If you’re looking for a large-cap success story from this coronavirus-stained year, look no further than GPU giant Nvidia (NVDA). Driven by two segments - gaming and data center – perfectly suited to the times, investors have rewarded Nvidia with share gains of over 70% year-to-date. So, is now the time to reduce exposure to this impressive performer?
Au contraire, says Rosenblatt analyst Hans Mosesmann, who argues Nvidia’s “data center and gaming tailwinds are just getting started.”
The 5-star noted, “We continue to like the Nvidia story over the long-term, as we see the secular shift to data processing units within the data center, the entrance into new markets (inference, analytics, machine learning), and strategic partnerships (Mercedes-Benz, potentially others) helping to drive strong revenue growth over the coming years.”
Mosesmann doesn’t expect data center momentum to slow down anytime soon. With the recent addition of data specialist Mellanox, the segment now makes up 40% of Nvidia’s overall business. Along with Mellanox, Mosesmann sees additional tailwinds stemming from the A100 Tensor Core GPU - the world's fastest cloud and data center GPU - and “the secular shift within the data center to the data processing unit (DPU).”
As for gaming, with most games now able to run on different platforms, Nvidia will benefit from users’ ability to purchase new GPUs along with new consoles. Therefore, the launch of new gaming consoles during the holiday season should act as another tailwind for Nvidia “for many quarters.”
Add to the mix Nvidia’s new partnership with Mercedes, in which the two are collaborating on self-driving vehicles using Nvidia’s DRIVE platform - set to hit the market in 2024 - and Mosesmann makes a bold, yet realistic prediction.
“We would not be surprised if this initial partnership between Nvidia and Mercedes leads to a string of additional partnerships for Nvidia, as the Nvidia DRIVE platform is the only other platform outside of Tesla that can bring software and AI capabilities to the car,” the analyst said.
To this end, Mosesmann maintains a Buy recommendation on Nvidia shares and raises the price target from $400 to $500. What’s in it for investors? Upside potential of 19%. (To watch Mosesmann’s track record, click here)
Nvidia has received strong support from Mosesmann’s colleagues, too. Its Strong Buy consensus rating is based on 27 Buys, 4 Holds and 1 Sell. However, given those outsized gains, the $397.38 average price target implies a modest downside. (See Nvidia stock-price forecast on TipRanks)
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A lot of people in the stock market want Nikola Corporation (NKLA) to be the next Tesla. Unfortunately, the company filed a prospectus allowing shareholders to dump a large amount of shares that will cause an overhang on the stock.
Nikola has yet to generate revenues from vehicle sales, yet the stock already has a market value of $21 billion, an amount approaching the level of Ford. The company has the innovative promise similar to Tesla in the vehicle space with the goal of building a fleet of hydrogen fuel-cell electric trucks, but the hype extends far beyond reality here and the selling shareholders know this.
20% of the Shares
The company only went public on June 4 via a merger with VectoIQ, yet shareholders are already getting ready to leave. You can’t blame them with the stock soaring from below $15 before the deal was announced to above $90 at the high point.
A few weeks ago, the company filed a prospectus to allow shareholders to unload 23,890,000 warrants and 53,390,000 shares for a combined 77,280,000 shares at a future date. The good news is that Nikola will receive the $11.50 value per warrant for total aggregate proceeds of $275 million. The bad news is that shareholders want to sell over 20% of the company, giving the stock an overhang until these shares are sold.
As a result, Nikola will have around $1.0 billion in cash to fund operations.
Not Close to Tesla Yet
The market is already assigning a Tesla valuation to a company without a production vehicle. At the end of 2019, Nikola listed 14,000 orders for a $10 billion backlog. The company now lists orders of up to $14 billion.
The issue here is that full production isn’t expected until 2022 or possibly 2023 at the earliest. Tesla didn’t see its stock surge beyond $40 until back in 2013 when revenues reached $2 billion.
The electric vehicle company had a long-proven concept with questions only surrounding Elon Musk’s ability to scale operations to justify the share price. After reaching $2 billion in revenues in 2013, the company took four years to generate $14 billion in total revenues.
Nikola might have a large order book, but it is going to take a considerable amount of time for it to ramp up production. Tesla provided a prime example of how even a cutting-edge manufacturer struggled mightily to meet production targets for years.
Takeaway
The key investor takeaway is that the valuation for Nikola far exceeds where Tesla traded, even when the latter already had a strong business. Although it’s unclear whether all shareholders will dump these shares, investors should sit on the sidelines until the overhang is gone.
The pre-revenue company is fully valued, with NKLA pricing in perfection for an unproven business model. Even J.P. Morgan analyst Paul Coster has a $45 price target on the stock, based on potential 2027 EBITDA of $1.7 billion. Anytime analysts start using numbers out seven years, investors better beware.
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Disclosure: No position.