The linchpin of Nvidia’s business has been gaming

Business Strategy & Outlook

Nvidia is the top designer of discrete graphics processing units that enhance the visual experience on computing platforms. The firm’s chips are used in a variety of end markets, including high-end PCs for gaming and data centers. Traditional GPU uses include professional visualization applications that require realistic rendering, including computer-aided design, video editing, and special effects. Nvidia has experienced success in focusing its GPUs in nascent markets such as artificial intelligence (deep learning) and self-driving vehicles. Hyperscale cloud vendors have leveraged GPUs in training neural networks for uses such as image and speech recognition. The linchpin of Nvidia’s business has been gaming. PC gaming enthusiasts generally purchase high-end discrete GPUs offered by the likes of Nvidia and AMD. Going forward, the data center segment will drive most of the firm’s growth, led by the explosive artificial intelligence phenomenon. This involves collecting large swaths of data followed by techniques that develop algorithms to produce conclusions in the same way as humans. As Moore’s law-led CPU performance improvements have slowed, GPUs have become widespread in accelerating the training of AI models to perform a task. However, other solutions are more suitable for inferencing, which is the deployment of a trained model on new data.

Today’s basic variants of AI are consumer-oriented and include digital assistants, image recognition, natural language processing, and recommendation engines. The firm views the car as a “supercomputer on wheels.” Although this segment currently contributes relatively little to the top line, the opportunity Nvidia has to grow its presence in cars beyond infotainment as drivers seek autonomous features in newer vehicles is acknowledgeable. Nvidia’s Drive PX platform is a deep learning tool for self-driving that is being used in R&D at more than 370 partners. In 2020, Nvidia acquired Mellanox to bolster its data center offerings in the networking realm to raise switching costs and improve performance of Nvidia’s existing portfolio.

Financial Strengths

Nvidia is in strong financial shape. The firm had about $13.1 billion in cash, cash equivalents, and marketable securities, versus total debt of about $11 billion on its balance sheet at the end of October 2022. Semiconductor firms tend to hold large cash balances to help them navigate the cycles of the chip industry. During downturns, this provides them with a cushion and flexibility to continue investing in research and development, which is necessary to maintain their competitive and technology positions. Nvidia’s dividend is very reasonable relative to its financial health and forward prospects, and the firm also returns excess cash to shareholders via stock buybacks.

Bulls Say

The proliferation of the artificial intelligence and deep learning phenomena that rely on Nvidia’s graphics chips presents the firm with a potentially massive growth opportunity.
The firm has a first-mover advantage in the autonomous driving market that could lead to widespread adoption of its Drive PX self-driving platform.
The increasing complexity of graphics processors provides a barrier to entry for most potential rivals, as it would be difficult to match Nvidia’s large R&D budget.

Company Description

Nvidia is the top designer of discrete graphics processing units that enhance the experience on computing platforms. The firm’s chips are used in a variety of end markets, including high-end PCs for gaming, data centers, and automotive infotainment systems. In recent years, the firm has broadened its focus from traditional PC graphics applications such as gaming to more complex and favorable opportunities, including artificial intelligence and autonomous driving, which leverage the high-performance capabilities of the firm’s products.

(Source: Morningstar)

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