A company that needs to be on the radar for investors right now is NVIDIA Corporation (NASDAQ: NVDA). NVIDIA is a technology company that provides graphics, computing and networking solutions. They are headquartered in Santa Clara, California and provide services in the United States, Taiwan, China and internationally. They have a strong history of being one of the most innovative companies in the world, specifically with manufacturing semiconductors. These semiconductors are used in the following industries: home entertainment (including gaming and esports), cloud computing and data centers, artificial intelligence (AI) and driverless cars.
NVIDIA’s stock price has taken a major blow so far in 2022. However, this is not a reason for panic as it can be attributed to rising inflation and fears of a recession. These could impact NVIDIA’s prospects in the short term, however, NVIDIA still has more than a lot to like and now is the time to buy at a price that is close to their 52-week low. NVIDIA’s strong financials are one of the reasons as to why they should continue to appeal to investors. Their revenues have grown by an impressive 146.51% from 2020 to 2022. Likewise, profit margins are extremely strong including 25.6% in 2020, 26% in 2021 and 36.2% in 2022. Along with that, their gross profit has steadily improved from 62% in 2020, 62.3% in 2021 to 64.9% in 2022. Increasing their gross profit while also increasing revenues displays that NVIDIA’s products are in great demand by the marketplace. Moreover, NVIDIA has a very strong cumulative average rate of return (CARR). As of July 1, 2022, NVIDIA’S 5-year CARR and 10-year CARR were 29.3% and 46.9% respectively. Why is the CARR so important? CARR accounts for all returns, stock price appreciation, stock splits and dividends. Even more impressive is the fact that it was calculated after the ongoing correction where NVIDIA lost half its value since November 2021.
Furthermore, NVIDIA’s balance sheet is highlighted by the large increase in cash and marketable securities from 2021 to 2022. The company increased cash and marketable securities from $11.5 billion in 2021 to $21.2 billion in 2022. This was largely due to the fact the company generated almost $9.1 billion in cash from operating activities in its 2022 fiscal year. As a result of NVIDIA consistently generating so much cash from operations, it does not need to borrow money or issue more shares to finance its growth. Therefore, they don’t need to rely on creditors to finance their operations or research and development. Since they do not need to issue more shares, then this does not dilute earnings per share (EPS). This is significant as EPS drives up the stock price in the long term. Hence, this also provides the company with a lot of flexibility as it executes its growth plans moving forward.
The data center graphics processing unit (GPU) market will continue to be a major part of these growth plans. In the fiscal year of 2022, NVIDIA produced around $15.9 billion in revenue from data centers, its largest source of revenue. NVIDIA’s biggest potential runaway for growth lies in the fact that they are the dominant player for discrete GPUs. Discrete GPUs differ from integrated GPUs as they have their own memory and power source which results in higher performance. Therefore, more and more people will continue to make the transition from integrated GPUs to discrete GPUs. This bodes well as the GPU market as a whole is expected to reach $198.77 billion by 2027 and NVIDIA holds an almost 80% market share in the entire discrete GPU market.
A further catalyst not only for this year but the coming years is NVIDIA’s exciting new development of the Omniverse Cloud, a software for building 3D designs and virtual worlds. One of the main applications for this software is the “digital twin” industrial simulation industries. In other words, the Omniverse creates a digital twin of the physical world in which has all types of practical applications in the real world. These digital robots obey the laws of physics and are taught by artificial intelligence to become more efficient in building automotive parts. Using artificial intelligence to make applications smarter and more efficient is one of NVIDIA’s greatest strengths. NVIDIA CEO Jensen Huang calls it the “automation of automation,” and can be looked at as NVIDIA’s version of the metaverse.
Lastly, one of the most overlooked components of a successful business is its corporate culture and environmental responsibility. While this is difficult to quantify, it can be analyzed by looking at how NVIDIA ranks on Glassdoor. On the 2021 Glassdoor rankings, NVIDIA was rated 31st in the United States for the companies with the top CEOs. In addition, the 2022 Glassdoor rankings have NVIDIA as the best place to work. Environmentally, they are in the process of building a supercomputer that is dedicated to helping solve climate change and are also aiming to source 100% of their global electricity use from renewable sources by 2025. The sky is the limit with motivated employees working for a progressive firm with a visionary leader in Jensen Huang.
NVIDIA’s strong financials, dominant position in the GPU market, exciting new development of the Omniverse Cloud and corporate responsibility are the main reasons as to why NVIDIA is a must-buy for investors.
References
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