Nvidia Corp (NVDA) 2019 · Nvidia Corp. operates a global visual computing company by designing the graphics processing units (GPU) for professional markets including gaming, professional

Important disclosures appear on the last page of this report.

The Henry Fund

Henry B. Tippie College of Business

Ziyi Zhang [[email protected]]

Nvidia Corp (NVDA) Apr. 2nd 2019

Information Technology – Internet Information Providers Stock Rating HOLD

Investment Thesis Target Price $178-182 Nvidia Corp. operates a global visual computing company by designing the graphics processing units (GPU) for professional markets including gaming, professional visualization, datacenter, automotive, and OEM&IP respectively. It operates through two segments, the Graphics Processing Unit (GPU) and Tegra Processor. Nvidia has been putting effort in developing its GPUs for different applications. Fueling with the prosperity of growing trend of each market, the company would have a better return in long-term. The intensified international trade relations and the historical leftover restrict the development in a short-term, and thus lead to a HOLD recommendation. Drivers of Thesis

Enlarge in GPU market – Nvidia grows alongside the improvement of entire GPU market, which keeps enlarging its market share with a CAGR of 30% through 2026.

Acquisition of the Mellanox Technologies with $6.9 billion cash may decrease the manufacture expense and bring benefits in datacenter segment.

Increase in automotive vehicles market – The business structure in automotive vehicles highly fit into the growing trend of this market.

Risks to Thesis

The cryptocurrency bubble has burst, which generated nearly $1.95 billion starting from April 2017 [13], the leftover from the heat brings up a big problem.

The dispute between US and China will result in a lower return in China market and higher cost.

Stronger dollar position lowers the revenue from international market.

Henry Fund DCF $190.59 Henry Fund DDM $157.72 Relative Multiple $146.33 Price Data Current Price $183.00 52wk Range $124.46 – 292.76 Consensus 1yr Target $180.79 Key Statistics Market Cap (B) $111.40 Shares Outstanding (M) $608.50 Institutional Ownership 67.80% Five Year Beta 1.63 Dividend Yield 0.30% Est. 5yr Growth 8.00% Price/Earnings (TTM) 28.55 Price/Earnings (FY1) 24.16 Price/Sales (TTM) 9.83 Price/Book (mrq) 12.28 Profitability Operating Margin 32.47% Profit Margin 35.35% Return on Assets (TTM) 19.38% Return on Equity (TTM) 49.26%

Earnings Estimates Year 2017 2018 2019A 2020E 2021E 2022E

Analyst $4.72 $6.44 $7.85

EPS $2.57 $4.61 $6.63 $5.41 $6.15 $7.54

growth 138% 79.4% 43.8% -18.4% 13.7% 19.5%

12 Month Performance Company Description

Nvidia Corporation, based in Santa Clara, California, designs graphics processing units for the gaming and professional markets, as well as system on a chip unit for the mobile computing and automotive market. The company operates through two segments, GPU and Tegra. GPU produces processors for gaming (GeForce), design professional (Quadro), big data and deep learning (Tesla), and cloud-based streaming (GRID). The Tegra segment produces SoCs, DRIVE automotive computers, and SHIELD set-top box.

28.6

49.3

26.9

35.6

47.3

29.4

40.2

29.6

17.1

0

10

20

30

40

50

60

P/E ROE EV/EBITDA

NVDA Industry Sector

-60%

-40%

-20%

0%

20%

A M J J A S O N D J F M

NVDA S&P 500

source: yahoo finance

source: yahoo finance

Page 2

EXECUTIVE SUMMARY

We recommend a hold on Nvidia, with a upside of a 3.8%. Nvidia mainly focuses on GPU design and diversified the application of GPU across markets, including gaming, datacenter and autonomous vehicles. As each market is having an upward trend and becoming the core of the total market, Nvidia is going to have a better future in long-term resulted from the growing demand.

Based on the revenue structure segmented by geography, we see the biggest concern for Nvidia will be the macroeconomic outlook. More than half of Nvidia’s revenue relies on China’s market and so does the manufacture. The China’s economic recession and the trade war will lower the demand from Chinese consumers and may lead to a bad influence on revenue. Once the dispute between USA and China could be settled down effectively, Nvidia would have a surging point. Furthermore, the diminishing heat of cryptocurrency left excess inventories for Nvidia to solve.

COMPANY DESCRIPTION

Nvidia is a technology company incorporated in Delaware and headquartered in Santa Clara, California. Starting with the focus on PC graphics, Nvidia invented the Graphics Processing Unit (GPU) in 1999. As three-dimensional models of image, video or video game into a representation on computer screen becomes more persuasive, the need for faster processing speeds increases. GPU allows for faster graphics processing speeds.

Nvidia recently extend their focus to the revolutionary field of artificial intelligence (AI). Fueled by the sustained demand for better 3D graphics and the scale of the gaming market, Nvidia has evolved the GPU into a computer brain at the intersection of VR, HPC, and AI.

Nvidia has achieved progress in areas including datacenter, gaming, professional visualization, automotive and edge computing. The two reportable segments of Nvidia are GPU and Tegra Processor.

The following pie chart is a breakdown of Nvidia’s revenue for fiscal year 2019, $11.7 billion in total. GPU business

revenue was $10.17 billion, up 25% from a year earlier, which composes 87% of total revenue. Tegra Processor businesses revenue was $1.51 billion, slightly up from a year ago, which account for 13% of total.

Source:10-k

Business segments

GPU

GPU business spans three platforms, gaming, visualization, and datacenter platform.

In fiscal year 2019, Nvidia announced a new computer graphics technology using Turing architecture named Nvidia RTX. It produces movie-quality images in real time using ray tracing and AI. The company also released many new GeForce RTX desktop GPU products.

Gaming revenue driven by the growth in gaming GPUs was up 13% from a year ago to $6.25 billion. According to DFC Intelligence analysis, the PC gaming market has been continuing to grow from strength-to-strength. They predicted the market rise to $37 billion by 2022. [1] From this point, we predicted the revenue of GPU will have a stable growth for next five years will a CAGR of 13.7%. However, the revenue of PC gaming will be dominated by Asia, which accounts for 58% of the market. [1] The deteriorating macroeconomic conditions will drive a decrease in demand from China’s market. As thus, we forecasted a lower CAGR over the next five years than the previous CAGR, 21%. In addition, the revenue of previous couple years is boosted because of the heat of mining. The growth rates during fiscal year 2017 and 2018 are both nearly 40%. As the decrease in the heat of cryptocurrency, the demand for GPU will be more stable, and dominates

13%

87%

Revenue

Tegra Processor

GPU

Page 3

by the gaming industry. This resulted in a slowly decrease in the growth rate over the forecasting years.

Datacenter revenue is the second biggest segment of GPU business, and was $2.93 billion in for fiscal year 2019. This revenue is up 52% from a year ago, and led by strong sale of Volta architecture-based products, including Nvidia Tesla V100 and DGX system. However, based on Gartner’s report of IT spending in 2019, the spending in data center will have a slowdown in next two years. The slowdown of entire market will decrease the demand in this segment.

Factored in the results of diminishing heat of mining and the slowdown of total datacenter market, we modeled the revenue in the coming year will have a 14% decrease. We also have the faith that the revenue will bump up back in the following years as the gaming industry is regarded as the future of entertainment. Thus, we had a CAGR of 12% over the five-year forecasted period.

Tegra Processor

Tegra Processor business includes automotive, SOC modules for gaming platforms, and embedded edge AI platform. The business revenue was up slightly in fiscal year 2019 compared to fiscal year 2018, which are $1.54 billion and $1.53 billion respectively. This increase was mainly driven by the increase from automotive revenue. The automotive revenue was $641 million, accounted for 15% increase compared with 2018. The increase was primarily from infotainment modules, production DRIVE PX platforms, and development agreements with automotive companies.

SEMICO suggested that the automotive electronics will grow at a CAGR of 8.9% through 2020. [4] As the revenue of Tegra is mainly driven by the automotive revenue, we have modeled a CAGR of 8% in processor based on the market rate.

Geography

Source: 10-K

Above is the pie chart of revenue segmented geographically. Revenue from sales outside of the United States accounted for 87% of total revenue for fiscal year 2019. China included Taiwan is the major player accounted for 53 % of the total revenue.

Source: 10-Q

The chart shows that the total revenue of Nvidia is highly correlated with the behavior in Asia. Sales and arrangements with third-party manufactures provide for pricing and payment in US dollars, and, therefore, are not subject to exchange rate fluctuations.

However, China, as the biggest player in Asia market, has a slowdown in the entire economy, and this drives a decrease in demand. We penetrated China’s influence in our entire revenue forecast and led to a CAGR of 10% in the forecast period.

