Quick Summary

NVIDIA (NVDA) designs and sells graphics processing units (GPUs) and mobile/automotive device processors (Tegra). GPUs are semiconductors designed specifically for the highly parallel processing tasks required for applications such as computer graphics and gaming, and increasingly, artificial intelligence (AI) and machine learning. About 51% of revenues are from GPU sales for gaming, and 27% for data center machine learning and AI applications. 11% of sales are for professional visualization applications (e.g., video processing workstations). 6% of sales are from Tegra processors used in-vehicle infotainment systems. The remaining 5% fall into the various "other" categories, including crypto-currency mining products.

Does The Company Have Recurring And/Or Rising Revenues?

SOMEWHAT. Growth has not been a problem, with sales rising at a 3-year compound average rate of 17%. NVIDIA's growth will come mainly from its data center and automotive efforts. GPUs as data center accelerators, in particular, is forecast to be a tremendous market, growing at over 35% annually through 2025 to reach a market size near $30 billion. The company has been active in this space, acquiring Mellanox (a data center networking hardware firm) in 2019 to expand its footprint in the data center. Less certain are NVIDIA's efforts in autonomous driving systems, another market forecast to reach nearly $30 billion by 2025, but in fact providing very little revenue at present. If it does succeed, NVIDIA is well-positioned, with its Drive PX platform already widely adopted by vehicle manufacturers. The revenue model is not a recurring one, however. GPU and other chip sales are transactional, non-recurring sales. NVIDIA's chips can be designed out of end-systems with competitor's products, and consumers can easily decide to purchase PCs with AMD or Intel graphics depending on price and quality concerns.

Does The Company Have Durable Competitive Advantages?

SOMEWHAT. In high-end gaming GPUs, NVIDIA clearly has an ECONOMIES OF SCALE advantage. Since the beginning, this has been a limited market controlled by a duopoly with AMD (once ATI), with NVIDIA more frequently than not maintaining technical and market leadership. The firm currently boasts 70% market share, allowing it to substantially out-spend AMD on R&D. Barriers to entry are high, as well, as can be seen from the relative lack of success from outside competitors over 20 years (even Intel failed to crack the high-end GPU market). Early indications are that NVIDIA could be able to extend this advantage into data center GPU applications as well. In autonomous driving, the outlook is less clear, as the market is still in the very embryonic stages, and technology is developing rapidly.

GreenDot Rating: YELLOW

NVIDIA gets a YELLOW (somewhat attractive) business model rating. The growth potential in the data center is quite attractive, and the autonomous driving opportunity is a real wild card. In high-end gaming, NVIDIA enjoys some solid competitive advantages that should protect a very large slice of a substantial ($9 billion) market. On the downside, NVIDIA also will face increasing competition, from AMD and others, given the burgeoning end markets for GPUs, and its largest segment (gaming PCs) is slow-growing. Overall though, this is a very well run company with growth and a moat. That makes it an attractive investment option if bought at a reasonable price.