The Case for Nvidia, by Rutvij Thakkar

Thesis: Nvidia and Apple will be partnering to create CPUs for iPhones, the Mac lineup, and pretty much any other place Apple will have a logistic chip, only adding to Nvidia’s already bright future.

Apple has been touching new all-time-highs every other day on news of the iPhone 12 and ARM MacBooks, which has hurt INTC and made Taiwan Semiconductors and other suppliers to AAPL reach new highs and realized values.

(Here's the background info in case you missed the news https://www.youtube.com/watch?v=LS52JigV1CY)

Who is ARM? ARM Holdings is a designer of SoC (system on chips), and the ARM CPUs for cellular and tablet devices, they are especially known for their seamless touchscreen integration and provide open intellectual property designs for manufacturers. They license their chip designs, rather than selling them the way Intel and AMD do. A list of ARM licensed chip designs:

Apple was actually approached by Softbank to buy ARM but they couldn't due to ARM licensing logistics out to competitors as well, and Apple obviously has a very private philosophy too so that wouldn't work. But, they will continue to use chipsets based on ARM's architecture for the future macbooks/iphones as well

“Apple has had an architecture license from March 2008.[73] Their A6, A6X, and S4, all subsequent Apple processors (used in iPhone 5, iPad (4th generation) and Apple Watch Series 4).[74]” (this chipset design will be used eventually for the all-intelligent Airpods and upcoming Beats devices as well, in order to compete with Google’s Pixel Buds)

(https://wccftech.com/apple-shows-disinterest-in-buying-arm-from-softbank/). But if you just follow the money, and try to find out who actually will OWN ARM, the offer has come from none other than Nvidia, and the deal to buy ARM is all but confirmed. (seekingalpha.com/article/4370499-chippening-part-2-nvidia-reaches-for-outstretched-arm). And I'm sure that you are aware of how Apple is trying to expand its reach into countries like India for the first time offering first-party stores and an online store, etc. This will only increase their sales numbers, and Apple will only get more bullet proof from hereon. The real story here is in NVDA, the most direct benefactor of Apple's corporate restructuring phase.

When NVDA does end up buying ARM, the merger will either be seen as A.) a value destroying buy that wasn't worth it or B.) A merger of epic proportions that inserts Nvidia into the mobile and CPU market. NVDA has already shown great adaptability and flexibility as it has gone from graphics cards to building huge data centers and the most powerful computer in the academic research world, and even self-driving tech, Nvidia is shaping out to be the most innovative company of this next decade.

(https://blogs.nvidia.com/blog/2020/07/21/university-of-florida-nvidia-ai-supercomputer/)

With the rise of data science and AI being the most in-demand occupations, Nvidia will be the first company to benefit in the same way that Microsoft did in the IT revolution.

"Apple recently indicated it would change their use of Intel chips in Mac computers to custom made ARM-based chips. This is likely due to the desire to include a touch screen and also due to the general efficiency of the design as well as ARM's licensing of its IP to Apple. This could be the start of a major transition for chip usage among desktop computers. Moreover, this technology appears to be competitive for use in data-centers markets.

NVIDIA is not currently a major competitor in the smartphone and tablet business, so acquiring ARM would expand it into new realms where ARM happens to dominate. NVIDIA did previously attempt to compete in this business, but its Tegra chips never got much market share."

You already know how durable Nvidia is, but for those of you that don't I'll leave you with these too: Nvidia's R&D expense/gross profit is surprisingly low due to multiple income streams, and although it is increasing (as expected) we can expect gross profits to massively increase too with the world's largest company as its customer. Their Cash per share has grown insanely :

Cash Per Share ratio

And they have low long term debt that has barely increased, but their assets have remarkably increased, which means a low lt debt/asset ratio, just showing you how much of a powerhouse NVDA is.

LT debt/total assets

NVDA's Net profit margin has been increasing even though costs to manufacture data centers have gone up.

Nvidia has been able to use assets efficiently more because of data centers too, as their ROA has become 16%

Here are their other margins:

Surprisingly high margins considering it's a growth stock add to its future prospects.

Since 2016, Nvidia's revenues had more than doubled in the 2019 financial year. All that growth is being realized now which is why the share price has more than doubled from its Covid lows, and the 52-week low of NVDA was 160$. Currently it's running at $510

Compared to other semiconductor companies (even though Nvidia does so much more) Nvidia is able to keep Return on Equities and Return on Assets ratios much higher than the industry average:

By intrinsic value, Nvidia is trading at the same DCF multiple that AAPL is trading at (Investors are currently valuing NVDA shares intrinsically at the same rate as they are for AAPL) Which just shows you how much confidence has grown in this once relatively unknown company.

Not only that, but along with decreasing/flatlining long term debt, they have a negative cash conversion cycle, which greatly reduces operating expenses. Financially, this is only the beginning of their growth. Aside from just solid financials for such a revolutionary company, they have revolutionary products. Their cloud services and acquisition of Mellanox's high speed data platform will only expand their bases. Nvidia has a vision, and it may be very far-out and hard to accomplish or it may be the most genius thing I've ever seen. I'm not sure how long this'll take to work itself out, but I wouldn't fear buying for “overvaluation” here.

Nvidia is one of the only companies post merger that provides GPU and CPU design to pretty much all major manufacturers, as even Microsoft is looking to change to the ARM architecture for Surfaces. Apple’s huge consumer outreach will be equivalent to the revolution created by the transition from PowerPC to the x64 bit architecture. https://www.cultofmac.com/587398/2018-ipad-pro-performance-macbook-pro/

ARM is used by Surface too, but the chip itself is made by Qualcomm. Nvidia has potential to replace this segment as well, and if Nvidia can successfully integrate their data center segment with their Mellanox networking and ARM, the profit multiples and synergies made from the vertical integration would be insane, and the innovation created can't possibly be valued. Nvidia currently makes more from data centers now than gaming, which just shows how broad their future is (https://siliconangle.com/2020/08/19/nvidias-data-center-sales-top-gaming-first-time/) and almost half of their revenues are generated from the lucrative data center business. On top of that, Jensen Huang's leadership is almost irreplaceable as he has a huge stake in the business of 4% and has the vision to make strategic value creating acquisitions like Mellanox and ARM. Nvidia has huge institutional investors like Vanguard and BlackRock financing them as well, making it a growth stock with huge institutional backing, a rare combination where smart money meets the retail investor to back a company that may eat a huge semiconductor market share from Qualcomm, AMD, Intel, etc. with the ownership of ARM that was officially confirmed last week.

With huge customers like Dell, Amazon, Google, and even Tesla using their GPUs and Tegra SoCs, Nvidia has clear coasting in the future as few competitors threaten this space, especially once they own ARM. I personally see a price target of 1000$ by mid 2022 for Nvidia at the current number of shares, and possibly more if they perform a split.

Disclaimer: This isn't investment advice and the author of this column may have a vested interest in the mentioned securities.