53%

20%

13%

8%6%

Geographical Revenue Decomposition

China

Other Asia Pacific

United States

Europe

Other Countries

Page 4

RECENT DEVELOPMENTS

Recent Earnings

In the fourth quarter of Nvidia’s 2019 fiscal year, earnings per share is $0.80, which is higher than the consensus’s expectation, $0.75, and the revenue was $2.21 billion, which is $10 million higher than the consensus’. According to NVDA’s financial statement, earnings per share was down 53 % from $1.72 a year earlier and down 57 % from $1.84 in the previous quarter. Revenue was down 24 % year over year in the quarter, which was $2.91 billion a year earlier, and down $3.81 billion in the previous quarter.

The decreases in both earnings and revenue are largely driven by gaming business. Following the boom of cryptocurrency, management’s expectations on the revenue of GPU increased, and thus leaded to a high inventory. However, the cryptocurrency bubble has burst – bitcoin has lost nearly 80% of its value over the past year, and other digital coins fared even worse. GPU’s demand is highly driven by mining, and thus after the disappearance of demand from miners, the excess inventory needs to be dealt with. As the mining revenue has been included in gaming segment, this segment will likely suffer a steeper decline in a short-term. In addition, sales of TITAN RTX™ using Nvidia’s new Turing™ architecture were lower than expected as well. Although these products generate a revolutionary leap in performance and innovation with real-time ray tracing and AI, the current price, $2,499, is way more expensive than a common one priced around $500. Customers would wait for lower price points and further demonstrations of RTX technology in actual games, which results in a delay in purchase, and further in a lower revenue.

Data center also missed the expectation. Nvidia said that ‘number of deals in the company’ forecast did not close in the last month of quarter as customers shifted to more cautious approach.’ This should be attributed to the slowdown of the entire data-center market. Gartner issued its forecast for total worldwide IT spending in 2019 and pointed out that the spending in data center would be to slow for at least the next 2 years. Gartner expects an increase by 4.2% in 2019, which is less than half the rate of 2018. Also, looking further ahead, Gartner predicts that

the data center spending will decline by nearly 4% in 2020. [3]

Acquisition of Mellanox

On March 11th, Nvidia announced a $6.9 billion, all-cash deal to acquire Mellanox. This is an Israel- and Silicon Valley-based supplier of smart interconnect solutions and services for servers and storage. This announcement directly led to a 7% pop in Nvidia’s shares, and the share price continued to rise as the market further digested the news, finally achieved 12.7% gain for the week that began with the Monday acquisition news.

A reasonable explanation of this growth is both companies are leading players in the datacenter market, especially in high-performance computing (HPC), acquisition leads Nvidia to become more dominant in the datacenter market. Mellanox has an irreplaceable place in the interconnection technology market. It provides libraries of software that can exploit its clients’ advanced needs, turning its interconnects to deliver high bandwidth and low latency for specific use cases. Nvidia, as the leading position in GPU market, also delivers tremendous value though its software, such as CUDA, CuDNN, TensorRT, and most recently its RAPIDS library for Machine Learning acceleration. This drives another irreplaceable status for Nvidia. The combination of both companies can leverage their platforms to each other’s advantages; and the integration between the GPU and the interconnection technologies of two companies would move the union from leading position to a monopoly in the HPC market.

Driven by the artificial intelligence, machine learning, data analytics and data sciences, datacenters are becoming the most important computers. Datacenters will require high performance GPUs and also the interconnection technology to operate all GPUs together. Last year, Nvidia announced its own interconnect technology, called NVSwitch, which is a fabric of 16 interconnected GPUs that appear as one massive GPU, with shared data space, to solve more scalable problem. Mellanox can help Nvidia to ramp that approach to even larger and more capable GPU clusters. With the acquisition of Mellanox, Nvidia can move the revenue of GPUs from reliance on gaming industry to datacenter. According to annual report of fiscal year 2019, revenue from datacenter has the largest growth rate, 52%, and brought up $2.9 billion return. We

Page 5

can see Nvidia intended to shift the whole business towards datacenter. The acquisition will support this ambition.

In addition, Nvidia had a long-time partnership with Mellanox before the acquisition, and thus the leverage of the existing products with the new products would not be a big problem for Nvidia.

Nvidia Drive Constellation

Nvidia released its new cloud-computing platform in 2018, named Nvidia DRIVE Constellation. This platform uses two different GPU equipped servers and software to simulate the operations of an autonomous vehicles. One of the servers runs the Nvidia DRIVE Sim software, using Nvidia GPUs to simulate possible the output of the image sensors and provide photo-realistic visualization of virtual vehicle travel. The simulated sensor output is then constantly fed do the second server, which contains a DRIVE Pegasus autonomic driving platform that operates AI to react on the sensor input. The final driving decisions will be infused back to the DRIVE Sim server to complete the closed-loop system.

The variability of millions of roads, driving conditions, weather, traffic, and unexpected events lead to many corner cases that can create hazards for people and liabilities for automakers and testers. This constellation can help them, instead of simulating all kinds of situations by themselves, run their systems through a near-endless number of scenarios.

We believe that this platform will boost the revenue as automakers can instantly adjust their software based on the testing results shown from this constellation without having actual driving tests. It both reduce costs and improve safety.

Analysts’ Expectations Comparison

Consensus estimated the total revenue for fiscal year 2020 would be $11.18 billion which is highly corresponded with our estimation, $11.83 billion. The forecasting of gross income also only has a minimal difference, where consensus has a $6.78 billion and we have a $7.14 billion. These near values should be resulted from the pessimistic opinions towards short-term revenue of Nvidia. We both believe the excess inventories cause a big trouble for

Nvidia in next year. Consensus had an even more pessimistic idea than we have. The revenue based on their estimation has a decrease rate of 4.6%. We believe that even the leftover will cause trouble to Nvidia, it would still have a positive growth rate.

We are more optimistic towards earnings per share of 2020 than consensus. We forecasted EPS to be a $5.41/share while consensus had a $4.72/share. The potential reason should be our assumption about acquisition’s affects on R&D and SG&A. We believed that the acquisition will lower the R&D expense as the combined company may find some efficiencies by merging R&D effort; and increase the SG&A expense as there would be a potential expense for leveraging the new employees with the existing ones. Also, we didn’t factor in the possible change of the share outstanding to our model. This could be another reason leads to our higher EPS.

INDUSTRY TRENDS

GPU Market

Based on the research from Acumen, The Graphics Processing Unit Market size is likely to reach over $103.6 billion by 2026, which shows a CAGR of 30%. The hardware segment accounts for over 70% of total GPU market in 2018 and is relied upon to command the market by 2025. Nvidia has a great position under this market. As it shown in FY19 10-k, Nvidia’s 87 % of revenue relies on GPUs business.

Segmented by applications, GPU market can be divided into gaming, design and manufacturing, healthcare, automobile, real-estate, and others. The gaming application segment is expected to hold a major share of the GPU market accounting for over 34% by 2024.[7] This market growth is attributed to the growing demand for high-resolution games. This also positions a good trend for Nvidia, as Nvidia’s revenue highly relies on gaming business. In FY19, 52 % of revenue came from gaming industry. Although Nvidia is intended to shift the whole business from gaming-oriented to data center and AI, we believe that this highly reliance cannot be changed in short-term.

Page 6

The automotive GPU market is also overserved to be the most noteworthy development with a CAGR of 35% from 2018 to 2024. This demand is driven by the rapidly growth in automotive vehicles market. As the market is concentrating on growing new vehicles with enhanced plan and usefulness, GPUs are broadly utilized in programming to trigger the analysis of complex informational indexes and the use of questions to structure new models and simulate potential scenarios. We believe that as the expansion in demand of this product, the GPU market will be observed a surge over the forecast timeframe. In addition, Nvidia has already stepped into automotive vehicles market which brought up 5 % revenue in FY19. This again directs a good shape for Nvidia’s future business.

Data Center

The global data center market is estimated to reach revenues of around $174 billion by 2023, growing at a CAGR of approximately 4% from 2018 to 2023. [8]

We believe that datacenters are the most important computers in the world. Nvidia’s CEO pointed out that the emergence of artificial intelligence and machine learning and data analytics has put so much load on the datacenters. The data size and computer size are so great that can not fit on one computer. So, they should be distributed on multiple computers and the high-performance connectivity is required to allow these computers to work together. That is why datacenter as the giant coherent-computers is rapidly becoming important these years.

Nvidia has already addressed a concern in this growing market. The company are engaged with accelerating computing platform including AI and HPC applications. The platform is functioned across a scalable amount of GPUs. This drives Nvidia keeping developing and optimizing its datacenter business, which was accounted for a quarter of the last year total revenue. Based on this large proportion of existing business, we believe that the increasing concern from Nvidia towards datacenter and the growing necessity of datacenter would lead to a prosperity to future revenue.

