NVIDIA: Gaming and Data Growth Are Long-Term Catalysts
In the past one year, NVIDIA (NVDA) shares have gained 16%, outperforming the NASDAQ Composite index. This is not surprising, as NVIDIA is tapping growth in a number of areas, and this has enabled it to improve its financial performance on a consistent basis. For example, in the second quarter, NVIDIA's revenue was up 5% year-over-year to $1.15 billion, and the company expects more growth going forward as its third-quarter revenue is anticipated to be $1.18 billion.
The fact that NVIDIA is continuously improving its financial performance is not surprising, and it is likely that the company will continue getting better in the long run.
Gaming will be the key to growth
NVIDIA is performing well despite a challenging macro and semiconductor market, primarily due to its strategy of developing unique platforms for automotive, high-performance computing, cloud, gaming, enterprise graphics, and virtualization. In fact, during the second quarter, these four platforms contributed to 85% of its revenue, an increase from 68% contributed last year.
Looking ahead, there is a strong possibility that these segments will continue growing. This is because the international gaming market is expanding at an accelerated pace, with sales of PC gaming systems for this year forecasted at $28 billion and growing continuously. In fact, currently there are more than 80 million people playing multiplayer online battle arena games, which is double the number of gamers compared to the last three years.
Thus, NVIDIA will continue seeing strong growth in the gaming segment, which will lead to demand for its graphics processing units. In order to tap growth in this segment, NVIDIA is focusing on the sales of its flagship GeForce GTX 980 Ti GPU, which is driving virtual reality and 4K gaming.
As a result of demand in this market, NVIDIA has increased the number of users of its GeForce Experience PC gaming platform to 65 million from 38 million last year. Going forward, it should attract more users to the platform after releasing the NVIDIA SHIELD Android TV device, the smart TV platform, which interfaces TVs to key entertainment apps and services. The chipmaker is also witnessing solid momentum for NVIDIA GRID graphics virtualization, which grew its customer base nearly 3 times to more than 300 enterprises from last year.
Other key segments
But, the good thing is that gaming is not the only segment that is contributing to NVIDIA's growth. The chipmaker is in partnership with more than 50 companies that are leveraging the NVIDIA DRIVE PX platform to implement self-driving cars. Further, the company's GPU-accelerated data center platform is growing steadily and finding application in key computing efforts such as high performance computing applications including, deep learning and cloud-based virtualization.
In fact, NVIDIA is actively working with more than 3,300 companies discovering the usage of deep knowledge in verticals such as translation capabilities, image analysis, and speech recognition. It recently launched cuDNN 3.0, which enhances the performance of deep knowledge training on GPUs and allows the training of highly complex neural networks. As a result of the services that it provides, cuDNN has been downloaded by over 9,000 researchers globally till date.
Shareholder-friendly and an attractive valuation
NVIDIA is a shareholder-friendly company. Last quarter, the company successfully executed $400 million in share buybacks and paid $52 million in cash dividends, returning a total of approximately $452 million of capital to its shareholders. All in all, during the first half of the year, NVIDIA has paid back a total of $551 million to its shareholders.
In addition, NVIDIA's valuation is also quite attractive. The stock has a trailing P/E ratio of 23.6 and a forward P/E ratio of 19. This means that NVIDIA will be able to grow its earnings going forward. Additionally, the stock is cheaper than the industry average on a forward P/E basis, which makes it a good investment.
Apart from having strong end-market prospects, NVIDIA is well-positioned from a fundamental perspective as well. As such, I think investors should remain invested in the company for the long run as it can deliver more upside after doing well in the past year.