NVIDIA: Should you Buy into the Rally?

The dimming sales of PC market have taken a toll on many stocks, however NVIDIA has managed to steer clear of this trend as the stock is up close to 40% year-to-date. NVIDIA has a nicely diversified its business and has multiple revenue streams that have allowed the company to perform strongly despite the falling PC sales.

The company’s recent quarterly report paints a great picture of its business. In Q2FY16, NVIDIA reported earnings per share of $0.34, $0.13 greater than the consensus estimate of $0.21. Revenue for the quarter came in at $1.15 billion, $0.14 billion better than what the analysts were modelling.

In terms of segment, Tegra processor revenue was $128 million, decreased 19% from a year prior.
GPU revenue was $959 million, an upsurge of 9% y-o-y, whereas gaming revenue rose 59% to $661 million.

On the other hand, strategy for creating a platform for gaming, HPC and cloud, enterprise graphics and virtualization, and automotive are the company’s main platforms that contributed around 85% of its revenue, up from 68% a year before. The company’s growth was chiefly driven by its GTX gaming platform’s nonstop momentum, escalated automotive sales, and the gaming markets underlying strengths.

High-Performance Computing

NVIDIA with its graphic processor is belligerently focused on targeting the high-performance computing market. Nowadays, the company is offering high-performance co-processors to manage severe computational tasks. These new co-processors are very much similar to the graphics chips sold by the company in the gaming market. So it makes quite easy for the company to grasp operating leverage by selling such products.

Moreover, gross profit margin and average selling prices percentages are fairly superior in the high-performance computing market. According to a report from the company, it was clearly detailed that the products that it sells in the high-performance computing account for even higher gross profit margin than its corporate average.

On the flipside

NVIDIA recently launched its most awaited cloud gaming service, GeForce NOW @ $7.99 per month. This service offers members instant access to more than 50 PC games. The only problem with this amazing feature is that it is only available through NVIDIA’s SHIELD family of devices. Therefore, to use this service one must own any of the NVIDIA’s $ $299 SHIELD portable handhelds.

Till now, NVIDIA’s SHIELD devices haven’t been much popular. Although each piece of SHIELD hardware has its advantages, the fact is that NVIDIA has sold very few SHEILD devices. So, in my opinion, the company should expand GeForce NOW to other platforms so as to reap the complete benefits of a great service. I truly believe this was a very good initiative NVIDIA and limiting to SHEILD will just harm its true potential.

Conclusion

Despite the recent rally, I think NVIDIA is attractively priced. The company has nicely diversified its business model and hasn’t struggled despite the falling PC sales. Given the company’s presence in the gaming and automobile industry, I expect NVIDIA to continue moving higher. I can see the stock hitting $32 in the next few months, making it an ideal pick in the present market.
Published on Oct 25, 2015
By Akshansh Gandhi

Copyrighted 2016. Content published with author's permission.

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