The Rise of Autonomous Vehicles

The global transportation industry is going though significant disruptive changes, and the key driver behind this is the emergence of autonomous vehicles. The market is predicted to grow from current $24.2 billion to $98.3 billion by 2023. This shows a remarkable CAGR of 32.63%.

Source: Marketwatch

Although the CAGR over the forecasted period shows a bright future in this market, we believe that autonomous vehicle development is a time and resource-intensive business as it requires dozens of test vehicles, and an insanely massive amount of both hours and data to complete the test and then finally bring an actual product. However, Nvidia offers both the on-board supercomputers required for real-time autonomous vehicle control as well as a cloud-based testing platform. Under this business structure, Nvidia will benefit from the growing process of the market as it offers the platform for automotive manufactures testing their systems. At the same time, Nvidia keeps updating and completing its own GPU business to follow the pace of improving need from automotive vehicles. This will not only bring a giant benefit to the company, but also lead to an irreplaceable and even monopoly position for Nvidia in this market.

Gaming Industry

Driven by the demand for high-resolution games, the gaming application segment is expected to hold a major share of the GPU market accounting for 34% by 2024. According to ESAC Report 2018, 80% of Canadians believe that video games will become the mainstream entertainment. Around 30% of gamers have purchased a digital download of the full game in the past 6 months. Both data here visualize a positive expectation on gaming industry.

Page 7

Source: Statista The above chart shows a growth in penetration rate of gamers among the general population in the United States from 2013 to 2018. This again indicates the increasing popularity of gaming industry. According to FY19 annual report, 53% of Nvidia’s revenue came from gaming application. Nvidia offers GPUs for both PC gaming and cloud-based game-streaming service. Therefore, we concluded that, under the increasing trend of the entire gaming industry, Nvidia would have a good performance.

MARKETS AND COMPETITION

Peer Comparisons

Source: Jon Peddie Research

Nvidia and AMD are the leading companies split the GPU market. We see that Nvidia dominants the market in the last 10 years. It also increased its market share dominance over AMD since the second quarter of 2018. This growth is dependent on the booming of cryptocurrency. As we discussed above, the disappearance of mining demand will hurt Nvidia’s following returns. And thus we see the market share of Nvidia will have a downward trend over the timeframe, but it is still large enough to dominant the GPU market.

Budget Winner

Under $200 Nvidia

$200 - $350 Tie

$350 - $500 Nvidia

$550 + Nvidia

Source: maketecheasier

An easy approach to compare two companies is based on

the need of their products. The above chart is the

comparisons between two graphics card companies

breaking down by budget. Nvidia’s flagship cards run

around $1200, while AMD’s top cards come in around

$500. Nvidia wins in almost every price range except one

time in range $200 - $350. This strongly shows a higher

growth rate in Nvidia’s future revenue as gamers basically

can pay the same price with a better quality from Nvidia.

Geographic Breakdown

2018 revenue segmented by geography (In millions) NVDA AMD

United States 12.85% 20.49%

58%

61%

63% 63%64%

66%

56%

58%

60%

62%

64%

66%

68%

2013 2014 2015 2016 2017 2018

Penetration rate of gamers among the general population in the US

Page 8

China including Taiwan 52.59% 38.86%

Other Asia Pacific 20.21% 30.16%

Europe 7.80% 7.26%

Other Countries 6.55% 3.23%

Source: 10-k

From the geographical revenue breakdown for Nvidia and

AMD for 2018, we can see both companies are highly

correlated with China’s market. Under the current

macroeconomic situation that United States has an

intense relation with China, we believe that AMD will have

a better position in the industry, as AMD’s revenue is more

diversified that Nvidia’s. Nvidia has more than half of the

revenue came from China, and thus affecting by the

international relation, Nvidia will be influenced deepener.

Gross Profit Margin

Source: Factset

The chart shows gross profit margin over the past five

years starting from 2014 for NVDA and AMD. In general,

Nvidia has a higher gross profit margin than AMD does.

This shows that AMD has spent more in COGS over the

past five years. This is primarily because AMD’s

manufacture mostly relies on GLOBALFOUNDRIES Inc,

which is an American company, while Nvidia uses Chinese

manufacturers. The labor cost in United States is 4 times

more than China. [10] We believe that the big difference

in labor cost is the main drive in COGS expense here.

Although Chinese labor cost keeps growing, we believe

that US labor cost will still be way more expensive than

China. In addition, the acquisition of Mellanox will

decrease the COGS to some extent, as the Mellanox

manufactures products itself. This results in a better

position for Nvidia in the market. We have molded our

gross profit margin stably around 60% with a CAGR of only

1% over the forecasting period.

Operating Profit Margin

Source: Factset

AMD had a struggling period from 2015 to 2016. That was

the time AMD launched the graphics cards Fury and Fury X

both featured high-bandwidth memory. This was

supposed to give AMD an advantage in the high-end

portion of the market, however, the Fury X essentially

matched the performance of Nvidia’s flagship graphics

card. Starting from 2016, both AMD and Nvidia went into

a better performance period, as they both set to move to

a 14nm manufacturing process. The around zero operating

profit margin shows that AMD has a history of over

promising and under delivering.

However, Nvidia has seen consistent growth in operating

margin since 2014. As we believe that, the SG&A would

increase in the next couple years resulted from the

acquisitions, we have a decrease in operating profit margin

for this period. In general, we have estimated a stable

operating profit margin around 50% for Nvidia over the

forecasting period.

Inventory Turnover

0%

20%

40%

60%

80%

2014 2015 2016 2017 2018

NVDA AMD

-20%

0%

20%

40%

2014 2015 2016 2017 2018

NVDA AMD

Page 9

Source: Factset

Both Nvidia and AMD manufacture products based on the

estimation of customers’ demand and requirements. They

sell many of the products through a channel model, and

the decisions made by channel partners will directly

impact financial results. Companies will build inventories

in order to have shorter shipment lead times and quicker

delivery schedules, and thus a sufficient inventory to fill

customers’ orders on a timely basis indicates a better

financial strength.

We see inventory turnover as an efficient symbol to

compare two companies’ financial strength. Over that last

five years since 2014, Nvidia had a decrease in inventory

ratio, signaling improved efficiency. The dramatic

decrease from 2017 to 2018 is resulted from the heat of

mining. However, this situation misled Nvidia to highly

increase its inventories, and thus in the following years,

the excess inventories will be the core problem the

company needs to face. AMD, on the other hand, contains

products including both GPU and CPU. The cryptocurrency

had less influence on company’s inventory. Under this

circumstance, AMD is expected to be in a better shape in

the following years.

Valuation Metrics

Source: Factset

We compared some valuation metrics between NVDA and

AMD, including EV/EBITDA, P/E, and total debt/EV.

Overall, these metrics lead to an undervalued position for

NVDA relative to AMD.

A low PE ratio indicates that the current stock price of

NVDA is low relative to earnings, and thus shows that

NVDA is a relative cheaper option than AMD. EV/EBITDA,

which eliminates both the affect by changing the capital

structure and the non-cash expenses such as depreciation,

is a better measure than the PE ratio. A low EV/EBITDA also

indicates that NVDA is more attractive than AMD as it

indicates an undervalued position for NVDA. However,

NVDA has a higher EV/Sales than AMD does, which shows

an overvalued position for NVDA relative with AMD. We

do not put too much concern here as AMD sells both CPUs

and GPUs, and thus the burst of cryptocurrency bubble has

relative lower influence on AMD’s sales. In the long-term,

like what we have discussed above, Nvidia will have a

better sale in GPU than AMD.

ECONOMIC OUTLOOK

Stronger US dollar

3.5

4

4.5

5

5.5

2014 2015 2016 2017 2018

NVDA AMD

24.16 21.5

6.89

55.69

29.78

2.88

0

10

20

30

40

50

60

P/E (ttm) EV/EBITDA EV/Sales

NVDA AMD

Page 10

Source: Trading economics

The chart shows a stable growth in US Dollar over the last year, and the US Dollar is expected to trade at 96.06 by the end of Q2 in fiscal year 2019. The expectation of US Dollar in next 12 months is expected to reach 97.33 based on trading economics.

We believe that the exchange rate will be the largest economic issue for Nvidia as the company has in total 87 % of revenue came from countries outside United States. As the sales and arrangements are both priced in US dollars, an increase in the value of the US dollars relatives to other currencies would increase the price of Nvidia’s products, and thus would lead to a decrease in demand.

