Sussex County Technical School

Young Investors Society

M arch 1 6 , 20 1 8
Nvidia Corporation
R e s e a r c h An a l ys t s :
Consumer Electronics Headquarters: Santa Clara, CA
J e f f r e y B a s s e t t a n d W i l l ia m H e n d e r s h o t
S ym b o l : N V D A USA
Recommendation: BUY Current Price: $199.23 j bas s et t @s us s ex tec hs tu d en ts .c om
Target Price: $271.48 wh e nd ers ho t @s us s ex t ec hs t ud e nts .c om

COMPANY STATISTICS
Market Cap ($ Bn): $147.354
Company Overview
Nvidia Corporation showed the world the capability of the computer graphics when it created
Enterprise Value ($ Bn): $140.81
the graphics processing unit (GPU). Following the years Nvidia has been continuously
52-Week Range: $95.49 - raising the bar for computer graphics with devices ranging from desktops to smart phones.
$251.97 They hold over 1,100 U.S. patents.
Dividend Yield: 1.57%
Sales by Product: 59% Gaming, 12% Professional Visualization, 12% DataCenter, 7%
Free Cash Flow Yield: 99.70%
Automotive, 10% OEM & IP.
P/E (Current) 51.73x
Sales by Geography: 19.7% China, 7.88% Europe, 34.06% Taiwan, 16.89% United States,
P/Book (Current) 20.23x
7.87% Other Americas, and 13.61% Other Asia Pacific.
Return on Equity 46.05%
Market Position: Nvidia Corporation dominate the global GPU market. They have 72.8%
global market share, compared with AMD at 27%.
FIGURE 1: NVDA SALES BY
GEOGRAPHY 2015 Shareholders: Fidelity® Growth Company - 2.26% of shares (13,696,794 shares held)

Other
Asia China,
Pacific, 20%
Other
Americas,13.61%
8%
Europe,

INVESTMENT THESIS
United 8%
States,
17%

Taiwan ,
We rate The Nvidia Corporation (NVDA) as a Strong Buy with a Target Price of $271.48.
34% Our recommendation is driven by the following key points:

Source: Csi Market  One of the Strongest Brands Ever Built – Nvidia Corporation is an iconic brand. It
contains a rare combination of the factors that make an impenetrable brand: it is Multi-
generational with years of brand history, it reduces searching costs because of its
“The Way it’s meant to
consistency and availability throughout the world, it has a plethora of patients, it is
be played.” -Nvidia heavily trademarked and its image is widely known.
 Emerging Markets Offer Huge Growth Potential – Nvidia has always had a growing
GPU market from the gaming and work environment. Recently they have had
FIGURE 2: NVIDIA PRODUCT
SALES (BY MILLIONS) explosive growth as crypto miners want the best cards. The GPU’s are in sure demand
they are selling from anywhere from twenty to hundreds of dollars over MSRP.
7000 6424
 A Cash Generating Machine – Nvidia Corporations operates seamlessly and are
6000
always creating updated version of their hardware and software. They generated $and
5000
paid out $0.15 in dividends per share which is up 7.14% since last year.
4000
3000
2000 13.2x
1000
1 486

0
Emerging & Developed
Developing Countries
Countries
Source: Nvidia Annual
Reports
 Page 2 Nvidia Corporation

Industry Analysis
The largest GPU corporation in the world. In the gaming GPU market 85% of the
GPU’s are NVIDIA. They have continuously out sale the other GPU
companies. They are growing at an incredible rate, due to the incredible demand of
the gamer, cryptocurrency number, and workforce. This is because they are high
quality, best performance, and always updated.

Market Snapshot:
If you are not gaming a console, you’re likely gaming on an NVIDIA GPU. NVIDIA
has a commanding lead of the global gaming pc who choice to game on pc rather
than console. This means that NVIDIA is the way to go if you are gaming on a pc. In
the GPU market, they dominate with 71.5% of market share. NVIDIA is the dominant
market leader in nearly every market in the world. See top chart on page 2.

FIGURE 4: GLOBAL NON-ALCOHOLIC

MARKET SHARE %

30% Competitive Positioning

25% 24% Moat Analysis: Wide-Moat
Source of Competitive Protections:
20%
 Brand: NVIDIA has pushed itself to be the leader in the GPU market and
has let its competitors in the dust. This company is reliable, fair, and
15%
profitable. It is well known throughout the world. When you think of a GPU,
you think of the great quality cards that NVIDIA makes, like the Titan X.
10%
10%  Distribution: NVIDIA is an international company that sells to countries
around the world. To have a computer, you need a GPU. Therefore, anyone
5% in the world looking for one is very likely to go with NVIDIA. They distribute
5% their products to be safe and sound during travel and always arrive in mint
2% 2% 2% condition.
1% 1% 1%
0%  Economies of Scale: Being such a dominant market leader allows NVIDIA
to withstand any dry periods in sales or shifts in the economy. This
company is strong and is willing to take whatever the world throws at it.

