Is There Too Much Hype in NVIDIA?

Is There Too Much Hype in NVIDIA?

NVIDIA NVDA share prices have appreciated 51.3% this year when the S&P 500 managed a mere 8.5%. So it’s reasonable to feel at least a little concerned about the valuation, even if the company’s growth opportunities abound.

And there’s no denying the secular drivers in each of the markets NVIDIA serves, whether it’s gaming, data center, artificial intelligence or cryptocurrencies.

The current boom in the most popular cryptocurrency bitcoin (on the blockchain system) is driven by bitcoin mining (requires tremendous processing power offered by GPUs), with the momentum unlikely to continue through next year. But new cryptocurrencies like ether (supported by the Ethereum system) and other coins like Monero, Dash, Stratis, Syscoin, Litecoin and Factom are emerging that should ensure continued momentum in GPU demand.

The underlying reason that the market remains hot is the stability relative to most other currencies in the world. Moreover, cryptocurrencies actually appreciate in value when geopolitical factors negatively impact the currency market, further boosting mining and the demand for processing power.

NVIDIA has competition from the other discrete GPU provider Advanced Micro Devices AMD , but the co,pany is really well positioned in areas like gaming. The success of the Nintendo Switch has been very good for NVIDIA. Gaming is an ever expanding market, given the move toward e-sports, which in the past management called “as popular among U.S. male millennials as America’s favorite pastime. More people watch gaming than HBO, Netflix NFLX , ESPN, and Hulu combined.”

VR is yet to gain momentum because of limited volumes of machines that can handle the content and a relatively limited volume of content. But this is definitely one area waiting to grow and NVIDIA is ready for it with its GTX 1080 Ti. It is however seeing some interest on the professional VR side with a rather illustrious customer in Lockheed Martin LMT .

The biggest driver of shares is, however, the data center. Sequential growth in the last quarter was less than exciting (due to new product transition issues), but it’s equally hard to ignore the 175.5% growth from last year. There are two major legs to this growth, the first being machine learning and the second, high performance computing (HPC). GPU acceleration (the 100X faster Volta-based V100 accelerator started shipping last quarter) of servers is very cost effective for data center operators, so growth should continue for several years at least as corporate workloads keep moving to the cloud. In the last quarter for instance Amazon AMZN agreed to use NVIDIA GPUs in its AWS G3 instances.

To put all of this into perspective, note that NVIDIA generated 53% of its revenue from Gaming in the last quarter, with the balance coming from Data Center (19%), Professional Visualization (11%), Auto (6%) and OEM & IP (11%). So Gaming and Data Center together account for 72% of the business and have a combined average growth rate of around 72%. Plus there are multiple growth drivers in both to ensure than this strong momentum continues. This is pretty phenomenal and the reason the share price appreciation is not just about hype. It therefore makes perfect sense to buy the dips whenever possible.