nvidia corp (nasdaq: nvda) · global device growth of m2m, non-smartphones, smartphones, tvs: 83.9%...
TRANSCRIPT
NVidia Corp (NASDAQ: NVDA)
Lukas Neske, Patrick He, Zach Kirshner, Allen Shi, Rivers Hughes, Bohan Wu
3/29/2015
Hardware (Graphics Processing Units) Software - virtualization
(Graphics Processing Units = GPU)
Hardware (GPU) Hardware (Tegra)
5
Thesis
Market undervaluation of NVidia’s growth potential
Gaming
Automotive
Cloud Computing and Supercomputing
Given NVidia's expansion from low-end PC GPUs to high-end cloud computing, supercomputers, enterprise graphics and auto markets, we believe current market consensus underestimates NVidia's future growth, which creates a buying opportunity.
Remaining exposure to PC OEMs could be a risk as PC segment has shrunk in the past year
CATALYSTS
RISKS
Recommendation: BUY Current Price: $21.38 Target: $25.55 (+19.5%)
Industry Overview
Patrick He
7
What is a Graphics Processing Unit (GPU)?
“SOUL” OF THE PC
Originally intended for 3D game rendering
Main capabilities are manipulating computer graphics and image processing
CPU has a few cores optimized for sequential serial processing
GPU has thousands of smaller, more efficient cores for parallel processing, designed for handling multiple tasks simultaneously
Optimized for taking huge batches of data and performing the same operation over and over very quickly
GPU ACCELERATION
Each individual core of a GPU still works slower than each core of CPU
Works alongside CPU, performing intensive, repetitive tasks
Can speed up some programs by 100x compared to using CPU alone
GPU is still ill-suited to heavy or complex processing on a single or few streams of data, so CPU is still necessary
https://www.youtube.com/watch?v=-P28LKWTzrI
HIGH-END GPU MARKET SHARE
NVDA enjoys large, steady market share of discrete GPU sales at ~75% against AMD
Focus on specified high-end AIB market has allowed for strong foothold
Keeps attention on discrete graphics to specialize rather than compete with Intel
~51% use NVDA’s steam program for game development (AMD 30%, Intel 19%)
8
Sources: Cisco VNI 2014; DFC, GDC Survey, 2013
PC gaming as a part of the larger gaming market
Constitutes ~40% of worldwide gaming market (~$100bn)
Higher individual share than consoles, phones, tablets, and other individual gaming devices
Global device growth of M2M, non-smartphones, smartphones, TVs: 83.9% from 80.3% by 2018
12bn to 20bn devices globally
All devices in which GPUs play crucial roles
Exposure in high-end tablets and PCs
Projected $20bn gaming software revenue from PCs alone in 2015
PC hardware market to reach over $23bn by 2017
GAMING MARKET
Industry Overview
Sources: Jon Peddie Research
9
New Markets
DRIVERLESS AUTOMOTIVE INDUSTRY
As a developing/currently undeveloped industry, promise only exists in the future
CEOs of many automotive companies (Ford, Tesla, Audi, Land Rover, etc.) confident in the probability of truly driverless cars to be available by early 2020s
Driverless cars expected to constitute 9% of auto industry by 2035
Sources: InMobi, 2013, Forbes
Tablet gaming as a part of the larger gaming market
Constitutes relatively small 11.6% of the market
However, strong driver with highest CAGR of 47.6%
Higher than PC ever reached
87% of connected mobile devices will be tablets/mobile phones by 2017
Advantageous and appropriate time for Nvidia’sforay into tablet market
All mobile devices with GPUs play crucial roles
Broader gaming market expected to reach $86.1bn by 2016; 6.7% growth YoY
MOBILE TABLET INDUSTRY
Sources: Forbes, Motoring.com
10
New Markets
ENTERPRISE GRAPHICS
300+ cloud/HPC applications for developers, including software applications such as accelerated libraries
HPC is a large and growing opportunity
$15bn annual HPC server spend
$3b+ opportunity per year
Used by supercomputers, higher education, government, industries (finance, manufacturing, energy)
Datacenter platform
HPC/CLOUD COMPUTING
Sources: Forbes, Motoring.com
11
Major Players
Focus on both discrete and lower end GPU design