Figure 6: Porter's Five Forces

Bargaining
Power of
Customers
Porter’s Five Forces:
5
4  Bargaining Power of Customers – Moderate (2 out of 5): NVIDIA sells
3 Intensity of millions of GPU’s a year, so there is little customer bargaining.
Barriers to 2 Competitive
Entry 1
0
Rivalry
 Intensity of Competitive Rivalry – Low (3 out of 5): There are handful
Threat of
Bargaining different GPU brands, all of the others are trying to play catch up with
Power of
Substitutes
Suppliers
NVIDIA.
 Bargaining Power of Suppliers – Insignificant (4 out of 5): NVIDIA meets
with its suppliers regularly and review business with them
LEGEND  Threat of Substitutes – Insignificant (3 out of 5): NVIDIA creates an
ecosystem with its streaming shadow play features, community, and game
0 High threat
1 Significant threat streaming service.
2 Moderate threat
3 Low threat  Barriers to Entry – HIGH (5 out of 5): NVIDIA has dominated so much of
4 Insignificant threat the GPU industry it’s incredibly hard for other companies to compete with
5 No threat such an established market.
 Nvidia Corporation Page 3

Year
Annual ($ Bn)
Revenue Annual %
Revenue Drivers
Below are the main drivers behind Nvidia’s revenue growth:
2007 3.77 0.0%
2008 4.14 9.8%  Emerging Markets: NVIDIA ranks first in various gaming communities
and platforms such as iCafe—a place that gives youngsters access to
2009 2.82 -31.9%
high-performance PCs—as well as Steam, which is a
2010 3.63 28.7% worldwide community of gamers. However, the key growth driver in
2011 3.93 8.3% emerging markets is the growing popularity of eSports. A professional
2012 4.12 4.8% gaming team, ESL, has its tournaments standardized on GeForce GPUs
(graphic processing units).
2013 4.09 -0.7%
2014 4.57 11.7%  Pricing Power: Because of the demand in the GPU market they are well
2015 4.86 6.3% off of the inflation rate of ~3% per year
2016 6.13 26.1%
 New Products: NVIDIA is never short on new products whether that is
2017 8.97 46.3%
from software innovation, new GPUs or collector’s edition.
2018E 11.12 2.0%
2019E 12.74 2.6%  Cryptocurrency/Block Chain Technology: The takeaway here is that
2020E 14.59 4.0% NVIDIA is already generating some solid revenue from the cryptocurrency
market. While Q3's percentage is a bit light, Q2's 6.7% can hardly be
10 YR Annual Growth 9.1% categorized as negligible -- and remember, it's understated by an
unknown amount. If fact, NVIDIA generated more revenue in Q2 from the
Figure 6: Nvidia Revenue crypto market than from its auto market platform, which accounted for
($ Bn) 6.4% of total revenue.