Trade War

We see the trade dispute between Unites States and China as another big issue for Nvidia. As Nvidia has 24 % of revenue came from China excluding Taiwan in fiscal year 2019, the intense relation between US and China will decrease the demand from Chinese market. Also, Nvidia is a fabless semiconductor company, which means the company does not manufacture the chips by themselves. The Trump administrator’s latest tariffs of 10 % on $200 billion of imports from China will apply to graphics cards assembled in China. This affection has already appeared on the new RTX product family, which has a price increased by 5 to 10 %. [6] As the Chinese market grows in bigger in Nvidia’s revenue, the trade war will affect deeper.

China’s Economic Slowdown

Due to the facts including a rapidly aging population, a falling birth rate, a tightening Federal Reserve and high debt, China’s economics are facing a recession period. Also, China’s economic growth is highly dependent on the

investment in fixed assets, such as factories, machinery, and apartment buildings. However, such investment fell as a share of GDP from 82% in 2016 to 71% in 2018 resulted from the governments’ regulation. A further drop is expected in the following years, as one in four apartments in China currently sit empty and auto manufactures are operating at just over 50 percent capacity. All these facts lead to a recession concern.

Nvidia’s revenue would be affected by this recession as the company’s business relies on China’s market heavily while the Chinese consumers may have a lower demand in GPUs.

CATALYSTS FOR CHANGE

Nvidia’s efficiency to deal with the overhang inventories will directly influence the return in the following years. The blockchain is still a potential boom for GPU market.

Intel announced that it will enter into GPU market by 2020. This would make the company the third-largest player in GPU market. It won’t be too hard for Intel to catch up the pace in this field as it has stuffed its own onboard graphics into its processors for years.

INVESTMENT POSITIVES

• Nvidia’s 87 % of business is based on GPU production. The demand of GPUs come across diversified markets, which keeps enlarging this market. Nvidia, under this situation, will develop a better return.

• Nvidia is intended to shift the business towards data center, which has already had a quarter portion of the total business structure based on the revenue. The growing necessity of datacenter is a big drive for Nvidia.

• Nvidia has already put effort in the automotive vehicles business and has the intention to enlarge this segment. Along with the steady increasing in this market, we believe that Nvidia will earn a better shape.

INVESTMENT NEGATIVES

Page 11

• According to Market Insider, Nvidia had a 75% market share of GPUs sold for mining purpose, which generated $1.95 billion since April 2017. [14] The ‘crypto hangover’ needs to be corrected in the following years.

• Foreign exchange rate is the biggest concern here as Nvidia has 87 % of revenue relied on countries outside the United States. The expected stronger position of US dollar decreases the demand.

• The dispute between United States and China hasn’t shown a good signal now. This dispute will directly affect COGS and also the revenue from China, which accounts for more than half the revenue.

VALUATION

Revenue

We segmented our revenue by two components, GPU and Tegra. Based on the historical data from 2015 to 2019, the composition of these two products were very steady. GPU accounted for an average of 87% of the total revenue and Tegra Processor accounted for 13% on average.

We forecasted our total revenue based on the discussion we had before, with a decrease in 2020 and a stable increase until 2024. Based on the total revenue and the proportions Nvidia kept for the last five years, as we believe Nvidia would want to keep a stable inside business-structure, we estimated each component’ revenue in the forecasting period. It shows a CAGR of 13.7% over five-year period for GPU and a CAGR of 10% for Tegra Processor.

Cost of Revenue

R&D

Nvidia as a technology highly focus on the research and development activities in order to improve and enhance product design. The historical percentage of R&D expense out of total revenue is 20% on average. Mellanox is a technology company focusing on product design as well and has spent roughly 32% of total revenue on R&D in last quarter compared with 29% by Nvidia. We believe that the combined company may find some efficiencies by merging

R&D effort, and thus we have modeled the R&D expense as 19% of total sales with a CAGR of 16% over the forecasting period.

SG&A

The sales, general and administrative expense is driven by employee additions and increases in employee compensation and other infrastructure cost. In the previous five years, the SG&A expense comprised 8.81% on average. In last quarter, Nvidia spent 12% of total revenue on SG&A, when Mellanox spent over 18%. So, because of the acquisitions, we forecasted the combine SG&A will be slightly more than the historical average in the first two years, as the new merge will spend extra to leverage the new employees with the existing ones. We finally modeled this expense with a CAGR of 7% over the forecasting period.

Valuation Models

We estimated the stock price using three valuation models, discounted cash flow (DCF), dividend discount model (DDM), and relative valuation model for Nvidia. Three models brought up a wide range of prices, and we favor the DCF most.

The DCF model is highly consistent with our assumption of the future revenue and cost. It implies all the drives and risks we have made and gave us a stock price $189, which is an upside of approximately 3.3%.

We also built in DDM model. This approach gave us a stock price $157, which is a downside of 14.2%. This approach only bases on the information in income statement and is relatively low consistent with our assumption. Because we have included the possible influence from the acquisitions of Mellanox Technologies in our cost and revenue, but we have not enough information about the influence on share outstanding, share-based employee compensation, and the buyback of share. Therefore, this approach is less favor to us as it cannot incorporate all the existing situations.

Our least favor model will be the relative valuation. Nvidia’s business almost solely depends on the GPUs, with a revenue portion of 87%. Companies including AMD, Intel, Qualcomm are more diversified in their product. Also, Nvidia and AMD are almost the only players in the GPU market. This model gave us a stock price $146.

Page 12

REFERENCES

1. GameDaily.biz https://gamedaily.biz/article/172/pc-games-market-will-hit-37-billion-by-2022-dfc-intelligenceThe

2. Nvidia DRIVE Constellation https://www.Nvidia.com/en-us/self-driving-cars/drive-constellation/

3. Gartner https://www.gartner.com/en/newsroom/press-releases/2019-01-28-gartner-says-global-it-spending-to-reach--3-8-trillio

4. SEMICO https://semico.com/content/automotive-electronics-cagr-grow-89-through-2020-says-semico-research

5. Trading Economics https://tradingeconomics.com/united-states/currency

6. CNBC https://www.cnbc.com/2018/09/27/trumps-tariffs-on-chinese-goods-to-hit-amd-Nvidia-gaming-graphics-cards.html

7. MarketWatch https://www.marketwatch.com/press-release/at-30-cagr-graphic-processing-unit-gpu-market-remuneration-to-surpass-usd-80-billion-by-2024-2019-02-06

8. MarketWatch https://www.marketwatch.com/press-release/data-center-market---global-outlook-and-forecast-2018-2023-2018-12-11

9. maketecheasier https://www.maketecheasier.com/amd-vs-Nvidia-who-is-king-of-gpus/

10. NationMaster https://www.nationmaster.com/country-info/compare/China/United-States/Labor

11. The Motley Fool https://www.fool.com/investing/general/2015/12/23/the-worst-advanced-micro-devices-inc-headlines-in.aspx

12. EXTEREMETECH https://www.extremetech.com/gaming/271292-intel-will-enter-gpu-market-by-2020

13. COINTELEGRAPH https://cointelegraph.com/news/report-analyst-finds-nvidia-earned-135-billion-more-in-total-crypto-revenue-than-stated

14. FOREIGN AFFAIRS https://www.foreignaffairs.com/articles/china/2019-03-11/whats-causing-chinas-economic-slowdown

IMPORTANT DISCLAIMER

Henry Fund reports are created by students enrolled in the Applied Securities Management program at the University of Iowa’s Tippie College of Business. These reports provide potential employers and other interested parties an example of the analytical skills, investment knowledge, and communication abilities of our students. Henry Fund analysts are not registered investment advisors, brokers or officially licensed financial professionals. The investment opinion contained in this report does not represent an offer or solicitation to buy or sell any of the aforementioned securities. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Henry Fund may hold an investment position in the companies mentioned in this report.

