Epiphany Investing

Searching Out the Optimal Portfolio of “Revelation” Stocks

NVIDIA Thesis for Secular Trends Portfolio

Posted on | September 20, 2008 Time: 12:14 pm |

In the haste to get some positions picked up late in the day Thursday after the announcement of the game-changing Treasury deal for mortgage assets, I neglected to outline our buy thesis for each position.

I was able to snap up a 2% position (1830 shares) of graphics chipmaker NVIDIA (NVDA) late in the day for $10.94 for the Secular Trends Portfolio. I am averaging in, and will look to double the position over the next few weeks as the dust settles from the craziest week on Wall Street that I’ve ever been witness too.

NVIDIA has seen its stock price cut by over two-thirds in 2008 after spending most of 2007 in the stratosphere. They are a custom maker of graphics solutions for PCs, notebooks, supercomputers and other high-IQ devices, while also having a strong presence in the video game console market.

I always like to think that the Semiconductor names will eventually stop being so volatile, but as I dig into my second decade as a follower it appears to just be the nature of the beast. Even Intel has sported a Beta well above 1 for most of the decade. But there is real value being built here. These guys have to fight off constant competition from upstarts and a PC cycle that - in many ways - is still in a 20-year megatrend of lower prices and outsourced production.

That said, NVIDIA is a technological powerhouse. They’ve managed to survive, even thrive, against Intel and the former ATI (which is now part of Advanced Micro Devices (AMD)). They are a fabless producer, having most production outsourced to Taiwan Semiconductor (TSM). This decision has kept them from having a bloated balance sheet (a la’ AMD) and allows NVIDIA to keep its R&D budget very, very high. This is almost a necessity if they wish to hold off Intel, which has recently made a big push to invade NVIDIA’s prime real estate - Graphics Processing Units, where NVDA has averaged a market share well above 60% over the past several years.

Financial Metrics

I’ll defer to myself here and offer a link to my recent commentary on 2nd quarter earnings. This piece discusses the recent gaffes and competitive struggles that led to the last leg of the 2/3 share cut I’ve already mentioned. Shares currently trade for less than 10x Fiscal ‘08 earnings, but again the volatility story makes this ratio much less telling than for most sectors. A big key for NVIDIA is the balance sheet, with over $3/share in cash and zero debt. This give them (and us as investors) a lot of flexibility to wait out the zigs and zags of technology cycles.

I have never been - nor will I become - one of those overdedicated techies that spend days parsing out the specs of each new chip that comes to market. I always imagine them sitting on the floor of their apartments, surrounded by wires and cracked-open desktops as they fervently hold a stopwatch to the latest results given the combination of X processor on Z operating system with Y graphics chip. I suppose these folks serve a valuable role in their corner of the market. I’d rather be one layer above that fray and focus on the operating results of the companies. NVIDIA has proven to me that they can remain relevant, as they’ve done sor for over a decade. Their fan base is extremely loyal, and the company is smart enough to give them constant developer tools to test, fiddle, and communicate back their thoughts to the company.

Secular Targets

My core thesis is quite simple - we contstantly crave better graphics, and this isn’t going to stop or even slow down until we get to the phase of “I can’t tell the difference between my screen and photo quality”. Each new iteration of operating system, video game, cell phone or other device has had a higher graphics capability than the one before it. Other features may come and go, but never, ever, graphics.

To that end, NVIDIA should be able to either plant a permanent flag in an expanding industry, or get acquired for their intellectual property and brands. I am rooting for the first but would understand if the second came to be as well.

Ryan Barnes

More on this topic (What's this?)
NVDA : Long-term prospects and valuation (Blogvesting, 7/19/08)
nVidia revisited. (Bapcha's Stocks., 9/16/08)
Nasdaq briefly - 2 Nov (Short-Term Trading, 11/2/08)
Read more on NVIDIA at Wikinvest
  • Share/Bookmark
Category: Investing Philosophy, Secular Trends Portfolio, Tech Earnings
Tags: > >

Comments