Nvidia (NVDA) - Get NVIDIA Corporation Report has not been spared these troublesome times, with its valuation falling by more than 30% this past month. However, this is a very high-quality company with strong cash flows that has right now been put on sale. Looking ahead, there are plenty of reasons to be bullish on this investment. Here's why:
Very Well-Positioned Operations
Over the next several months or possibly longer, as the world adapts to extraordinary times with increased working from home, more screen time, and more e-gaming, the demand for high-performance laptops is going to soar.
However, picking out the biggest winners will be very challenging as investors have already priced the likely winners higher. But arguably, a more realistic and rewarding approach to take is to broaden one’s investment horizon.
Looking out to the next two years, stocks are very likely to be trading higher than they are at present. Indeed, today’s prices may not be the absolute bottom of this downturn, but the point of investing is not to time the bottom: it's to buy low and sell higher.
Admittedly, there’s plenty of uncertainty of how coronavirus will impact the global economy and stocks are going to continue to be highly volatile with investors being driven by emotions rather than facts. Amidst all this, Nvidia is a stand-out high-quality company that is worth considering.
Highly Profitable Enterprise
As Nvidia increases its exposure to value-added products and software services, its GAAP gross margins continuing to expand over time. Specifically, over the past four years, its GAAP gross margin has gone from 58.8% to 62.0%.
Furthermore, especially impressive is that Nvidia’s fastest-growing segment, its datacenter segment, is a higher margin contributor to the companies gross margin, particularly when compared with its gaming segment.
Presently, Nvidia’s gaming segment still commands approximately 50% of its total revenues. However, datacenter revenues are rapidly picking up momentum and as of the most recent quarter, the group now generates close to a 30% of Nvidia’s total revenue, with sequential figures reporting an increase of 33%.
Valuation - Large Margin of Safety
A mistake many investors make is believing that the management of some companies is great when they're really average with no real skin in the game.
The same can not be said here: Nvidia’s CEO Jen-Hsun Huang has expertly lead Nvidia and grown it into a formidable enterprise, and yet he still owns approximately 3.9% of the company, thus firmly aligning his interest with shareholders.
With close to $4 billion of company stock, shareholders are getting a highly motivated founder and experienced CEO to navigate the company through these uncertain times, ready to capitalize on high return on investment opportunities.
Compared with the past four years, Nvidia’s exposure to high-margin software revenue has gone from less than half to more than half. Similarly, its leveraged operating business model has seen its non-GAAP gross margins expand from 22% in fiscal 2017 to 38% in fiscal 2020.
Consequently, Nvidia’s total revenues are estimated to grow approximately 20% to 22% in fiscal 2021 (calendar year 2020). This means that investors are paying less than 27 times trailing cash flows from operations for a company that is incredibly well-positioned to benefit over the next two, three, and five years ahead, and one that is continuously diversifying its operations.
The Bottom Line
Nvidia’s near-term results are likely to have some pluses and minuses. However, when we start to see the actual impact of the coronavirus, the bad news will be out, and the uncertainty lifted. Looking further out than the next twelve months, Nvidia’s valuation today is cheaply valued.