Financial Analysis
Below are the financial statements and key forecasts for Nvidia Corporation (NVDA).
KEY FINANCIALS 2014 2015 2016 2017 2018 2019E 2020E 2021E
$9.71 Income Statement ($ Bn)
$6.91 Revenue 4.13 4.68 5.01 6.91 9.71 11.12 12.73 14.58
$4.13 $4.68 $5.01 Cost of Sales 1.86 2.08 2.20 2.84 3.88 4.34 4.90 5.61
Gross Profit 2.27 2.60 2.81 4.07 5.83 6.78 7.83 8.96
EBITDA 0.73 0.76 0.75 1.91 3.21 2.85 3.31 3.83
2014 2015 2016 2017 2018
Operating Expenses 1.77 1.80 1.86 2.10 2.60 -4.44 -5.09 -5.79
Operating Profit 0.50 0.76 0.75 1.93 3.21 2.35 2.74 3.18
FIGURE 7: NVIDIA GROSS Net Income 0.44 0.63 0.61 1.67 3.05 2.00 2.36 2.77
MARGIN COMPARED TO PEERS Earnings per Share 0.68 0.97 0.94 2.57 4.69 3.08 3.62 4.26
Free Cash Flow 0.58 0.78 1.09 1.50 2.91 1.92 2.27 2.67
(2018)
Shares Outstanding 0.65 0.65 0.65 0.65 0.65 0.65 0.65 0.65
70.00% 62.25%60.00% Profitability
60.00% 50.00%48.25% Gross Margin 55.0% 55.6% 56.1% 58.9% 60.0% 61.0% 61.5% 61.5%
50.00% Operating Margin 12.0% 16.2% 14.9% 28.0% 33.1% 21.1% 21.5% 21.8%
40.00% Net Margin 10.7% 13.5% 12.3% 24.2% 31.4% 18.0% 18.5% 19.0%
30.00% Return of Equity (ROE) 9.9% 14.3% 13.7% 29.0% 40.8% 21.7% 20.8% 20.2%
20.00% 9.62% ROIC 7.2% 9.4% 9.1% 20.7% 42.1% 27.9% 33.3% 40.3%
10.00% 3.83%
Growth
0.00% Revenue Growth 13.3% 7.1% 37.9% 40.5% 14.5% 14.5% 14.5%
EPS Growth 43.3% -2.6% 172.0% 82.6% -34.4% 17.7% 17.6%
Liquidity
Net Debt / EBITDA 0.30 1.19 -0.78 0.11 -0.63 -1.30 -1.72 -2.09
Current Ratio 5.95 6.38 2.57 4.77 8.00 8.00 8.00 8.00
Debt to Equity 0.31 0.32 0.00 0.34 0.27 0.22 0.18 0.14
Dividend Payout Ratio 41.1% 29.5% 34.7% 15.6% 11.2% 12.0% 12.0% 12.0%

Figure 8 Nvidia ROE & Profit ($ Bn)

Profitability: Nvidia has exceptional profitability, as demonstrated by their Gross Margins (60%),
$3.50 50.00% 31.4% Net Margin and 5 Year Avg. ROE of 21.5%.
$3.00
40.00% Growth: While not a high-flying growth company, Coca-Cola has 10-year average growth of 7.7%,
$2.50
and is expected to grow revenues 14.5%/yr and earnings 17-18% per year going forward.
$2.00 30.00%
Liquidity: Nvidia is a cash generation machine, free cash flow is 30% of revenues, and the balance
$1.50 20.00%
sheet is in a healthy position with NDebt / EBITDA of .58x, and 8x Current ratio, which they pay out a
$1.00
10.00% healthy dividend and share buybacks.
$0.50
$0.00 0.00%
2014 2015 2016 2017 2018

Earnings ($ Bn) ROE

 Page 4 Nvidia Corporation

Figure 9: NVDA Target Price (2020)

Valuation
Net Income (Bn. $) 4,575,122,198
Our 2020 target price is $271.48 per share for Nvidia Corporation, which represents 36.3%
Total Shares 605,000,000 upside from the current share price. We arrived at our target price through the following
assumptions:
E.P.S. 7.56  We used a target multiple of 36x P/E, which is in line with current peer’s average.
Target Multiple (P/E) 36  We assumed a 2020 E.P.S. of $7.56/share.

Target Price (2017) 271.48 Valuation analysis: Nvidia Corporation is currently trading at a slight premium to its 5-year
average P/E ratio (37.7x) and a 42.4x EV/EBITDA and 20.3x P/Book. On a yield basis, the
Current Price 199.2 stock looks attractive at 3.2% div yield and 4.6% FCF yield

Upside Potential 36.3%

Investment Risks
Figure 10: Comparable Valuations The following are the main investment risks for Nvidia:

Current 5 Yr Avg Currency risk – With majority of the revenue coming from foreign countries. NVIDIA is
impacted negatively when counties with a weaker currency buy the products.
Company P/E P/E
Intel Corp 26.4 16.9 Cryptocurrency/Block Chain Technology- The takeaway here is that NVIDIA should
profit the most when new digital currencies emerge. This explains why the company's GPUs
Texas Instruments 30.9 22.6 have been considered great for mining Ethereum, a relatively new cryptocurrency, but no
NXP 19.3 16.9 longer ideal for mining the larger and more established bitcoin. This dynamic will continue to
repeat itself, Huang says.
Broadcom Limited 63.3 39.7
Acacia Communications 49.4 34.0
Advanced Micro 382.3 68.5 Management & Governance
Nvidia 39.6 31.8 NVIDIA’s is run by Jen-Hsun Huang and his 10,000 employees. Jensen has been CEO
Peers Avg 87.3 32.9 since April 1993.

Major Shareholders- There is no majority shareholders, most of the shares are free float
Relative to peers -54.6% -3.5% on the exchange (80.66%). Jen-Hsun Huang owns 0.26% of the shares outstanding.
52.84% of the available shares are institutionally owned.

Independence – The board of directors consists of 8 members