Shippensburg University Investment Management Program

Hold NVIDIA Corp. (NASDAQ: NVDA) 11.03.2020

Current Price Fair Value 52 Week Range

$501.36 $300 $180.68 - 589.07

Analyst: Valentina Alonso Key Stock Statistics Email: [email protected] Sector: Information Technology Revenue (TTM) $13.06B Stock Type: Large Growth Operating Margin (TTM) 28.56% Industry: Semiconductors and Semiconductors Equipment Market Cap: $309.697B Net Income (TTM) $3.39B

EPS (TTM) $5.44

Operating Cash Flow (TTM) $5.58B

Free Cash Flow (TTM) $3.67B

Return on Assets (TTM) 11.67%

Return on Equity (TTM) 27.94%

P/E $92.59

Company overview P/B $22.32

Nvidia is the leading designer of graphics processing units that P/S $23.29 enhance the experience on computing platforms. The firm's chips are used in a variety of end markets, including high-end PCs for gaming, P/FCF 44.22 data centers, and automotive infotainment systems. In recent years, the firm has broadened its focus from traditional PC graphics Beta (5-Year) 1.54 applications such as gaming to more complex and favorable Dividend Yield 0.13% opportunities, including artificial intelligence and autonomous driving, which leverage the high-performance capabilities of the Projected 5 Year Growth 17.44% firm's graphics processing units. (per annum)

Contents Executive Summary ...... 3 Company Overview ...... 4 Business Segments ...... 4 GPU ...... 4 Tegra Processor ...... 4 Markets ...... 5 Gaming ...... 5 Professional Visualization ...... 5 Data Center...... 5 Automotive ...... 5 Investment Thesis ...... 5 Information Technology sector ...... 5 Semiconductors and Semiconductors Equipment ...... 6 Fundamental Analysis ...... 6 Revenue ...... 6 Liquidity ...... 7 Profitability and Payout Policy ...... 7 Valuation of NVDA ...... 8 Dividend Discount Model (DDM) ...... 8 ...... 8 Recommendation ...... 8 Sources ...... 9 Appendix A ...... 10 Appendix b ...... 13 ...... 13

EXECUTIVE SUMMARY NVIDIA Corp. is a company in the Information Technology sector, specifically in the Semiconductor and Semiconductor Equipment industry. Its stock (NVDA) is traded on the NASDAQ. NVIDIA has been a fast-growing company over the past 10 years, in terms of revenue, EPS, and dividend payout. Its stock has outperformed the S&P 500 consistently over the past 10 years. The company’s stock has fallen around 35% from the end of Q2 fiscal 2019 to Q2 fiscal 2020 end due to a decline in revenues and adjusted net income margin. The company is slowly recuperating after this abrupt decline. GPU COMPANY OVERVIEW The GPU was initially used to simulate human NVIDIA Corporation was founded in 1993 and a year imagination, enabling the virtual worlds of video games later, the company partners with SGS Thomson and films. Today, it also simulates human intelligence, Microelectronics to manufacture the company's single- enabling a deeper understanding of the physical world. chip graphical-user interface accelerator. Their first product ever launched was the NV1, which was the PCI Its parallel processing capabilities, supported by up to card used in the first SEGA 3D game. thousands of computing cores, are essential to running deep learning algorithms. This form of AI, in which BUSINESS SEGMENTS software writes itself by learning from data, can serve as the brain of computers, robots and self-driving cars NVIDIA Corporation operates as a visual computing that can perceive and understand the world. GPU- company worldwide. It operates in two segments, GPU powered deep learning continues to be adopted by and Tegra Processor. The GPU segment offers thousands of enterprises to deliver services and processors, which include GeForce for PC gaming and features that would have been impossible with mainstream PCs; GeForce NOW for cloud-based traditional coding. gaming; Quadro for design professionals working in computer-aided design, video editing, special effects, NVIDIA’s GPU product brands are aimed at specialized and other creative applications; Tesla for artificial markets including GeForce for gamers; Quadro for intelligence (AI) utilizing deep learning, accelerated designers; Tesla and DGX for AI data scientists and big computing, and general purpose computing; GRID, data researchers; and GRID for cloud-based visual which provides power of NVIDIA graphics through the computing users. cloud and datacenters; DGX for AI scientists, researchers, and developers; and EGX for accelerated GPU business revenue decreased by 7% in fiscal year AI computing at the edge. The Tegra Processor 2020 compared to fiscal year 2019, which reflects a segment provides processors comprising SHIELD decline in GPUs sold for gaming. GeForce GPU devices and services designed to harness the power of product sales for gaming decreased by 10%, reflecting mobile-cloud to revolutionize home entertainment, AI, lower sales of GeForce desktop GPUs and SoCs for and gaming; AGX, a power-efficient AI computing gaming platforms, partially offset by growth in GeForce platform for intelligent edge devices; DRIVE AGX for notebook GPUs. Revenue from Quadro GPUs for self-driving vehicles; Clara AGX for medical instruments; professional visualization increased by 7%, reflecting and Jetson AGX for robotics and other embedded use. strength in desktop and notebook workstations. Data The company's products are used in gaming, Center revenue, which includes Tesla, GRID and DGX, professional visualization, datacenter, and automotive increased by 2%, driven by vertical industry growth markets. NVIDIA Corporation sells its products to partially offset by lower hyperscale sales. original equipment manufacturers, original device manufacturers, system builders, add-in board Tegra Processor manufacturers, retailers/distributors, Internet and cloud Tegra processors are primarily designed to enable service providers, automotive manufacturers and tier-1 branded platforms - AGX and SHIELD. NVIDIA’s Tegra automotive suppliers, mapping companies, start-ups, brand incorporates GPUs and multi-core CPUs to drive and other ecosystem participants. supercomputing for autonomous robots, drones, and cars, as well as for game consoles and mobile gaming