Much smaller cap compared to NVIDIA
Overall graphics market Share 18%
Provide multiple GPU designs
Focus on design and engineering of lower end, non-discrete GPUs
Overall graphics market share 67%
Focus on auto microprocessors
Semiconductor market share 12%
Focus on mobile technology developments
Mobile telecommunications market share 36%
Company Overview
Zach Kirshner
13
Company Overview
Source: SEC Filings and S&P Capital IQ
Nvidia is dedicated to advancing visual computing to enable individuals to interact with digital ideas, data, and entertainment with an ease and efficiency unmatched by any other communication medium
Founded in 1993
Headquartered in Santa Clara, CA
Operates under a unique business model with three elements
Targets four large markets
Description Target Markets
Business Model
Creating
Offering
Licensing
Creating NVidia-branded products and services
Offering processors to original equipment manufacturers (OEMs)
Licensing intellectual property
Gaming Enterprise
HPC & Cloud Automotive
14
Product Offerings
Gaming:
PC Gaming: GeForce GTX GPUs
Mobile Gaming: SHIELD
Cloud-based streaming of gaming devices: GRID
Enterprise:
Workstations: Quadro GPUs
Enterprise graphics virtualization: GRID
HPC & Cloud: Tesla
Automotive: TegraTegra
GPU
GPUGPU GPU
GPU
Tegra
15
GeForce
Source: SEC Filings and Bloomberg
Hardware
PC Gaming: GeForce GTX GPUs
Software
GeForce Experience: Optimizes games and provides notifications of driver updates
Includes Twitch capabilities
16
Shield
Source: SEC Filings and Bloomberg
Shield
Portable gaming
Android Gaming Market
17
Grid- Gaming
Source: SEC Filings and Bloomberg
Grid
Graphic intensive games on cloud
Eliminating lag
“Netflix for gaming”
18
Quadro
Source: SEC Filings and Bloomberg
Quadro
Professional graphics design
Powers 80% of world’s workstations
No need for physical models
Quadro
New horizons for moviemaking
2014 marks 5th year in a row when all films nominated in Academy Awards “Best Visual Effects” created in Quadro
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Grid- Enterprise
Source: SEC Filings and Bloomberg
Grid
Visual Computing Appliance (VCA)
Film studios and other business creative teams access
Sends output over network
Grid
Market shift: employees bring own devices to work
Delivers amazing graphics from cloud to any device
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Tesla
Source: SEC Filings and Bloomberg
Tesla
Revolutionizing parallel computing
Power 85% of accelerated HPC systems
Model climates
Solving world’s greatest scientific and technical challenges
University of Illinois breakthrough in HIV research performing first all-atom simulation of virus
21
Tegra
Source: SEC Filings and Bloomberg
Tegra
Bringing heart of GeForce and soul of Tesla to mobile
Powers 4.5 millions cars on the road including 20+ brands and 100+ models
Advance self-driving cars
Futuristic high-computing endeavors
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Business Breakdown
Source: SEC Filings and Bloomberg
Management Team
Lukas Neske
Management Team
24
Jen-Hsun Huang
Co-founder in 1993
Served as: President, CEO, member of the board of directors
“NVidia's Steve Jobs”
Milestone developments
Graphics Processing Unit (GPU)
Electronic circuit to manipulate memory to accelerate creation of images
Essential for display output
Interactive graphics for smartphones, tablets, notebooks
Key figure in developing 7,000 patents under his leadership
Breakthroughs in parallel processing and cheap supercomputing
KEY: THE FOUNDERS
Chris A. Malachowsky
Co-founder in 1993
More than 30 years of industry experience
Member of executive staff and senior technology executive
Key: Management skills
Grew startup to global leader in visual and parallel computing
Integrated into most important areas across the company
IT
Operations and product engineering
Research
Market Trends and Opportunities
Allen Shi
Pulling Away
Source: Jon Peddie Research
Pulling away from main competitor: AMD
Higher end products for graphics industry
