June 14, 2017    5 minute read

Investing Opportunities: Is Nvidia a Strong Buy or a Strong Sell?

The Rise of Machines    June 14, 2017    5 minute read

Investing Opportunities: Is Nvidia a Strong Buy or a Strong Sell?

Nvidia has come a long way since it was first funded in 1993 by Jensen Huang, Chris Malachowsky, and Curtis Priem. The company has achieved multiple milestones throughout its life: the invention of the GPU (graphical processing unit) in 1999, being named the company of the year by Forbes in 2007, launching the Tegra Mobile processor in 2008 and powering the AI revolution with their Pascal technology in 2016.

All these achievements have clearly paid off for Nvidia with NVDA shares up more than 850% over the past three years. Now the question investors are really asking themselves is, will it go even higher? Or will it plummet? As in every discussion about anything in life, there are two sides of the same coin. In investing, this is known as the bullish side and the bearish side.

Let’s begin by dissecting the arguments of the bearish side.

The Bearish Proponents of NVDA

The analysts that are feeling bearish on Nvidia have found that the company’s revenues are highly dependent on the gaming product cycle, as it earns 59% of its revenues from gaming alone. Hence, Nvidia as a company doesn’t really have a diversified product portfolio. This is always a risk to any company, in any sector.

In addition to this, the bearish proponents claim that Nvidia operates in a niche market, and they see in Advanced Micro Devices a worthy opponent that could bring the fight to Nvidia. This competition will eventually drive prices down, resulting in less profits.

Furthermore, AMD is set to launch its next-generation Vega GPU by June 2017, which would compete with Nvidia’s Pascal GPU in both the gaming and AI industries. The performance of AMD for the past three years is also evident in its stock, growing as much as 200%. This performance is somewhat justified to be persistent, since Apple announced recently that its newest Macs will, in fact, be equipped with AMD technology. This is one of the many examples that show that AMD is perfectly capable of taking Nvidia’s market share. Additionally, Nvidia is set to face competition from other companies as well. More specifically in the data centre industry as Intel moves aggressively to develop AI (artificial intelligence) technology. Because of Intel’s resources, they can easily start a price war with Nvidia in the AI sector.

This rising competition seems to be Nvidia’s number one concern, according to the bearish sentiment.

The Bullish Proponents of NVDA

Some other opinions seem to point to investors having plenty of upside potential in NVDA. In fact, Citigroup analysts believe Nvidia stock may still double. The whole idea behind the bullish sentiment is that Nvidia is transitioning from a PC GPU providing company to an artificial intelligence company. This new AI market could benefit Nvidia tremendously.

Some key figures from the AI market are listed below. These help to understand the potential benefits Nvidia may draw from this market. BCC a US-based research company estimates a growth rate averaging 22% in the AI sector combine by 2024. Below, the different growth rates for the Autonomous Robots sector (Heavily dependent on AI technology) can be appreciated.

The next chart shows a forecast for cumulative global artificial intelligence revenue from 2016 to 2025, illustrating how the market for artificial intelligence is projected to continue rising as technology becomes increasingly advanced.

The proponents of the bullish sentiment towards Nvidia claim that the company is starting to look a lot like Intel did right before the chip revolution during which Intel’s rally continued on for five or six years until the tech crash. This gave Intel one of the greatest runs of all time for a large tech company as evidenced by the graph below

Source: StockCharts.com and the Reformed Broker.

If this hypothetical scenario unfolds, but with Nvidia as the protagonist, there is no doubt the bullish proponents of the stock would be right in the long term.

In Conclusion: A Strong Buy or Strong Sell?

To be honest, both sides can be wrong, and they can both be right. Why? Because the market is like that…

Nvidia could indeed be the Intel of the AI market which is slated to become the “next big thing”, like data and social networks are today. Hence, Nvidia would soar over a time horizon of 5-10 years. However, if something else replaces the AI market as the next hot technology field, then Nvidia won’t necessarily achieve the glory it is expected to accomplish. Additionally, Intel itself might also be the next Intel of the AI market or AMD for that matter.

The bottom line is that Nvidia’s success or demise is dependent on the company’s effectiveness alone and how it will react and adapt to new market trends and technologies. Depending on what investment goals are on the table and what the time horizon is, Nvidia comes with large opportunities with, unsurprisingly, high risks.

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