NVIDIA CorporationRevenue Decomposition

Fiscal Years Ending Jan.31 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024EGraphics Processing UnitRevenue 3,839 4,187 5,822 8,137 10,175 10,274 11,698 13,746 16,315 19,581 Revenue Growth% 9.06% 39.05% 39.76% 25.05% -12.31% 13.87% 17.50% 18.69% 20.02%Percentage of total revenue 86.89% 88.22% 87.60% 84.14% 86.85% 86.85% 87.31% 87.70% 88.07% 88.50%Tegra ProcessorRevenue 579 559 824 1,534 1,541 1,555 1,701 1,927 2,211 2,545 Revenue Growth% -3.45% 47.41% 86.17% 0.46% 0.92% 9.37% 13.29% 14.72% 15.11%Percentage of total revenue 13.11% 11.78% 12.40% 15.86% 13.15% 13.15% 12.69% 12.30% 11.93% 11.50%OtherRevenue 264 264 264 43 - - - - - - Revenue Growth%Percentage of total revenueTotalRevenue 4,682 5,010 6,910 9,714 11,716 11,829 13,399 15,673 18,526 22,126 Revenue 4,418 4,746 6,646 9,671 11,716 11,829 13,399.42 15,673.37 18,526.19 22,126.38 Revenue Growth% 7.42% 40.03% 45.52% 21.15% 0.96% 13.28% 16.97% 18.20% 19.43%Percentage of total revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

NVIDIA CorporationBalance Sheet($ million)Fiscal Years Ending Jan.31 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Total assets 7,201 7,370 9,841 11,241 13,292 14,102 14,853 16,435 18,394 21,006 Total current assets 5,713 6,053 8,536 9,255 10,557 11,189 11,659 12,851 14,312 16,309

Cash, cash equivalents and marketable securities 4,623 5,037 6,798 7,108 7,422 7,727 8,324 8,905 9,648 10,801 Cash and cash equivalents 497 596 1,766 4,002 782 928 1,360 1,774 2,344 3,321 Marketable securities 4,127 4,441 5,032 3,106 6,640 6,800 6,964 7,132 7,303 7,479

Accounts receivable, net 474 505 826 1,265 1,424 1,356 1,536 1,797 2,124 2,537 Inventories 483 418 794 796 1,575 2,105 1,799 2,149 2,540 2,971 Prepaid expenses and other current assets 133 93 118 86 136 0 0 0 0 0

Property and equipment, net 557 466 521 997 1,404 1,603 1,896 2,291 2,794 3,411 Gross Property and equipment 1,179 1,100 1,191 1,737 2,171 2,717 3,375 4,161 5,091 6,178 Accumulated depreciation 622 634 670 740 767 1113 1479 1870 2296 2766

Goodwill 618 618 618 618 618 618 618 618 618 618Intangible assets, net 222 166 104 52 45 24 12 7 2 0Other assets 91 67 62 319 668 668 668 668 668 668

Total liabilities, convertible debt conversion obligation and shareholders' equity 7,201 7,370 9,841 11,241 13,292 14,102 14,853 16,435 18,394 21,006 Total liabilities 2,783 2,814 4,048 3,770 3,950 4,277 4,398 4,707 5,189 3,670

Total current liabilities 896 2,351 1,788 1,153 1,329 1,607 1,638 1,816 2,133 2,395 Accounts payable 293 296 485 596 511 666 715 809 967 1,168 Accrued and other current liabilities 603 642 507 542 818 941 923 1,007 1,166 1,227 Convertible short-term debt 0 1,413 796 15 0 0 0 0 0 0

Convertible long-term debt 1,384 0 1,983 1,985 1,988 1,988 1,988 1,988 1,988 0Other long-term liabilities 503 463 277 632 633 682 772 903 1,067 1,275

Other long-term liabilities excluding capital lease obligations, long-term 489 453 271 0 633 682 772 903 1,067 1,275 Capital lease obligations, long-term 14 10 6 0 0 0 0 0 0 0

Convertible debt conversion obligation 0 87 31 0 0 0 0 0 0 0Total shareholders' equity 4,418 4,469 5,762 7,471 9,342 9,825 10,455 11,728 13,206 17,336

Preferred stock 0 0 0 0 0 0 0 0 0 0Common stock 1 1 1 1 1 2 2 2 2 2 Additional paid-in capital 3,855 4,170 4,708 5,351 6,051 5,712 5,151 4,590 4,029 3,468 Deferred compensation 0 0 0 0 0 0 0 0 0 0Treasury stock, at cost -3,395 -4,048 -5,039 -6,650 -9,263 -11,073 -12,883 -14,693 -16,503 -16,503

Accumulated other comprehensive income / loss 8 -4 -16 -18 -12 (12) (12) (12) (12) (12)Retained earnings 3,949 4,350 6,108 8,787 12,565 15,196 18,197 21,841 25,689 30,381

NVIDIA CorporationIncome Statement($ million)Fiscal Years Ending Jan.31 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Revenue 4,682 5,010 6,910 9,714 11,716 11,829 13,399 15,673 18,526 22,126 Cost of revenue (2,082) (2,199) (2,847) (3,892) (4,545) (4,684) (5,027) (5,684) (6,796) (8,209)Gross profit 2,599 2,811 4,063 5,822 7,171 7,145 8,372 9,989 11,730 13,918 Total operating expenses (1,840) (2,064) (2,129) (2,612) (3,367) (3,546) (3,786) (4,422) (5,708) (6,623)

Research and development (1,360) (1,462) (1,466) (1,797) (2,376) (2,295) (2,546) (3,040) (4,075) (4,867)Research and development excluding restructuring and other charges (1,360) (1,331) (1,463) (1,797) (2,376) (2,295) (2,546) (3,040) (4,075) (4,867)Restructuring and other charges - (131) (3) 0 0 - - - - -

Sales, general and administrative (481) (602) (663) (815) (991) (1,251) (1,240) (1,382) (1,633) (1,755)Income / loss from operations 759 747 1,934 3,210 3,804 3,599 4,587 5,567 6,022 7,295 Interest and other income / loss, net (4) (4) (29) (14) 92 113 117 121 125 129

Interest income 28 39 54 69 136 164 168 172 176 180 Other income / expense, net (32) (43) (83) (83) (44) (51) (51) (51) (51) (51)

Interest expense (46) (47) (58) (61) (58) (65) (65) (65) (65) (65)Other income / expense, net excluding interest expense 14 4 (25) (22) 14 14 14 14 14 14

Income / loss before income tax expense / benefit 755 743 1,905 3,196 3,896 3,712 4,704 5,688 6,147 7,424 Income tax expense / benefit (124) (129) (239) (149) 245 (418) (947) (1,127) (1,329) (1,551)Net income / loss 631 614 1,666 3,047 4,141 3,294 3,757 4,561 4,818 5,873

Per share

Basic 1 1 3 5 7 5.40 6.14 7.43 8 9 Weighted average shares

Basic 552 543 541 599 608 610 612 614 616 618

Cash dividends declared and paid per common share 0.340 0.395 0.485 0.570 0.610 1.09 1.24 1.50 1.57 1.91 Payout ratio 30% 35% 16% 11% 9% 20% 20% 20% 20% 20%

NVIDIA CorporationCash Flow Statement($ million)Fiscal Years Ending Jan.31 2015 2016 2017 2018 2019

Net cash provided by / used in operating activities 905.7 1,175.0 1,672.0 3,502.0 3,743.0

Net income / loss 630.6 614.0 1,666.0 3,047.0 4,141.0

Adjustments to reconcile net income / loss to net cash provided by / used in operating activities 275.1 561.0 6.0 455.0 -398.0

Stock-based compensation expense related to stock option purchase - - - - -

Stock-based compensation expense 157.8 204.0 247.0 391.0 557.0

Depreciation and amortization 220.1 197.0 187.0 199.0 262.0

Deferred income taxes 82.6 134.0 197.0 -359.0 -315.0

Loss on early debt conversions - - 21.0 19.0 0.0

Impairment charge on investments - - - - -

Gain on sale of long-lived assets and investments - - - - -

Cumulative effect of change in accounting principle - - - - -

In-process research and development expenses - - - - -

Total other 35.5 87.0 33.0 20.0 -45.0

Payments under patent licensing arrangement - - - - -

Net gain on sale and disposal of long-lived assets and investments -16.5 -6.0 -3.0 -1.0 -

Restructuring and other charges - 45.0 0.0 0.0 -

Amortization of debt discount 28.0 29.0 25.0 3.0 -

Other 24.1 19.0 11.0 18.0 -

Bad debt expense / benefit - - - - -

Gross tax benefit from stock-based compensation - - - - -

Net loss on retirements of property and equipment - - - - -

Non-cash realized gain on investment exchange - - - - -

Tax benefits / deficit from stock-based compensation -18.5 -10.0 0.0 0.0 -

Changes in operating assets and liabilities -202.5 -51.0 -679.0 185.0 -857.0

Accounts receivable -49.3 -32.0 -321.0 -440.0 -149.0

Inventories -95.0 66.0 -375.0 0.0 -776.0

Total prepaid expenses and other assets 4.4 -16.0 -18.0 21.0 -55.0

Prepaid expenses and other current assets - - - - -

Deposits and other assets - - - - -

Accounts payable -26.9 -11.0 184.0 90.0 -135.0

Accrued liabilities and other long-term liabilities -35.8 -58.0 -149.0 514.0 258.0

