NVIDIA (NVDA) has been leveraging its platform strategy and product segmentation strategy to improve its profits while keeping its expenses in check. Its platform strategy uses one GPU (graphics processing unit) architecture across gaming, data center, automotive, and professional visualization platforms.
Now, NVIDIA is exploring new verticals where AI (artificial intelligence) can make a difference. New verticals could increase NVIDIA’s profits in the longer term. The company is acquiring data center networking firm Mellanox (MLNX) to complement its data center offerings. NVIDIA’s strategy has helped it maximize returns from minimum investments, encouraging the company to innovate further.
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Return on equity
As seen from the above graph, NVIDIA’s ROE (return on equity) of 49.3% is higher than the ROEs of peers Advanced Micro Devices (AMD) and Intel (INTC), which are strong players in CPU (central processing unit) computing. A company’s ROE shows the profit a company can generate from shareholder capital in a particular period.
NVIDIA’s peers have realized the opportunity in GPU computing and are investing in it. AMD has launched the world’s first 7-nm (nanometer) data center GPU. Intel is also developing its own discrete GPU.
NVIDIA is currently trading at 31.5x its earnings per share, which is higher than the industry’s and Intel’s PE ratio of 21.6x and 12.76x. NVIDIA has a strong potential to boost its earnings in 2020 and beyond as the 5G (fifth generation) rollout will make way for autonomous vehicles and edge computing by providing strong connectivity to the cloud. Thus, NVIDIA seems to be a “buy” even at the current PE ratio. Of the 36 Wall Street analysts monitoring NVIDIA, 22 have a “buy” recommendation.
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