Is Nvidia now a software stock? The competitive advantage of CUDA

[Jay Goldberg]

The big picture: The world has gone mad for AI. Setting aside what the latest AI models are actually good for, it is not surprising that investors are looking for stocks with "AI exposure." Unfortunately, this turns out to be a fairly short list at the moment, and at the top of that list is Nvidia.

Nvidia has largely captured all the market for chips used for training AI models and is also performing well with chips for inference. The company is strategically well-positioned, which is reflected in its stock price, currently trading at 167x trailing twelve months earnings and 67 times this year's estimated EPS. These are significant multiples that may give many investors pause.

Editor's Note:
Guest author Jonathan Goldberg is the founder of D2D Advisory, a multi-functional consulting firm. Jonathan has developed growth strategies and alliances for companies in the mobile, networking, gaming, and software industries.

While Nvidia is unquestionably the leader in the hottest new market, and there are no signs of anyone challenging their dominance, it's important to note that the company has experienced boom/bust swings throughout its 40-year history. Although their CEO has done an incredible job in bringing them to this point, combining deep technical understanding, a keen strategic mind, and eloquence to convince others of their vision, the Street has often become overexcited about their numbers, often just before a major inventory correction. There are currently no signs of a downturn, but, to put it politely, Nvidia sometimes struggles to accurately forecast its end markets and effectively communicate its expectations to the market.

So what is Nvidia worth?

A big part of the disconnect right now is that for the first time Nvidia's strong market position is based on software more than its hardware. For years, the company had to compete with AMD for leadership in the GPU Feeds and Speeds race. Nvidia emerged as the winner in most of those contests, but there was always some competition to challenge them. The AI market is different. Nvidia has maintained its lead thanks to its CUDA software. Although not an operating system per se, CUDA's ubiquity and relative ease of use have made it the de facto common software layer for AI software meeting silicon.

A big part of the disconnect right now is that for the first time Nvidia's strong market position is based on software more than its hardware.

AMD has never had anything to rival CUDA, and from what we can tell they are not even trying. While there are software libraries attempting to displace Nvidia, these are owned or largely supported by software companies that don't care enough about the intricacies GPU firmware intricacies to create a true alternative. Perhaps a few years of near monopoly could change that, but currently, there doesn't seem to be anything on the horizon.

Considering Nvidia's software as their true competitive advantage, should they be viewed as a software company? This idea may seem mildly outlandish but is worth considering. We conducted some rough comparisons for Nvidia's stock, which are shown in the table below.

	Share price (5.8.23)	FY1 EPS	FY2 EPS	FY1 PE	FY2 PE
NVDA	291.51	4.53	6.05	64.4x	48.2x
AMD	95.04	2.55	3.66	37.3x	26.0x
QCOM	108.31	8.38	9.77	12.9x	11.1x
MRVL	41.01	1.52	2.3	27.0x	17.8x
CRM	197.9	6.36	7.92	31.1x	25.0x
MSFT	308.65	9.67	10.92	31.9x	28.3x
ADBE	344.06	13.83	15.7	24.9x	21.9x
SNOW	160.42	0.6	1.01	267.4x	158.8x
DDOG	78.54	1.18	1.56	66.6x	50.3x
AAPL	173.5	5.32	5.85	32.6x	29.7x

Nvidia is already trading at more than double the value of its large-cap semiconductor peers. It also carries a hefty premium compared to large-cap established software companies like Microsoft, Salesforce, and Adobe. The closest comparable group would be new, high-growth software companies like Snowflake and Datadog. That is an impressive peer group.

While the Street expects Nvidia's earnings to double over the next two years, Snowflake's earnings are projected to double in just one year. If Nvidia traded at Snowflake's multiple, the stock would be worth approximately $600, more than double its current price of $291. The fact that we are even considering a company like Snowflake in this discussion is enough reason to raise serious questions about Nvidia's valuation.

Another way to think about Nvidia is by comparing it to companies that monetize their unique software through hardware sales, such as Apple. Some may argue that the two companies are very different, but conceptually, they share the commonality of hardware prices with software differentiation. However, even Apple trades at a discount of almost 40% compared to Nvidia.

As much as we believe Nvidia is executing incredibly well, it is difficult to feel comfortable with the current share price.