and entertainment devices.

NVIDIA announced an Automotive partnership with Toyota Research Institute-Advanced Development to , medical instrumentation, and aerospace. Digital develop, train and validate self-driving vehicles; unveiled content creation includes professional video editing and postproduction, special effects for films, and the NVIDIA DRIVE AP2X automated driving solution, encompassing DRIVE AutoPilot software, DRIVE AGX broadcast-television graphics. and DRIVE validation tools; introduced the NVIDIA DRIVE AV Safety Force Field to enable safe, Data Center comfortable driving experiences; and announced The NVIDIA accelerated computing platform addresses availability of the NVIDIA DRIVE Constellation AI and HPC applications. The platform consists of autonomous vehicle simulation platform. energy efficient GPUs, CUDA programming language, specific libraries such as cuDNN and TensorRT, and Tegra Processor business revenue decreased by 6% in innovations such as NVLink and NVSwitch fiscal year 2020 compared to fiscal year 2019. This was interconnects, which enable application scalability driven by a decline in revenue from SoCs for gaming across multiple GPUs. platforms, which was partially offset by an increase of 9% in Automotive revenue, reflecting growth in AI Automotive cockpit solutions and development services agreements. NVIDIA’s Automotive market is comprised of cockpit infotainment solutions, AV platforms, and associated MARKETS development agreements. Leveraging their technology leadership in AI and building on their long-standing NVIDIA specializes in markets in which GPU-based automotive relationships, they deliver a full solution for visual computing and accelerated computing platforms the AV market under the DRIVE brand. NVIDIA has can provide tremendous throughput for applications. demonstrated multiple applications of AI within the car. These platforms incorporate processors, systems AI can drive the car itself as a pilot, in either partial or software, programmable algorithms, systems, and fully autonomous mode. AI can also be a co-pilot, services to deliver value that is unique in the assisting the human driver in creating a safer driving marketplace. NVIDIA has created platforms that address experience. four large markets: Gaming, Professional Visualization, Data Center, and Automotive.

