Nvidia Stock: Auto Business May Drive Continued Performance (NASDAQ:NVDA)

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NVIDIA (NVDA) has been on an incredible run of late, fueled by tremendous growth across its business segments. Revenue has more than doubled over the past 3 years, resulting in explosive economies of scale. Gross margins are up nearly 500 basis points while operating margins are up over 900 basis points. Free cash flow has increased by 2.3 times over that span.

NVDA growth and margin expansion

NVDA (NVDA Investor Presentation)

While the business itself is clearly very strong and growth momentum is impressive, the expected slowdown in growth and the premium valuation multiples attached to the stock – even after the recent pullback in the share price – imply that it is not a Buy at the moment. On the other hand, the explosive growth potential in the automotive business could be an x-factor that drives continued outperformance for the company. In this article, we will overview the business as a whole and then discuss the qualitative aspects of the automotive business that indicate massive growth could materialize there.

NVDA Stock Has A Wide Moat Business Model

Even more importantly, the company possesses a wide moat due to its intellectual property. Thanks to its leading position in the GPU space, the company plays an integral and increasingly prominent role in the global economy.

As the leader in the space, NVDA is able to attract among the very best talent in the industry that it retains through generous compensation packages and a large research and development budget. In our view, this positions the company to retain its technical edge in the industry and continue to innovate to compound its intellectual property driven competitive advantages. This makes the business model fairly low risk and gives it tremendous long-term potential. We also see this competitive advantage on display in its superior profitability metrics compared to its rival Intel (INTC):

Nvidia vs Intel: return on equity and return on invested capital
Data by YCharts

NVDA Stock Has A Massive Growth Runway

Thanks to its world-class brain trust, strong base in technology and basic research, and strong macro tailwinds for its industry, NVDA has nearly limitless opportunities to grow. The company has already begun expanding into new markets, including data centers and autonomous driving:

NVDA Investor Presentation

NVDA (Investor Presentation)

These initiatives have already gained substantial momentum as its data center business saw 53% year-over-year growth in the first nine months of 2021 and its automotive business saw 13% year-over-year growth in the first nine months of 2021.

Meanwhile, its core gaming business soared by 72% year-over-year and its professional visualization business was its fastest-growing business, up 97% year-over-year, though it is still dwarfed in size by its gaming and data center businesses.

Long term, the data center and the automotive businesses should see significant sustained growth as both markets are massive and set to grow for many years to come. With artificial intelligence technologies exploding as well as the metaverse just beginning to take off, NVDA has enormous potential to increase the applications of and markets for its technologies.

One way in which NVDA has been aggressively pursuing

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Weekly metrics checks at Cooper Auto Group drive improvement

The presentations highlight five concepts the group characterizes as “nonnegotiables,” according to Koch.

Accountability: Each person has 100 percent responsibility for their department’s objectives, Koch said. They need to hit the goal or have a plan to get back on track to achieve it.

Assets: The managers are responsible for asset management. In the case of new or used vehicles, this would involve tracking factors such as wholesale profit, cost to market and days’ supply.

“You’re yoked with that responsibility,” Koch said.

CSI: Managers must keep their customer satisfaction index above the average in their zone or market.

“We’re on a growth trajectory,” Koch said, and automakers stress CSI and incentivize it financially.

Phone and Internet mastery: Employees who fail to demonstrate sufficient quality in handling phone calls or Internet leads aren’t allowed to work with that mode of communication until they demonstrate proficiency.

Cooper Auto Group had used a phone training system that scored employees’ ability to take calls, Koch said. If a staffer failed to exceed a score of 4 out of 5 on a 60-day average, “you went back to the training room,” he said. Similarly, employees need a 12 percent closing ratio to keep taking Internet leads.

“It’s not like, ‘Oh, you’ll never get another lead again,’ ” Koch said. But the group would want to “re-Cooperize you” until the targets are achieved, he said.

CRM: Cooper Auto Group wants customer interactions captured meticulously in its customer relations management system, Koch said. The information needs to be completely accurate at all times, he said.

“Believe it or not,” the managers struggle with this more than their respective sales personnel, according to Koch. “They live in that ecosystem,” he said of the rank-and-file sales force. But managers will call a customer on a cellphone and fail to document it, he said.

This precise CRM documentation allows the dealership to evaluate factors such as the ratio of closings to appointment shows, he said.

Koch said the dealership originally set a goal of 60 percent, only to realize it hadn’t even closed half of the customers who kept appointments.

But without clean data, “all of this reporting is just fabricated,” he said.

The weekly meetings can surprise new hires who “realize we run it like a business” according to Koch. “We have these meetings, and it’s not a sales meeting,” he said. “It’s not a hoorah, Saturday morning meeting. … We could be selling widgets.”

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