nvidia corp (nasdaq: nvda) · global device growth of m2m, non-smartphones, smartphones, tvs: 83.9%...

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

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


Shield

Portable gaming

Android Gaming Market

17

Grid- Gaming


Grid

Graphic intensive games on cloud

Eliminating lag

“Netflix for gaming”

18

Quadro


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

19

Grid- Enterprise


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

20

Tesla


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


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

22

Business Breakdown


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

27

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

nvidia corp (nasdaq: nvda) · global device growth of m2m, non-smartphones, smartphones, tvs: 83.9%...

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