Gaming Computer gaming is the largest entertainment industry. Many factors propel computer gaming’s growth, including new high production value games and franchises, the rise of competitive online gaming, *Revenue by market eSports, and the rise of virtual and augmented reality. INVESTMENT THESIS Professional Visualization The following portion of the report will focus on an NVIDIA works closely with independent software overview of NVDA’s stock, containing key economic vendors to optimize their offerings for NVIDIA GPUs. drivers of the sector, industry, and specific stock. It also Their GPU computing solutions enhance productivity contains a fundamental analysis where NVIDIA Corp. and introduce new capabilities for critical parts of the will be analyses based on revenue, profitability & workflow for such major industries as automotive, media payout policy, and liquidity. and entertainment, architectural engineering, oil and gas, and medical imaging. Information Technology sector

Visual computing is vital to productivity in many The information technology (IT) sector consists of a environments, including design and manufacturing and wide array of companies that develop software in digital content creation. Design and various fields such as the Internet, applications, manufacturing include computer-aided design, systems, databases management and/or home architectural design, consumer-products manufacturing entertainment, companies that manufacture hardware and equipment, companies that manufacture semiconductors

semiconductors and its equipment, and companies that Semiconductors and Semiconductors provide information technology consulting and services. Equipment

The graph above compares the sector’s performance FUNDAMENTAL ANALYSIS over the past 5 years to the S&P 500. This shows how the information technology sector is a cyclical sector, it This following section of the report will analyze NVIDIA mirrors the performance of the market. Over the past 5 Corp. through several financial metrics. These metrics years, the information technology sector has been include revenue, profitability & payout policy, and outperforming the S&P 500. liquidity. NVIDIA’s income statement, balance sheet, and statement of cash flows can be found in Appendix A.

Revenue

The chart above shows the business cycle of the IT sector. The business cycle approach offers considerable potential for taking advantage of relative sector performance opportunities. The U.S. is currently projected to be in the recession stage as COVID-19 ravages the economy

During the early cycle phase, this sector is economically sensitive, it has been boosted by shifts from recession to recovery. IT Stocks typically have been aided by renewed expectations for consumer and corporate spending strength. It has had healthy average and median relative performance, though their lower hit rates are due in part to the diversity of their underlying *NVDA Revenue Growth Metrics Since 2016 industries. During the mid-cycle, information technology has been the best performer of all the sectors during this phase, having certain industries—such as semiconductors and hardware— that typically pick up TTM 1/2020 1/2019 1/2018 1/2017 momentum once companies gain more confidence in the stability of an economic recovery and are more Revenue $13.065 $10.918 $11.716 $9.714 $6.910 B B B B B willing to make capital expenditures. During the late cycle, IT stock have lagged most often, tending to suffer Change 2.04% -6.81% 20.61% 40.58% - the most during this phase, as inflationary pressures crimp profit margins and investors move away from the most economically sensitive areas. During recessions, IT typically underperforms the broader market during this phase. .

From 2017 to the beginning of 2020, NVIDIA’s revenue . has increased over 58%. From 2019 to 2020 there was a slight decline of 6.8%. Since fiscal Q2 2019, the company has seen its stock price decline by around 35% due to a decline in revenue and adjusted net income margin. The decline in revenue was primarily led by the company’s GPU segment, which refers to revenue from Nvidia’s graphic processing units used in PCs and data centers. For Q1 of 2021, the company announced revenue of $3.08 billion up 39 percent from $2.22 billion a year earlier, and down 1 percent from $3.11 billion in the previous quarter. In Q2 2021, NVIDIA reported record revenue of $3.87 billion, up 50 percent from $2.58 billion a year earlier, and up 26 percent from $3.08 billion in the previous quarter. Revenue growth is a strong predictor of the Company's future success. The graph above shows the company’s dividend Profitability and Payout Policy payments by quarter. NVIDIA pays an annual dividend of $0.64 per share, with a dividend yield of 0.13%. NVDA's most recent quarterly dividend payment was made to shareholders of record on Thursday, September 24. The company has grown its dividend for the last 1 consecutive year and is increasing its dividend by an average of 9.69% each year. NVIDIA pays out 13.94% of its earnings out as a dividend.