■ Gaming, workstations
Focused and committed to discrete graphics
■ AIBs becoming standard in major new markets
■ supercomputers, scientific instruments
Add-in Board
Market ShareGPU
Market Share
Found in host of electronic devices■ Generic Graphics Card
Making gains on AMD:#2 in market
■ Record high PC attach rates: 137% and growing
4
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Opportunities
Looking to enter into enterprise cloud computing and automobile industries
Enterprise Cloud Computing (Tesla) Automotive Industry
Titan X Chip unveiled in March 2015
Industry leader in technology
Titan X has twice the computing power and double the energy efficiency of predecessor
Exciting and growing field
■ Cars today more reliant on high end technology
■ Elon Musk: Self-driving cars feasible
Currently 4% of revenues, but grew at 85% last fiscal year
Number of cars to carry Nvidia technology will triple within next 4 years
Large demand and successful partnerships
■ Tesla, VW & Audi
Source: Jon Peddie Research & WSJ
Gaming Technology (GRID)
Shield newest product
Exploits newest TVs based in ultra HD
■ Portable device connected to Nvidia Cloud Network of supercomputers
■ Enables new class of android gaming
Financials
Patrick He
Corporate
Source: Nielsen
29
NVDA has a strong cash balance
Currently sits on $4.6 billion in cash and short-term investments
Nvidia has returned $2.1 billion since FY 2014 in the form of share repurchases and dividends
Returned ~70% of FCF
12% reduction in shares over last 2 years
Management projects that it will issue at least $600 million in dividends for FY 2016
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
FY 2012 FY 2013 FY 2014 FY 2015
US Cash
Total Cash
Debt
30
Financials
31
Financials
32
Financials
33
Discounted Cash Flow26-Jan 25-Jan 31-Jan 29-Jan 28-Jan 27-Jan
In millions, except per share data
2015 2016 2017 2018 2019 2020 Current Share Price 21.38$ Equity Value 11,755
Revenue 5,280 6,004 6,857 7,846 8,982 549.8 Plus: Preferred Stock -
COGS excl. D&A 2,100 2,388 2,727 3,120 3,572 11,755 Plus: Minority Interest -
Gross Profit 3,180 3,616 4,130 4,725 5,410 Plus: Total Debt 1,398
2.0% Minus: Cash & Equivalents 4,623
Operating expenses: Beta 1.64 Current Enterprise Value 8,530
R&D 1,534 1,744 1,991 2,279 2,609 Market Risk Premium 7.5%
SG&A 542 617 704 806 922 14.20% LTM Sales 4,682
Legal settlement - - - - - Multiple 1.8x
1,398
EBITDA 1,104 1,256 1,434 1,641 1,879 2.4% LTM EBTDA 979
Depreciation 161 184 210 240 275 16.5% Multiple 8.7x
Amortization 87 99 113 129 148
Debt/Total Capitalization 10.6% LTM EBIT 759
EBIT 856 973 1,112 1,272 1,456 Equity/Total Capitalization 89.4% Multiple 11.2x
Effective Tax Rate 16.5% 16.5% 16.5% 16.5% 16.5% WACC 12.9%
EBIAT 715 813 929 1,063 1,217 LTM Net Income 631
Multiple 18.6x
Plus: D&A 248 282 322 369 422 Terminal Year EBITDA 1,879
Minus: CapEx (138) (157) (179) (205) (235) Terminal Multiple 7.0x
Minus: Change in NWC (15) (22) (24) (28) (28) Terminal Value 13,150
Unlevered FCF 811 916 1,048 1,199 1,376 2.2%
PV of FCF 718 719 728 738 750 PV of Terminal Value 7,169
NPV 3,653 PV of NPV 3,653
Enterprise Value 10,822
TV % of EV 66.2%
Minus: Debt 1,398
Minus: Preferred Stock -
Minus: Minority Interest -
Plus: Cash & Cash Equiv. 4,623
Implied Equity Value 14,047
549.8
Implied Share Price 25.55$
Implied Upside 19.5%
Current Enterprise ValueProjected Period WACC Calculation
Risk-free Rate
Total Debt
Cost of Debt
Diluted Shares Outstanding
Implied Perpetuity Growth Rate
Effective Tax Rate
Diluted Shares Outstanding
Equity
Cost of Equity
Enterprise Value Calculation
Thesis
Bohan Wu
35
Thesis
Market undervaluation of NVidia’s growth potential
Expanding PC Gaming Industry
Burgeoning demand for visual computing in automotive
Growing need for GPUs in the cloud computing and HPC space
Given NVidia's expansion from low-end PC GPUs to high-end cloud computing, supercomputers, enterprise graphics and auto markets, we believe current market consensus underestimates NVidia's future growth, which creates a buying opportunity.
