Quick NVDA DD (Semiconductor Outlook):

The semiconductor industry has experienced exponential growth over the past 2 or so years, as the demand for semiconductors has grown and expanded to other industries. The current state of the semiconductor industry is best summarized by the following, from Deloitte’s 2022 semiconductor industry outlook.

The absence of a single chip can prevent the sale of a device worth tens of thousands of dollars. We found that the ongoing chip shortage resulted in revenue misses of more than US$500 billion worldwide.

Over the long run, semiconductor revenues are likely to oscillate around a trend line. Still, that trend line looks steeper than ever before as we enter a period of robust secular growth.

We expect the global industry to grow 10% in 2022 to over US$600 billion for the first time ever. This results from the increasing importance of semiconductors across a variety of industries.
We expect shortages and supply chain issues to remain front and center for the first half of 2022
The ongoing talent shortage in Taiwan, China, and South Korea, will limit the growth in semiconductor supply. This is likely to drag on the shortage until some time in 2023
Finally, we expect the digital transformation within the industry to continue and accelerate.

Overall, it is pretty safe to say tat the semiconductor companies are going to have their fair share of challenges. However, in overcoming these challenges these companies will be able to make obscene amounts of money, which should help to increase their stock prices.

Unfortunately, the industries that are experiencing the worst ramifications from this shortage are likely to continue suffering and post less revenues.

There are 2 stocks in particular that have done well off of the chip shortage and are expected to continue to do well even after the shortage has levelled off. These companies are AMD and NVDA. Today, I will be focusing on NVDA, as it is up nearly 10% on the day.

Minimal Share Dilution:

Since August of 2017, NVDA has only experienced a 1% share dilution per year. During this time, their stock price has grown by 53% per year (on average) and paid out $0.74 in dividends which represents 0.4% of their 2017 share price every year. Overall, it is pretty safe to say that the effect of dilution has made NVDA a bad investment over the last 5 (or so) years.

Furthermore, analysts are expecting NVDA stock to increase by 20% over the next year. This large growth makes NVDA’s stock dilution essentially negligible. Furthermore, analysts are expecting NVDA’s EPS to be $6.78, which represents a YOY increase of 20% from this years expected EPS. Lastly, the average analyst price target for NVDA is $341/share, which represents a 21.4% upside. These facts are all based on analysts predictions, which are wrong more than they are right, however it paints a good future for NVDA.

Furthermore, NVDA has a net overall cash position of $8.35B (meaning they have $8.35B more cash than they have debt). This is just one of many metrics that show that NVDA is financially healthy.

NVDA (Microchip) Industry Expansion:

A large portion of NVDA’s current and future growth is going to come from the increasing amount of applications of their microchips across industries.

One of the most notable industry expansions has been into cars. Over the past couple of years we have heard the phrases” EV” and “microchip” being used in the same sentences and articles. This brings a lot of hype from the EV sector to the microchip sector (as the microchips are a “pick and shovels” play for the EV industry).

As applications for microchips in other industries start to be announced and popularized, semiconductor companies will have more hype, and the money will come piling in. One snippet form IRDS’s “The Future of Semiconductors article says this about the future of the industry:

IoT could generate upwards of $3.9 to $11.1 trillion in revenue by 2025. With the rise of smartphones, IoT naturally aligns with semiconductor innovation. Semiconductors and IoT have already disrupted the following industries:

Wearable technology
Smart-home appliances
Medical electronics
Industrial automation
Autonomous vehicles
Traffic control

These are just some of the possible industries that semiconductors can break into to maintain their rapid growth rates.