Why NVIDIA is a compelling stock

Playing in the Tech Champions League

There are quite a few tech behemots that are in a unique league of their own due to their dominant positions and ability to not only outgrow their competitors but also strengthening their already extremely strong ecosystems at a breathtaking pace on the back of their exclusive innovation capabilities, network effects, economies of scale and ample financial resources.

I mean we have there an Alphabet with Google, YouTube and its Cloud Business just to name the most popular and strongest properties. But as we all know, there is much more that belongs to the “Alphabet Empire”.

Or just take Apple, Amazon, Microsoft, Shopify and Meta Platforms – formerly known as Facebook and one of the most intreaguing and promising tech blue chip stocks.

And then, in that illustre league of the world strongest and most important tech giants plays California based NVIDIA.

NVIDIA is the ultimate growth company

Amid the irreversible and powerful secular trend towards digitalization of our societies and and the world economy, NVIDIA is probably one of THE BENEFICIARY of thriving business fields for decades to come.

For one, NVIDIA produces graphic processors, among others for the gaming sector which is one of the fastest growing industries. “It’s the industry of the present and the future”, dominating the entertainment market. So, definitively a sweet spot to be in. According to the company’s website, Gaming is the largest segment, account orfor over 40 % of the business revenues and we are talking here about a growth rate of over over 20 %.

Then comes the second largest segment Data Center, making up to USD 6.7 Bn annually or 40 % of total revenues with an annual growth rate of over 80%.

The third business segment is called Professional Visualization. It’s relatively small with its 6 % revenue contribution, showing relatively modest growth rates of 7 % but make no mistake: it’s here where NVIDIA is developing products to support AI (artificial intelligence) adoption in the data center, embedded devices, and automotive spaces. The next big growth trend after AI is VR (virtual reality), and as the world moves toward VR technology, there’s an increasing need for VR content. 

So, NVIDIA does not only make gaming consoles, micro-chips for personal computers, tablets etc., you can find its components and know-how in self drifing cars and the company is a leader in the space of AI. Furthermore, NVIDIA also makes cryptocurrency mining processors.

Automotive is the smallest of the fours NVIDIA segments with around 3 % revenue contribution and 11 % growth rate. The company’s economic moat is incredibly deep and broad and it’s quite reasonable to expect NVIDIA to grow pretty fast in years to come.

Free Cash Flow generation of the company is very strong and has litterally been taking off in the last few years.

NVIDIA is a nice combination of growth- and dividend stock

As we all know, most of the tech growth stocks don’t pay out dividends despite their massively growing Free Cash Flows and steadily growing cash piles. Alphabet and Meta Platforms (formerly Facebook) are no exceptions. Both could easily payout dividends but chose not to do so (see two interesting articles from Sure Dividends: Will Alphabet stock ever pay a dividend? and Will Meta Platforms ever pay a dividend?).

NVIDIA is here quite different, investing massively into their growth engines and innovitation innitiatives, while at the same time returning some “excess capital” to their shareholders.

NVIDIA initiated its shareholder distribution policy in 2012 and on average, its quarterly paid out dividends have been growing by roughly 20 % per year.

The company’s track record and consistent financial performance bodes well for its dividend growth but we have also see that the initial dividend yield will be modest at around 0.1 %. But we have to put this in perspective with the company’s awesome stock price rally in the last three years significantly lowering the dividend yield.

Currently, NVIDIA is paying out less than 10 % of its Free Cash Flow as dividends, so there is plenty of room for growth of its shareholder distributions.

Just to be clear: no one buys NVIDIA stocks for its dividend, but there is a sweet combination of growth plus cash flows from shareholder payouts which are quite likely to grow over the medium and long term.

In 2018 for instance, you could have acquired NVIDIA stocks for around USD 30 and today, theses shareholders receive USD 0.98 per share. So, Yield on Cost would be at around 3.2 % for these stockholders.

NVIDIA was created in 1993, so just imagine how incredibly rewarding an even small stock position has been for long term stockholders.

NVIDIA’s takevoer plans of Arm Ltd.

Arm Ltd. is a British semiconductor and software company, it’s parent company is the Japanese SoftBank Group. NVIDIA has been trying to buy Arm for $40 billion (combination of NVIDIA stocks plus cash) since 2020 but it’s still unclear that there will be some serious obstacles from the regulatory side.

Founder and CEO Jensen Huang puts the ambitions of NVIDIA as follows:

“We are buying Arm because we want to advance computing further. The future of computing is going to move further from the cloud to the edge. That is what Arm is fantastic at. Where we are fantastic is AI. So, imagine the possibilities in putting AI at the edge.

Together, NVIDIA and Arm would be able to:

  • expand AI computing globally,
  • accelerate Arm’s opportunities in all markets (mobile, PC/datacenter, and edge and Internet of Things) and
  • strengthen the ability to innovate.

NVIDIA combined with Arm would truly form a tech giant, creating the world’s premier computing company for the age of AI.

Conclusion

Today, it makes a lot of sense to keep and eye on NVIDIA stocks given the huge potential of that company. The share price had a huge run-up in the last three years, increasing eight fold. It’s hard to tell how much of that price boost has been fundamentally justified. But given the market dominance, growth rate in the past and the financial strength and profitability of the business model, it’s fair to say that NVIDIA clearly belongs in the top ten of the global tech growth stocks giants.

Stock markets can easily turn into bear markets, providing oportunities for long term oriented shareholders to get into quality positions at a more attractive prices. So, let’s embrace market volatility and keep our eyes focused on wonderful businesses.

Disclaimer
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

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