Accrued and other current liabilities 5.3 39.0 -135.0 33.0 256.0

Other long-term liabilities -41.1 -97.0 -14.0 481.0 2.0

Net cash provided by / used in investing activities -727.0 -400.0 -793.0 1,278.0 -4,097.0

Proceeds from sales and maturities of marketable securities 2,236.8 3,138.0 2,515.0 1,941.0 7,660.0

Proceeds from maturities of marketable securities 864.8 1,036.0 969.0 1,078.0 7,232.0

Proceeds from sales of marketable securities 1,372.0 2,102.0 1,546.0 863.0 428.0

Acquisition of businesses, net of cash and cash equivalents 0.0 0.0 - - -

Purchases of marketable securities -2,861.8 -3,477.0 -3,134.0 -36.0 -11,148.0

Purchases of property and equipment and intangible assets -122.4 -86.0 -176.0 -593.0 -600.0

Reimbursement of headquarters building development costs from banks - 24.0 0.0 0.0 -

Investment in non-affiliates - - - -36.0 -9.0

Other -0.5 -6.0 -5.0 - -

Proceeds from sale of long-lived assets and investments 20.9 7.0 7.0 2.0 0.0

Net cash used in / provided by financing activities -833.5 -676.0 291.0 -2,544.0 -2,866.0

Payments related to stock option purchase - - - - -

Proceeds from issuance of convertible notes, net 0.0 0.0 1,988.0 - -

Purchase of convertible note hedges 0.0 0.0 - - -

Proceeds from the sale of common stock warrants 0.0 0.0 - - -

Proceeds from issuance of debt - - - 0.0 0.0

Payments related to repurchases of common stock -813.6 -587.0 -739.0 -909.0 -1,579.0

Repayment of convertible debt - - -673.0 -812.0 -16.0

Dividends paid -186.5 -213.0 -261.0 -341.0 -371.0

Proceeds from issuance of common stock under employee stock plans 153.5 120.0 -9.0 -473.0 -895.0

Proceeds related to employee stock plans - - - 139.0 137.0

Payments related to tax on restricted stock units - - - -612.0 -1,032.0

Payment of notes payable assumed from acquisition - - - - -

Other 13.0 4.0 -15.0 -9.0 -5.0

Payments for debt issuance costs - - -8.0 0.0 -

Tax benefit from stock-based compensation 18.5 10.0 0.0 0.0 -

Other excluding tax benefit from stock-based compensation and payments for debt issuance costs -5.4 -6.0 -7.0 -9.0 -

Payments under capital lease obligations -2.9 -3.0 - - -

Others excluding payments under capital lease obligations -2.5 -3.0 - - -

Change in cash and cash equivalents -654.9 99.0 1,170.0 2,236.0 -3,220.0

Cash and cash equivalents at beginning of period 1,151.6 497.0 596.0 1,766.0 4,002.0

Cash and cash equivalents at end of period 496.7 596.0 1,766.0 4,002.0 782.0

Supplemental disclosure

Cash received / paid for income taxes, net -14.47 -14.00 -14.00 -22.00 -61.00

Cash paid for interest -17.21 -17.00 -13.00 -55.00 -55.00

Non-cash investing and financing activity

Change in unrealized gains / losses from marketable securities 2.97 - - - -

Assets acquired by assuming related liabilities 9.61 19.00 -16.00 -36.00 -76.00

Goodwill adjustment related to previously acquired business -25.00 0.00 0.00 - -

Deferred stock-based compensation - - - - -

Acquisition of business - stock option conversion - - - - -

NVIDIA CorporationIncome Statement($ million)Fiscal Years Ending Jan.31 2020E 2021E 2022E 2023E 2024ENet Income 3,294 3,757 4,561 4,818 5,873

Depreciation 346 365 392 426 470 Amortization 21 12 5 5 2 Accounts receivable, net 68 (180) (261) (327) (413)Inventories (530) 306 (350) (391) (431)Prepaid expenses and other current assets 136 0 0 0 0 Accountes payable 155 49 93 158 201 Accrued and other current liabilities 123 (18) 84 159 61 Other assets 0 0 0 0 0 Other long-term liabilities 49 90 131 164 207

Net Cash Provided by operating activities 3,662 4,381 4,657 5,013 5,971

Marketable securities (160) (164) (168) (172) (176)Change in PPE-Gross (546) (658) (786) (929) (1087)Goodwill 0 0 0 0 0

Net Cash Used for Investing activities (706) (822) (954) (1101) (1263)

Long-term debt 0 0 0 0 (1988)Additional paid-in capital (339) (561) (561) (561) (561)Dividends payment (663) (756) (918) (970) (1182)Common stock 1 0 0 0 0 Treasury stock, at cost (1,810) (1,810) (1,810) (1,810) 0

Net Cash Provided by financing activities (2811) (3127) (3289) (3341) (3731)

Net increase (decrease) in cash & cash equivalents 146 432 414 571 977

Cash & cash equivalents at beginning of period 782 928 1,360 1,774 2,344

Cash & cash equivalents at end of period 928 1,360 1,774 2,344 3,321

NVIDIA CorporationCommon Size Balance Sheet

Fiscal Years Ending Jan.31 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Total assets 153.83% 147.11% 142.42% 115.72% 113.45% 119.21% 110.85% 104.86% 99.29% 94.94%Total current assets 122.04% 120.82% 123.53% 95.27% 90.11% 94.59% 87.01% 81.99% 77.25% 73.71%

Cash, cash equivalents and marketable securities 98.76% 100.54% 98.38% 73.17% 63.35% 65.33% 62.12% 56.82% 52.08% 48.81%Cash and cash equivalents 10.61% 11.90% 25.56% 41.20% 6.67% 7.84% 10.15% 11.32% 12.65% 15.01%Marketable securities 88.15% 88.64% 72.82% 31.97% 56.67% 57.49% 51.97% 45.50% 39.42% 33.80%

Accounts receivable, net 10.12% 10.08% 11.95% 13.02% 12.15% 11.47% 11.47% 11.47% 11.47% 11.47%Inventories 10.31% 8.34% 11.49% 8.19% 13.44% 17.79% 13.43% 13.71% 13.71% 13.43%Prepaid expenses and other current assets 2.85% 1.86% 1.71% 0.89% 1.16% 0.00% 0.00% 0.00% 0.00% 0.00%

Property and equipment, net 11.90% 9.30% 7.54% 10.26% 11.98% 13.55% 14.15% 14.62% 15.08% 15.42%Gross Property and equipment 25.19% 21.96% 17.24% 17.88% 18.53% 22.97% 25.19% 26.55% 27.48% 27.92%Accumulated depreciation 13.29% 12.65% 9.70% 7.62% 6.55% 9.41% 11.03% 11.93% 12.39% 12.50%

Goodwill 13.20% 12.34% 8.94% 6.36% 5.27% 5.22% 4.61% 3.94% 3.34% 2.79%Intangible assets, net 4.74% 3.31% 1.51% 0.54% 0.38% 0.20% 0.09% 0.04% 0.01% 0.00%Other assets 1.94% 1.34% 0.90% 3.28% 5.70% 5.65% 4.99% 4.26% 3.61% 3.02%

Total liabilities, convertible debt conversion obligation and shareholders' equity 153.83% 147.11% 142.42% 115.72% 113.45% 119.21% 110.85% 104.86% 99.29% 94.94%Total liabilities 59.45% 56.17% 58.58% 38.81% 33.71% 36.15% 32.82% 30.03% 28.01% 16.59%

Total current liabilities 19.14% 46.93% 25.88% 11.87% 11.34% 13.59% 12.23% 11.59% 11.51% 10.82%Accounts payable 6.26% 5.91% 7.02% 6.14% 4.36% 5.63% 5.34% 5.16% 5.22% 5.28%Accrued and other current liabilities 12.88% 12.81% 7.34% 5.58% 6.98% 7.95% 6.89% 6.43% 6.29% 5.55%Convertible short-term debt 0.00% 28.20% 11.52% 0.15% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Convertible long-term debt 29.57% 0.00% 28.70% 20.43% 16.97% 16.81% 14.84% 12.68% 10.73% 0.00%Other long-term liabilities 10.74% 9.24% 4.01% 6.51% 5.40% 5.76% 5.76% 5.76% 5.76% 5.76%

Other long-term liabilities excluding capital lease obligations, long-term 10.44% 9.04% 3.92% 0.00% 5.40% 5.76% 5.76% 5.76% 5.76% 5.76%Capital lease obligations, long-term 0.30% 0.20% 0.09% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Convertible debt conversion obligation 0.00% 1.74% 0.45% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Total shareholders' equity 94.37% 89.20% 83.39% 76.91% 79.74% 83.06% 78.03% 74.83% 71.28% 78.35%

