Is Nvidia’s Wide Moat Worth the Price?
June 01, 2023
Read Time 4 MIN
Nvidia Stock Analysis: More Than Meets the AI
Nvidia Corp. (Ticker: NVDA) stole the spotlight as its first quarter results and staggering second quarter guidance reverberated through markets in the days following its May 24, 2023 release. The growing demand for and adoption of artificial intelligence (AI), which requires increasingly more processing power, drove a significant boost for the chip firm’s business. But Nvidia’s wide economic moat is fortified by more than just AI. We take a deep dive here to uncover how this tech fortress maintains its moat, and look at Morningstar’s fair value estimate for its stock.
Nvidia’s IP Strength Powers Its Moat
Morningstar believes Nvidia possesses a wide economic moat from its intangible assets related to the design of graphics processing units (GPUs). Nvidia’s current position originated with its popularization of GPUs as far back as 1999. According to Morningstar, GPUs allow graphics processing tasks to be offloaded from the CPU, thereby increasing overall system performance.
Nvidia’s roots are in gaming, and its patents related to hardware design has contributed to its market leading position in gaming GPUs, owning as much as 80% share of the market, according to Morningstar. Its dominance of the rapidly growing high-end gaming GPU market has allowed Nvidia to build economies of scale and invest in research and development efforts.
Morningstar’s research highlights a classic example of Nvidia’s wide economic moat: Nvidia’s advanced intellectual property creates barriers to entry so insurmountable that even chip behemoth Intel was unable to develop its own discrete GPUs and opted to license intellectual property from Nvidia.
Positioning for Growth Earns Nvidia Moat Ratings Upgrade
Morningstar notes that Nvidia has taken steps to leverage its GPU prowess in emergent areas such as data centers and automotive, which was a driving force behind their decision to upgrade Nvidia’s moat rating from narrow to wide in June 2021.
Data centers are critical to powering AI systems that can perform complex tasks, including speech recognition, photo recognition, and recommendation engines such as those used by Amazon and Netflix. Nvidia has first mover advantages in many areas of AI adoption, according to Morningstar. Nvidia is pioneering a new class of product: data processing units (DPUs) that can handle certain tasks, allowing CPUs to focus more on core applications. Some expect DPUs to become commonplace in all servers.
Nvidia has also focused on automotive innovation. While it does operate in the highly competitive infotainment solutions market (think tech-heavy digital cockpits), Morningstar notes that Nvidia hopes to carve a dominant position in the self-driving space. Its Drive PX self-driving system has been tested by more than 370 original equipment manufacturers in a research and development setting, but the opportunity is in the early days and Intel represents a formidable opponent, in Morningstar’s view.
Nvidia Stock Priced at a Premium, Despite Fair Value Increase
Nvidia has traded at or above its Morningstar-assigned fair value estimate for much of the last decade, despite several fair value estimate increases by Morningstar. Most recently, and following Nvidia’s May 24 earnings call, Morningstar increased its fair value to $300 per share from $200, a 50% increase. Morningstar Analyst Abhinav Davuluri noted that they have raised their forecast for Nvidia’s data center segment revenue to grow at a 30% compound annual growth rate over the next five years, up from 19% prior to Nvidia’s updated guidance.
Morningstar equity research analysts use a three-stage discounted cash flow model that considers a company’s economic moat to project free cash flow well into the future and arrive at a current per-share intrinsic value.
NVDA’s Consistent Premium to Fair Value
10 Years as of 5/31/2023
Source: Morningstar, May 2023. Past performance is no guarantee of future results. For illustrative purposes only and not representative of Fund performance. Not intended as a recommendation to buy or to sell any of the securities mentioned herein.
The Morningstar® Wide Moat Focus IndexSM included Nvidia for two quarters. The Index systematically targets high-quality wide moat companies that are trading at attractive levels relative to their Morningstar-assigned fair value. Nvidia was added in September 2022 shortly after its shares began trading at attractive levels and was removed in March 2023 after rallying 95%. Nvidia is not currently in the Index and, with a share price 30% above fair value at the time of this writing, isn’t expected to be added back any time soon—but only time will tell.
VanEck Morningstar Wide Moat ETF (MOAT) seeks to replicate as closely as possible, before fees and expenses the price and yield performance of the Morningstar Wide Moat Focus Index.
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April 10, 2024
Important Disclosures
Source for all data unless otherwise noted: Morningstar.
Fair value estimate: the Morningstar analyst's estimate of what a stock is worth. Price/Fair Value: ratio of a stock's trading price to its fair value estimate.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/us/en/investments/morningstar-wide-moat-etf-moat/holdings/.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.
The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
The Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.
An investment in the VanEck Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, risks related to investing in equity securities, consumer discretionary sector, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
Related Funds
Important Disclosures
Source for all data unless otherwise noted: Morningstar.
Fair value estimate: the Morningstar analyst's estimate of what a stock is worth. Price/Fair Value: ratio of a stock's trading price to its fair value estimate.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Holdings will vary for the MOAT ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here: https://www.vaneck.com/us/en/investments/morningstar-wide-moat-etf-moat/holdings/.
Effective June 20, 2016, Morningstar implemented several changes to the Morningstar Wide Moat Focus Index construction rules. Among other changes, the index increased its constituent count from 20 stocks to at least 40 stocks and modified its rebalance and reconstitution methodology. These changes may result in more diversified exposure, lower turnover, and longer holding periods for index constituents than under the rules in effect prior to this date. Past performance is no guarantee of future results.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
The Morningstar® Wide Moat Focus IndexSM was created and is maintained by Morningstar, Inc. Morningstar, Inc. does not sponsor, endorse, issue, sell, or promote the VanEck Morningstar Wide Moat ETF and bears no liability with respect to that ETF or any security. Morningstar® is a registered trademark of Morningstar, Inc. Morningstar® Wide Moat Focus IndexSM is a service mark of Morningstar, Inc.
The Morningstar moat-driven indexes represent various regional exposures and consist of companies identified as having sustainable, competitive advantages and whose stocks are attractively priced, according to Morningstar.
The Morningstar® Wide Moat Focus IndexSM Intended to track the overall performance of attractively priced companies with sustainable competitive advantages according to Morningstar's equity research team.
An investment in the VanEck Morningstar Wide Moat ETF (MOAT®) may be subject to risks which include, among others, risks related to investing in equity securities, consumer discretionary sector, health care sector, industrials sector, information technology sector, financials sector, medium-capitalization companies, market, operational, high portfolio turnover, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversification and index-related concentration risks, all of which may adversely affect the Fund. Medium-capitalization companies may be subject to elevated risks.
Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of a Fund carefully before investing. To obtain a prospectus and summary prospectus, which contain this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.