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https://www.techspot.com/news/98766-nvidia-now-software-stock-competitive-advantage-cuda.html

 

[human7]

There's a lot of software out there that only runs on CUDA, and it is the main reason many do not switch from Nvidia. Even if the competition came out with hardware that was 2x more performant and 2x more power efficient, and was able to consistently maintain that, it would still take a while for that advantage to overcome CUDA's prevalence.

Of course, Nvidia's hardware is typically excellent, which is what put them in this position in the first place, and what is keeping them there.

 

[Dimitriid]

Wait, Adobe is worth 344? How is that possible? How is Adobe worth close to 15% more than Microsoft? Yeah sure their software is useful and their pricing model is very solid (We've got close to everybody who needs a computer for creative work to pay us each month) but it's still nowhere near as valuable as owning a piece of most computers and laptops sold, owning nearly a third of all servers both traditional infrastructure and cloud, etc.

I thought only Apple were ridiculously over-valued as a company but Adobe takes the cake easily.

 

[human7]

Wait, Adobe is worth 344? How is that possible? How is Adobe worth close to 15% more than Microsoft? Yeah sure their software is useful and their pricing model is very solid (We've got close to everybody who needs a computer for creative work to pay us each month) but it's still nowhere near as valuable as owning a piece of most computers and laptops sold, owning nearly a third of all servers both traditional infrastructure and cloud, etc.

I thought only Apple were ridiculously over-valued as a company but Adobe takes the cake easily.

It isn't. Share price is a fickle thing, but not an indicator of a company's worth on its own. The number of shares that a company has differs from company to company, so the net worth is basically share price times the number of shares, and that is the market cap. Microsoft's market cap is about 2.3 trillion, Adobe's is about 170 billion.

Market cap is kind of fiat, though, if you look at the company's total assets or equity it will be much different than the stock market valuation. Microsoft's total assets is around 360 billion per Wikipedia, for example.

Adobe has two main sources of revenue: it's subscription services (such as the Creative Cloud) which brings in about 75% of its revenue, and it has a Digital Experience product offered to businesses which brings in the other 25%, which is a marketing platform built on data and analytics, as of last September (https://www.forbes.com/sites/qai/20...oes-adobe-make-money-in-2022/?sh=3bcadd78461d).

Adobe's stock price is on the slide right now due to its pending purchase of Figma, where it bought the comapany for 20 billion compared to a 10 billion evaluation. There's concern that Adobe is out of touch with its customers in the segment that Figma operates, so it isn't just about the purchase price but also about Adobe trying to stay relevant in that space and acting defensively. Who knows, in a year it may have doubled again. Stock price is a fickle thing.

 

[DiegoSynth]

There's a lot of software out there that only runs on CUDA, and it is the main reason many do not switch from Nvidia. Even if the competition came out with hardware that was 2x more performant and 2x more power efficient, and was able to consistently maintain that, it would still take a while for that advantage to overcome CUDA's prevalence.

Of course, Nvidia's hardware is typically excellent, which is what put them in this position in the first place, and what is keeping them there.

Exactly. AMD should do something about CUDA and Raytracing. If they manage this, they are the total winners. Otherwise, it's complicated.

 

[Porkous]

AMD should have better times than NV due it's CPU market. Nvidia runs software on its platform. AMD runs all the software so in theory, it could run more, due it's compatibility. I am speaking in terms of market, of course. Cpu is a bigger business, let's be serious. NVIDIA is pretty lucky because is only a GPU business... While others have to share a market between two... Not 3 or more.

 

[punctualturn]

Exactly. AMD should do something about CUDA and Raytracing. If they manage this, they are the total winners. Otherwise, it's complicated.

About CUDA:

https://www.amd.com/en/graphics/servers-solutions-rocm-hpc

About RT, please give it a rest, its still a gimmick and sadly, Tubers and reviewers that have lost touch with their audience keep pushing this for hardware that simply doesnt exist.

Capable hardware and software are easily at least 4 to 5 gens away.

Meanwhile, we have thousands of games with RT that are way better, gameplay wise than the current batch of mediocre RT games.

 

[human7]

Exactly. AMD should do something about CUDA and Raytracing. If they manage this, they are the total winners. Otherwise, it's complicated.

Absolutely for CUDA. OpenCL only gets you so far, and Nvidia hardware can run OpenCL code, too.

I'm not too worried about raytracing and DLSS, both Intel and AMD have a competitive solution in those areas. They may not be as good as Nvidia, but they aren't wash-outs, either.