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Analyzing the Dip in NVIDIA Corporation (NASDAQ:NVDA)

NVIDIA Corporation (NASDAQ:NVDA) shares have been faltering a bit, along with the rest of the market, and particularly chip-related names. However, that didn’t stop Goldman Sachs from coming out today to give the stock a big nod by adding it to the firm’s “Conviction Buy List”.

“We foresee a cyclical correction approaching and recommend investors to stay selective in Semis,” Goldman Sachs analyst Toshiya Hari said in a note Thursday. Of course, many of the company’s staunchest fans are excited about the company stretching the limits with applications such as self-driving automobile control systems. Hence, we often don’t really group this company in with the standard chip names.

NVIDIA Corporation (NASDAQ:NVDA) shares have been rocked along with the rest of the stock market, and especially the high-flying mega-cap tech names such as those typically grouped into the FAANG-BAT group (FB, AMZN, AAPL, NFLX, GOOG, BIDU, BABA, and TCEHY).

NVDA is usually lumped into this group because it has an operational and strategic vision that really boils down to changing the way the world works on a fundamental level.

That makes it notoriously hard to value. So, for our purposes here, we will think of it as a “premium chip name”.

NVIDIA Corporation (NASDAQ:NVDA) operates as a visual computing company worldwide. It operates through two segments, GPU and Tegra Processor.

The market tends, rightly or wrongly, to see the company as in a competitive battle for market share in the GPU space with AMD, though each has been seeing seemingly unrestrained top-line growth over recent years.

From this core biz perspective, there appears to be an expanding pie. However, the stock’s price is obviously floating on a big premium to this core business given other very high-growth but more speculative segments (self-driving cars, etc).


Breaking Down the Breakdown

It’s important to state what the company really does in plain terms.

NVDA’s GPU segment offers processors, which include GeForce for PC gaming and mainstream PCs; GeForce NOW for cloud-based game-streaming service; Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications; Tesla for AI utilizing deep learning, accelerated computing, and general purpose computing; GRID provides power of NVIDIA graphics through the cloud and datacenters; DGX for AI scientists, researchers, and developers; and cryptocurrency-specific graphics processing units.

The Tegra Processor segment provides processors designed to enable branded platforms – DRIVE and SHIELD; DRIVE automotive computers and software stacks, which offer self-driving capabilities; SHIELD devices and services designed for mobile-cloud in home entertainment, AI, and gaming applications; and Jetson TX 2, an AI computing platform for embedded use.

The company’s products are used in gaming, professional visualization, datacenter, and automotive markets. NVIDIA Corporation sells its products to original equipment manufacturers, original device manufacturers, system builders, add-in board manufacturers, retailers/distributors, Internet and cloud service providers, automotive manufacturers and tier-1 automotive suppliers, mapping companies, start-ups, and other ecosystem participants.

NVIDIA Corporation (NASDAQ:NVDA) managed to rope in revenues totaling $3.1B in overall sales during the company’s most recently reported quarterly financial data — a figure that represents a rate of top-line growth of 40%, as compared to year-ago data in comparable terms. In addition, the company has a strong balance sheet, with cash levels far exceeding current liabilities ($7.9B against $1.5B).

At this point, the fact that Goldman is willing to put it on the Conviction Buy List into the teeth of the correction is an important step. With earnings coming up on November 15, there isn’t a whole lot of time to short the stock without any warnings from the company on guidance (which seems extremely unlikely, in any case).

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