Preferred stock 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Common stock 0.02% 0.02% 0.01% 0.01% 0.01% 0.02% 0.01% 0.01% 0.01% 0.01%Additional paid-in capital 82.35% 83.23% 68.13% 55.09% 51.65% 48.29% 38.44% 29.29% 21.75% 15.68%Deferred compensation 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Treasury stock, at cost -72.51% -80.80% -72.92% -68.46% -79.06% -93.61% -96.15% -93.75% -89.08% -74.59%Accumulated other comprehensive income / loss 0.17% -0.08% -0.23% -0.19% -0.10% -0.10% -0.09% -0.08% -0.06% -0.05%Retained earnings 84.35% 86.83% 88.39% 90.46% 107.25% 128.47% 135.81% 139.35% 138.66% 137.31%

NVIDIA CorporationCommon Size Income Statement

Fiscal Years Ending Jan.31 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Cost of revenue -44.47% -43.89% -41.20% -40.07% -38.79% -39.60% -37.52% -36.27% -36.68% -37.10%Gross profit 55.53% 56.11% 58.80% 59.93% 61.21% 60.40% 62.48% 63.73% 63.32% 62.90%Total operating expenses -39.31% -41.20% -30.81% -26.89% -28.74% -29.98% -28.25% -28.21% -30.81% -29.93%

Research and development -29.04% -29.18% -21.22% -18.50% -20.28% -19.40% -19.00% -19.40% -22.00% -22.00%Research and development excluding restructuring and other charges-29.04% -26.57% -21.17% -18.50% -20.28% -19.40% -19.00% -19.40% -22.00% -22.00%Restructuring and other charges 0%% -2.61% -0.04% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Sales, general and administrative -10.27% -12.02% -9.59% -8.39% -8.46% -10.58% -9.26% -8.81% -8.81% -7.93%Income / loss from operations 16.21% 14.91% 27.99% 33.05% 32.47% 30.42% 34.23% 35.52% 32.50% 32.97%Interest and other income / loss, net -0.09% -0.08% -0.42% -0.14% 0.79% 0.96% 0.87% 0.77% 0.68% 0.59%

Interest income 0.60% 0.78% 0.78% 0.71% 1.16% 1.39% 1.25% 1.10% 0.95% 0.81%Other income / expense, net -0.69% -0.86% -1.20% -0.85% -0.38% -0.43% -0.38% -0.32% -0.27% -0.23%

Interest expense -0.99% -0.94% -0.84% -0.63% -0.50% -0.55% -0.48% -0.41% -0.35% -0.29%Other income / expense, net excluding interest expense 0.30% 0.08% -0.36% -0.23% 0.12% 0.12% 0.10% 0.09% 0.08% 0.06%

Income / loss before income tax expense / benefit 16.12% 14.83% 27.57% 32.90% 33.25% 31.38% 35.10% 36.29% 33.18% 33.55%Income tax expense / benefit -2.65% -2.57% -3.46% -1.53% 2.09% -3.53% -7.06% -7.19% -7.17% -7.01%Net income / loss 13.47% 12.26% 24.11% 31.37% 35.34% 27.85% 28.04% 29.10% 26.01% 26.54%

NVIDIA CorporationValue Driver Estimation($ million)Fiscal Years Ending Jan.31 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E

EBITA

Sales 4,682 5,010 6,910 9,714 11,716 11,829 13,399 15,673 18,526 22,126 COGS excluding D&A (2,082) (2,199) (2,847) (3,892) (4,545) (4,684) (5,027) (5,684) (6,796) (8,209)Depreciation (143) (124) (119) (144) (233) (346) (365) (392) (426) (470)Amortization of Intangibles (77) (73) (68) (55) (29) (21) (12) (5) (5) (2)Research & Development (1,360) (1,462) (1,466) (1,797) (2,376) (2,295) (2,546) (3,040) (4,075) (4,867)SG&A (481) (602) (663) (815) (991) (1,251) (1,240) (1,382) (1,633) (1,755)PLUS Implied Interest on Operating Leases 11 12 6 11 27 31 37 44 54 66

EBITA 549 562 1,753 3,022 3,569 3,262 4,246 5,215 5,645 6,889 Adjusted Taxes

Provision for Income tax 124 129 239 149 (245) 418 947 1,127 1,329 1,551 (+)Tax shield on Interest expenes 6 9 12 16 31 38 39 40 40 41(+)Tax shield on PV of Operating Leases 49 54 28 50 126 144 170 206 251 306

LESS 180 192 280 214 (88) 599 1,155 1,372 1,620 1,898 NOPLAT 370 370 1,473 2,807 3,657 2,663 3,091 3,843 4,025 4,990

Invested Capital

Operating Current Asset

Normal Cash 497 596 1,766 4,002 782 928 1,360 1,774 2,344 3,321Accounts Receivable 474 505 826 1,265 1,424 1,356 1,536 1,797 2,124 2,537Inventory 483 418 794 796 1,575 2,105 1,799 2,149 2,540 2,971Other Operating current assets 133 93 118 86 136 0 0 0 0 0

Non Interest-Bearing Current Liabilities

Accounts Payable 293 296 485 596 511 666 715 809 967 1,168Accrued and other current liabilities 603 642 507 542 818 941 923 1,007 1,166 1,227Other 503 463 277 632 633 682 772 903 1,067 1,275

Net Operating Working Capital 188 211 2,235 4,379 1,955 2,100 2,285 3,000 3,808 5,159PLUS

Net Property, Plant & Equipment 557 466 521 997 1,404 1,603 1,896 2,291 2,794 3,411Net Intangible Assets 222 166 104 52 45 24 12 7 2 0Pv of Operating Lease 212 233 123 215 548 625 740 894 1,090 1,331Other Assets 91 67 62 319 668 668 668 668 668 668

LESSOther Long-term Operating Liabilities 503 463 277 632 633 682 772 903 1,067 1,275

Invested Capital 767 680 2,768 5,330 3,987 4,339 4,829 5,957 7,295 9,295

NOPLAT 370 370 1473 2807 3657 2663 3091 3843 4025 4990Devided by: Beginning Invested Capital 767 680 2768 5330 3987 4339 4829 5957 7295ROIC 48.26% 216.75% 101.41% 68.60% 66.80% 71.23% 79.58% 67.57% 68.41%

NOPLAT 370 370 1,473 2,807 3,657 2,663 3,091 3,843 4,025 4,990 Minus: Change in Invested Capital (87) 2,088 2,562 (1,344) 352 490 1,128 1,338 2,000 FCF 370 457 (615) 245 5,001 2,311 2,601 2,715 2,687 2,990

Beginning Invested Capital 767 680 2,768 5,330 3,987 4,339 4,829 5,957 7,295 Multiplied by (ROIC - WACC) 0.37 2.06 0.90 0.58 0.56 0.60 0.69 0.57 0.57 EP 286 1,399 2,505 3,074 2,227 2,616 3,315 3,373 4,193

NVIDIA CorporationDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 8.00% CV ROIC 70% WACC 10.94% Cost of Equity 11.09% CV ROE 33.88%

Fiscal Years Ending Jan.31 2020E 2021E 2022E 2023E 2024E

DCF ModelNOPLAT 2,758 3,200 3,971 4,177 5,172 Cap Ex 352 490 1,128 1,338 2,000 FCF 2,406 2,710 2,843 2,839 3,172 CV 156,103 Discount Factor 1.109 1.231 1.365 1.515 1.515PV of FCF 2168 2202 2083 1874 103070

Value of Operating Assets 111,397

EP ModelEconomic Profit 2,322 2,725 3,443 3,525 4,374

CV 148,808 Discount Factor 1.109 1.231 1.365 1.515 1.515PV 2,093 2,214 2,522 2,328 98,254 Total PV 107,411 Beg IC 3,987

Value of Operating Assets: 111,397

Excess Cash 927.53 Total Short Term Investments 6,640.00

Value of Non-Operating Assets: 7,567.53

Long-term debt 1,988 Short-term debt - PV of operating lease 625.48Value of Non-Operating Liabilities: 2,613.48

Value of Equity 116,351.49$ Share Outstanding 610

Intrinsic Value: 190.59$ Partial Year Adjustment: 193.77$

Model Date 4/2/2019Next FYE 1/31/2020Last FYE 1/31/2019Days in FY 365Days to FYE 61

NVIDIA CorporationRelative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2020E 2021E 2020 2021 EPS gr. PEG 20 PEG 21AMD Advanced Micro Devices $26.75 $0.64 $0.96 41.8 27.9 18.5 2.26 1.51 INTC Intel Corporation $55.47 $4.50 $4.72 12.3 11.8 18.8 0.66 0.63

