting them at the forefront of technology in various segments, be it graphic cards, AI, deep learning, or other emerging technologies, they have the smart and the money to stand at the top.
There is always a price premium in purchasing market leaders (see Amazon, Apple, Singtel, etc.) but these premiums shouldn't be viewed as overvaluation. The fact that they are market leaders holds real economic benefits compared to being a lesser player.
They have serious brand recognition. See Apple. It is nearly a given or assumption that people have that Apple = Quality. Regardless of whether they live up to the expectations or not (they do), having a recognized brand will save a ton on marketing costs. Consumers are also more willing to accept new ideas you churn out (No audio jack, hello?) instead of criticising it to the ground. After all, a product is only as good as its sales potential. In the case of Nvidia, Geforce GTX cards are well known in the market to a point of near monopoly, with its only competitor being Radeon. Nvidia = good.
2) They are the market movers
Is it extremely unlikely that any other company (save for AMD) that has the capital requirements and technological expertise to take on Nvidia in its research for better graphic cards and innovations. Coming at a blend of physics, electrical engineering, computer sciences and various other fields. It is by no means cheap to gather a team that is capable of competition in this game.
Given that, Nvidia is in no hurry to constantly innovate products to beat their competitors, as seen in the smartphone industry. Their products are also not easily imitable by China as less complex products will be almost immediately replicated and sold at dirt cheap prices. There is essentially very little competition to squeeze Nvidia's margins. In a duopoly. it doesn't necessarily makes sense for Nvidia and AMD to be at each other's throats since a graphic card is a rather long-lasting object and consumers are unlikely to switch simply because one product offers slightly better performance than the other. If anything, brand loyalty is extremely prevalent in the gaming sector and some people SWEARS by their brands.
No issue of perfect competition = profits!
3) Sweet corporate governance
What better way to say you believe in the company than owning a chunk of their own shares? The 3 top shareholders are Nvidia's own CEO, CFO and VP.
A company with poor management will not only die slow, but it will hurt the whole time while they're dying. A weak management will result in inefficient decisions, sluggish workers, hiring costs and generally a lot of unwanted expenses. A unhappy worker that takes sick leaves more than usual? A manager that feels his opinions aren't respected and decides to just not try anymore? These whittles down profits from within, and it is something that can never be resolved in a short time frame. Bad, very bad.
I've always felt that Nvidia is a pretty cool company, seems like I am right. There was once where Nvidia actually told their outsourced cleaning company that they are paid too low, and actually told them to rebid their prices so that Nvidia can pay them more. That just immediately sold it for me.
https://www.investopedia.com/articles/insights/120816/top-3-shareholders-nvidia-corporation-nvda.asp
4) Sustainability and obsolescence
I definitely feel that the products offered by Nvidia are not going to be obsolete anytime soon. Yes of course the older generation of cards will be useless once the newer ones are released, but as discussed above, they are they ones releasing them anyway. With the R&D capability, I believe that they would be able to maintain their product demand for a long time to come. Self driving cars? On it. Deep learning AI? On it too. They can adapt to the needs of society, and at some point even giving more than what people actually think they need.
Gamers will always be in demand of graphic cards. Enthusiasts will constantly build the highest end PCs even though they have perfectly working ones. Games are constantly demanding more and more performance, as with the recent release of VR. There's no issue with product obsolescence as that of DVDs, VCD players, etc. With the addition of cryptocurrency and blockchain coming into play, these technologies should be even more in demand in the future.
5) They do STILL have good financials
-Trailing P/E of 51.11. Very overpriced compared to the dow jones average of 16? But reasonable I guess.
-Profit Margin of 31.37%. This is a very good value, earning over 31 cents per 1 dollar of sales. As mentioned by the above discussions.
-Quarterly Revenue Growth (yoy) of 34.00%. No company that large ever grows that fast. Seriously. This is only possible given the speed as which the world develops as of late. They are squeezed for supply.
Conclusion
There's potential for this to grow big in the long run. At the point the markets are right now the downside risks are pretty prevalent and Nvidia, being a tech company and one of the most meteoric stocks, tend to experience some regression.