Liquidity 1/2020 1/2019 1/2018 1/2017

Current 7.67 7.94 8.03 4.77 Ratio

TTM 1/2020 1/2019 1/2018 1/2017 Quick 7.04 7.26 7.26 4.26 Ratio Net $3.389 $2.796M $4.141M $3.047M $1.666M Profit M Cash 6.11 6.16 6.16 3.8 Ratio Change 23.6% -32.48% 35.9% 82.89% 171.33%

ROE 27.94% 22.91% 44.3% 40.78% 28.91% The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those ROA 11.67% 16.15% 31.15% 27.11% 16.93% due within one year. It tells investors and analysts how a company can maximize the current assets on its NVIDIA’s net profit had a huge increase of 171.33% from balance sheet to satisfy its current debt and other 2016 to 2017. From 2018 to 2019, NVIDIA Corp.’s net payables. NVIDIA Corp.’s current ratio deteriorated from profit margin ratio improved but then deteriorated 2018 to 2019 and from 2019 to 2020. Because the significantly from 2019 to 2020. TTM net profit id current ratio is greater than one, the company has the $3.389B, which is 23.6% higher than the previous year. financial resources to remain solvent in the short-term. Both its ROE and ROA improved from 2018 to 2019 but Its quick ratio and cash ratio also declined from 2018 to then deteriorated significantly from 2019 to 2020. 2019 but then improved from 2019 to 2020.

RECOMMENDATION VALUATION OF NVDA The valuation of NVDA will be determined primarily NVIDIA’s revenue and stock price has been declining in through a dividend discount model. This specific the past years, but the company is benefiting from rising dividend discount model will be a 2-stage growth demand for computer chips amid the COVID-19 model. The outcome of this model will be reinforced pandemic. The spread of the virus has induced a surge through a technical analysis evaluation using in online activity, including remote work and study as several different indicators. well as video gaming. The increased demand for computing power has benefited Nvidia's chip sales and Dividend Discount Model (DDM) is the reason for the increase in EPS and revenue. Based on my research, I expect substantial increases This model is designed to value the equity in a firm, in adjusted earnings per share (EPS) and revenue. with two stages of growth, an initial period of higher growth and a subsequent period of stable growth. The fair value is $300, and the current price is $501, With this model we have 3 assumptions, The firm is which means the stock is overvalued but its beta is 1.54 expected to grow at a higher growth rate in the first meaning that the stock is volatile in relation to the period, The growth rate will drop at the end of the market. first period to the stable growth rate, The dividend payout ratio is consistent with the expected growth NVIDIA announced that they will acquire ARM for $40 billion, which foresees good potential revenue in the rate. data center area.

NVDA will continue to recover and we should hold the

stock. The table above shows the estimated dividends for the future 5 years. I believe that the company will grow at a higher growth rate for the following 5 years and after that, the growth rate will drop and be stable around 7% per year. The current earnings per share are $5.44, which declines around %1 from the previous year’s EPS.

SOURCES https://eresearch.fidelity.com/eresearch/goto/evaluate/snapshot.jhtml?symbols=NVDA&type=sq

-NavBar https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=l earn§or=45 https://finance.yahoo.com/quote/NVDA/financials?p=NVDA https://www.nvidia.com/en-us/about-nvidia/corporate-timeline/

NVIDIA’s 2020 Annual report https://www.nvidia.com/en-us/csr/our-response-to-covid-19/ https://www.bloomberg.com/profile/company/NVDA:US https://www.macrotrends.net/stocks/charts/NVDA/nvidia/eps-earnings-per-share-diluted https://www.forbes.com/sites/greatspeculations/2019/08/16/what-factors-led-to-a-35-decline-in- nvidias-stock-price-over-the-last-12-months/?sh=1c76524078ec https://www.technavio.com/report/semiconductor-market-industry- analysis?utm_source=blog&utm_medium=report&utm_campaign=blogtoreport https://www.marketbeat.com/stocks/NASDAQ/NVDA/dividend/#:~:text=NVIDIA%20(NASDAQ%3

ANVDA)%20Dividend,a%20dividend%20yield%20of%200.13%25.

APPENDIX A Income Statement

Balance Sheet

Statement of Cash Flows

APPENDIX B