Average 27.1 19.8 1.5 1.1

NVDA NVIDIA Corporation $183.00 5.40 6.14 33.9 29.8 12.0 2.8 2.5 -

Implied Value: Relative P/E (EPS20) $ 146.03 Relative P/E (EPS21) 121.59$ PEG Ratio (EPS20) 94.38$ PEG Ratio (EPS21) 78.50$

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 13Average Time to Maturity (years): 3.00Expected Annual Number of Options Exercised: 4

Current Average Strike Price: 129.44$ Cost of Equity: 11.09%Current Stock Price: $183.00

2020E 2021E 2022E 2023E 2024E

Increase in Shares Outstanding: 4 4 4 4 4Average Strike Price: 129.44$ 129.44$ 129.44$ 129.44$ 129.44$ Increase in Common Stock Account: 561 561 561 561 561

Change in Treasury Stock 339 561 561 561 561Expected Price of Repurchased Shares: 183.00$ 203.29$ 225.82$ 250.86$ 278.66$ Number of Shares Repurchased: 2 3 2 2 2

Shares Outstanding (beginning of the year) 608 610 612 614 616Plus: Shares Issued Through ESOP 4 4 4 4 4Less: Shares Repurchased in Treasury 2 3 2 2 2 Shares Outstanding (end of the year) 610 612 614 616 618

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol NVDACurrent Stock Price $183.00Risk Free Rate 3.34%Current Dividend Yield 0.30%Annualized St. Dev. of Stock Returns 64.09%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 13 129.44 3.00 99.23$ 1,290$ Total 13 129.44$ 3.00 100.59$ 1,290$

Present Value of Operating Lease Obligations (2019) Present Value of Operating Lease Obligations (2018) Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015)

Operating Operating Operating Operating OperatingFiscal Years Ending Jan.31 Leases Fiscal Years Ending Jan.31 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2020 100 2019 63 2018 42 2017 75 2016 772021 97 2020 53 2019 36 2018 65 2017 662022 90 2021 50 2020 20 2019 58 2018 342023 77 2022 44 2021 17 2020 35 2019 272024 54 2023 25 2022 12 2021 11 2020 10Thereafter 265 Thereafter 11 Thereafter 13 Thereafter 20 Thereafter 27Total Minimum Payments 683 Total Minimum Payments 246 Total Minimum Payments 140 Total Minimum Payments 264 Total Minimum Payments 241Less: Interest 135 Less: Interest 31 Less: Interest 17 Less: Interest 31 Less: Interest 29PV of Minimum Payments 548 PV of Minimum Payments 215 PV of Minimum Payments 123 PV of Minimum Payments 233 PV of Minimum Payments 212

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 4.96% Pre-Tax Cost of Debt 4.96% Pre-Tax Cost of Debt 4.96% Pre-Tax Cost of Debt 4.96% Pre-Tax Cost of Debt 4.96%Number Years Implied by Year 6 Payment 4.9 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.1 Number Years Implied by Year 6 Payment 1.8 Number Years Implied by Year 6 Payment 2.8

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 100 95.3 1 63 60.0 1 42 40.0 1 75 71.5 1 76.741 73.12 97 88.1 2 53 48.1 2 36 32.7 2 65 59.0 2 66.242 60.13 90 77.8 3 50 43.2 3 20 17.3 3 58 50.2 3 34.07 29.54 77 63.4 4 44 36.3 4 17 14.0 4 35 28.8 4 26.793 22.15 54 42.4 5 25 19.6 5 12 9.4 5 11 8.6 5 9.988 7.86 & beyond 54 180.7 6 & beyond 11 8.2 6 & beyond 12 9.7 6 & beyond 11 14.7 6 & beyond 9.988 19.7PV of Minimum Payments 547.7 PV of Minimum Payments 215.5 PV of Minimum Payments 123.1 PV of Minimum Payments 232.8 PV of Minimum Payments 212.3

190.59 15.00% 15.50% 16.00% 8.00% 10.00% 12.00% 14.00%3.42% 189.40 189.40 189.40 189.40 189.40 189.40 189.403.52% 189.48 189.48 189.48 189.48 189.48 189.48 189.483.62% 189.56 189.56 189.56 189.56 189.56 189.56 189.563.71% 189.64 189.64 189.64 189.64 189.64 189.64 189.643.81% 189.71 189.71 189.71 189.71 189.71 189.71 189.713.91% 189.79 189.79 189.79 189.79 189.79 189.79 189.794.00% 189.87 189.87 189.87 189.87 189.87 189.87 189.874.10% 189.94 189.94 189.94 189.94 189.94 189.94 189.944.20% 190.02 190.02 190.02 190.02 190.02 190.02 190.024.29% 190.09 190.09 190.09 190.09 190.09 190.09 190.094.39% 190.17 190.17 190.17 190.17 190.17 190.17 190.174.49% 190.24 190.24 190.24 190.24 190.24 190.24 190.244.59% 190.31 190.31 190.31 190.31 190.31 190.31 190.31

190.59 0.120 0.620 1.120 1.620 2.120 2.620 3.1208.00% 192.34 192.34 192.34 192.34 192.34 192.34 192.348.50% 192.05 192.05 192.05 192.05 192.05 192.05 192.059.00% 191.76 191.76 191.76 191.76 191.76 191.76 191.769.50% 191.46 191.46 191.46 191.46 191.46 191.46 191.46

10.00% 191.17 191.17 191.17 191.17 191.17 191.17 191.1710.50% 190.88 190.88 190.88 190.88 190.88 190.88 190.8811.00% 190.59 190.59 190.59 190.59 190.59 190.59 190.5911.50% 190.30 190.30 190.30 190.30 190.30 190.30 190.3012.00% 190.01 190.01 190.01 190.01 190.01 190.01 190.0112.50% 189.72 189.72 189.72 189.72 189.72 189.72 189.7213.00% 189.42 189.42 189.42 189.42 189.42 189.42 189.4213.50% 189.13 189.13 189.13 189.13 189.13 189.13 189.1314.00% 188.84 188.84 188.84 188.84 188.84 188.84 188.84

190.59 3.45% 3.95% 4.45% 4.95% 5.45% 5.95% 6.45%2.00% 188.16 188.16 188.16 188.16 188.16 188.16 188.162.50% 188.61 188.61 188.61 188.61 188.61 188.61 188.613.00% 189.05 189.05 189.05 189.05 189.05 189.05 189.053.50% 189.46 189.46 189.46 189.46 189.46 189.46 189.464.00% 189.86 189.86 189.86 189.86 189.86 189.86 189.864.50% 190.25 190.25 190.25 190.25 190.25 190.25 190.254.96% 190.59 190.59 190.59 190.59 190.59 190.59 190.595.50% 190.98 190.98 190.98 190.98 190.98 190.98 190.986.00% 191.32 191.32 191.32 191.32 191.32 191.32 191.326.50% 191.65 191.65 191.65 191.65 191.65 191.65 191.657.00% 191.97 191.97 191.97 191.97 191.97 191.97 191.977.50% 192.27 192.27 192.27 192.27 192.27 192.27 192.278.00% 192.57 192.57 192.57 192.57 192.57 192.57 192.57

190.59 64.00% 66.00% 68.00% 70.00% 72.00% 74.00% 76.00%0.33% 190.59 190.59 190.59 190.59 190.59 190.59 190.590.83% 190.59 190.59 190.59 190.59 190.59 190.59 190.591.34% 190.59 190.59 190.59 190.59 190.59 190.59 190.591.84% 190.59 190.59 190.59 190.59 190.59 190.59 190.592.34% 190.59 190.59 190.59 190.59 190.59 190.59 190.592.84% 190.59 190.59 190.59 190.59 190.59 190.59 190.593.34% 190.59 190.59 190.59 190.59 190.59 190.59 190.593.84% 190.59 190.59 190.59 190.59 190.59 190.59 190.594.34% 190.59 190.59 190.59 190.59 190.59 190.59 190.594.84% 190.59 190.59 190.59 190.59 190.59 190.59 190.595.34% 190.59 190.59 190.59 190.59 190.59 190.59 190.595.84% 190.59 190.59 190.59 190.59 190.59 190.59 190.596.35% 190.59 190.59 190.59 190.59 190.59 190.59 190.59

190.59 9.50% 10.00% 10.50% 11.00% 11.50% 12.00% 12.50%48.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7250.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7252.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7254.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7256.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7258.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7260.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7262.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7264.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7266.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7268.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7270.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.7272.00% 191.46 191.17 190.88 190.59 190.30 190.01 189.72

risk free rate

CV ROIC

Gross Margin

marginal tax rate

Pre-tax cost of debt

CV growth rate

Marginal tax rate

Beta

Pre-Tax Cost of Debt

Market risk premium