Remaining exposure to PC OEMs could be a risk as PC segment has shrunk in the past year
CATALYSTS
RISKS
Recommendation: BUY Current Price: $21.38 Target: $25.55 (+19.5%)
Appendix
38
Appendix – Geographic Segments
16.9%
7.9%
7.9%
34.1%
19.7%
13.6%
Geographic Segment 2015
United States Other Americas
Europe Taiwan
China Other Asia Pacific
7.5%
8.4%
6.1%
26.5%39.2%
12.2%
Geographic Segment 2010
United States Other Americas
Europe Taiwan
China Other Asia Pacific
39
GeForce GPUs (Titan & GTX series)
SHIELD
41
GRID for Gaming
GRID for Enterprise Graphics Virtualization
43
Quadro for Workstations
44
Tesla
45
Tegra for Automotive
46
NVidia Graphic Cards in MacBook Pro
47
Notes – reshaping the company - overview
Doesn’t matter what components you are, the components eventually get good enough
Visual computing is about address vertical market, not about selling components anymore
Software more important than hardware now
We are experts in technology, software, hardware, domain, ecosystem
Innovator’s dilemma
Gaming is a 100B market
Hard technology
Auto market will be large
Sonars, radars…
Car will be the supercomputer on a wheel, software defined
Software - drivers
If you don’t own that architecture you can’t update that architecture
Enterprise – 90% market share
Too much graphics, too much data, can’t take the workstation
Cloud!
HPC & Cloud – accelerated computing (cannot be replaced by CPU, multi-core CPUs, add more transistors)
OEM (processor, enormous amount of software, system, cloud service), whatever the best manifestation is, we can make that
GPU still valuable for PC
Richest IP in the world
Innovate for growth
48
Notes – reshaping the company
It’s all about software – it will be deployed
Virtualization
Virtualization for graphics is very hard
Winning strategies
Focus on a few, large vertical markets where NVDA’s technology is essential
Engage deeply in these markets
Invent GPU-accelerated cloud computing
Mobile cloud is key
Example
TITAN is not just the component, we have the OPS (optimal playable settings) that understands the nature of your PC, and the game, and set everything in its best way for you
License our virtualization codes/tech to the game developers (fire, smoke, water, etc)
Just like the way an app store and a mobile device can change your day, same thing will happen to cars and to TVs.
SHIELD available in May – amazing
7300+ patents – invention heavy
IP
49
PC Gaming - Fish
36% YOY Growth
Launched Maxwell
TITAN X - $999
1.7B Gamers Worldwide (20% population)
330M Core PC Gamers
PC has keyboards, that’s why PC is irreplaceable
57M GeForce Gamers
Gaming Notebooks
Virtualization of Reality drives PC Gaming Growth
It will grow because the production value and content of games are growing exponentially, and thus need better hardware from NVDA on GeForce and TITAN.
Millions of lines of codes
VXGI – Voxel Global Illumination – real time global illumination – reality virtualization
Clothing simulation
Fluid simulation
Light simulation
Driving the production value of graphics, making GPUs a more critical need
50
Jeff – Enterprise - $833M
Cars manufacturing and development
Physical based rendering
Aircraft, cars, radiology, medical, technical and engineering workstations
GRID –
80% enterprise virtualization (VMware) – Vsphere
Quadro (Greg):
1.5B TAM
25M Designer
200M power User
400M Knowledge worker
100M Task worker
Physically-based rendering
IRAY
GRID – $5B TAM
VMware Partnership – TriGRID – virtual workstations – free TRIAL! Set up the server, software, security
You can run it on MacBook
51
HPC & Cloud - Shranker
Tesla is the market leader in accelerated computing datacenters
$5B+ growth opportunity
50B+ market for data center
DEVELOPER – application – uses – customer – data center
$15 B Annual HPC server cloud
$3B+ Opportunity /year
Contract Value $325M – HPC System
Delivery 2017
Why HPC Customers buy TESLA
To accelerate scientific discovery
TESLA works faster and cheaper, more energy efficient
Energy cost is the highest cost in the operation of a data center
Why Cloud Computing Customers buy TESLA – DEEP LEARNING requires intensive computing
More work for less money
Less energy
Much lower cost of acquisition
Less servers
Better computing performance
52
Auto Market - Rob
Tomorrow’s CAR – Supercomputer on a wheel
Our experience in other industries
8M Cars in the road
25M more coming….
ADAS and Deep Learning (Computation) (Technology, Software)
More cameras, more displays, self-driving car, parallel processing, deep learning
TAM?
Every car will have a supercomputer in 10-15 years
Reduced overall system costs
Cars are gonna be software defined
53
Why NVidia is a software company
PC Gaming – in addition to TITAN X, we created a whole OPS system and a great gaming platform for people to enjoy
GAMEWORKS – fire, water, smoke… shadows….
License them to the game developers, they end up in games
the game is more beautiful
More people play
Consumes more GPU horsepower
Demands more graphics tech
Higher ASP
GPU-accelerated CLOUD
VSphere (how is this a software business)
Revolutionize TV – app store
Smart TV, inspire innovations
Develop a software platform that has a lot of HORSEPOWER
Revolutionize Auto