Krause Fund Research Fall 2017 Technology Recommendation: SELL Analysts Peter Hadfield peter-hadfield@uiowa.edu

Austin Hassett austin-hassett@uiowa.edu

Company Overview NVIDIA Corporation, incorporated on February 24, 1998, inventor of the graphics processing unit (GPU) operates in four major categories within the semiconductor industries. The company is responsible for innovation and efficiency that drives gaming, professional visualization, data center, and automotive technology. Stock Performance Highlights 52-week High $218.67 52-week Low $83.62 Beta Value 1.87 Average Daily Volume 16.24 m Share Highlights Market Capitalization $129.68 b Shares Outstanding 600.00 m Trailing P/E Ratio 62.16 Company Performance Highlights ROA 17% ROE 41% Sales $ b Financial Ratios Current Ratio 4.77 Debt to Equity .7 One Year Stock Performance Source: finance.yahoo.com

NVIDIA Corporation (NYSE: NVDA)

November 10, 2017

Current Price: $216.14 Target Price Range: $171-$181

NVDA is trading at a higher price than its intrinsic value suggests

• Based on economic, industry, and company specific research we developed financial models for NVIDIA. Our models utilize discounted cash flow, economic profit, relative valuation, and dividend discount analyses. Our research and models concluded that NVIDIA is trading at a price above its intrinsic value, prompting a sell rating. • Our discounted cash flow analysis suggests an intrinsic value for NVIDIA of $171. This is the most relevant metric within our model and is the logical base for our target price range. • Our relative valuation analysis included a series of comparable firms based on size, industry, and firm characteristics. Our calculations concluded that NVIDIA is trading at a premium to its peers. However, their position within the semiconductor industry provides reason to believe they should trade at slight premium. • Our research led us to believe NVIDIA is a strong company with an extensive growth opportunities. We believe their net income will increase by over $3 billion dollars in the next five years. However. Our discounted cash flow, relative valuation, and associated assumptions and conclusions found that is it over-priced. • The competitive nature of NVIDIA’s industry restricts NVIDIA’s growth potential. To meet current demands and grow beyond our current projections NVIDIA would need to cut costs or expand revenues at an unrealistic rate. • NVIDIA is efficiently utilizing their operating funds to create new innovative products. It is unlikely that they will be able to reduce expenses or margins at a rate that would bring their intrinsic value above $181. NVIDIA’s business model leaves them vulnerable to patent infringement issues, security breaches, and rapid market changes

Executive Summary At NVIDIA’s current price, we recommend a sell rating. We believe our model optimistically forecasts NVIDIA’s future cash flows. The competitive nature of their industry and the risks associated with the company’s business structure will not allow growth that justifies their current stock price. NVIDIA has shown strong potential as a future investment, but we believe the market has inflated their stock price due to the exciting nature of their products and recent growth. Our target price for NVIDIA stands at $171-$181.

Economic Outlook

U.S. Real Gross Domestic Product Real Gross Domestic Product (GDP) is the measure of the market’s total economic output during a period after adjustments for price changes caused by inflation. Real GDP is an important industry indicator because it reflects the overall health of the economy. When the economy is flourishing, consumer spending and consumption increases. This results in increased company revenues. The chart below displays the real U.S. GDP growth from preceding quarters. Real GDP growth declined .1% from 2017 quarter two (Q2). The high Q3 real GDP growth is partially contributable to increased inventories caused by this year’s hurricanes. Inventories increased by $35.8 billion dollars which resulted in .73% increase in the 3Q GDP.

Source: Mataloni L. and Aversa J. We believe GDP will grow 2.3% over the next six months and reach a steady rate of 2% for the next five years. During the next six months, the lasting effects of the hurricanes will wear off causing inventories and real GDP to decrease. We expect the GDP to continue growing due to strong consumer confidence which is at a 17 year high. Consumer confidence index reflects consumers’ current attitudes toward likely business conditions and developments. However, we expect GPD growth to slow due to the increasing interest rates. When interest rates increase, the cost of capital increases. This increases the cost of financing and causes M&A activity to increase. Then, as M&A transactions and capital spending decrease, the economy will experience a slowing in growth.

Exchange Rates: Exchange rates are the value of one country’s currency in comparison with other country’s currency. Exchange rates are an important economic factor for the technology industry, because the S&P 500 and Dow Jones Indices estimated that U.S. information technology companies generated 57.78% of sales overseas in 2015.16 When technology companies report their revenue in the U.S. or transfer their cash to the U.S., they will be directly affected by the exchange rate. The chart below shows the five companies with the most amount of cash held overseas. Depending on where these companies hold their cash, the exchange rates may cause significant losses or potential gains.

Source: Meisler, L One measure of the value of the U.S. dollar is The U.S. Dollar Index (DXY). The DXY is a value relative to the six major trading partners of the U.S. Currently the DXY is valued at 94.39 which is a 7.65% decrease from one year ago to date. The DXY has ranged from 91.01 to 103.82 over the past 52 weeks. The DXY has grown since October, but recent news from the U.S. Senate suggesting delayed corporate tax cuts caused the DXY to drop .52 points on November 10th. However, with the continuing GDP growth and positive consumer spending and confidence, we believe the DXY will resume its growth over the next six months through 2021 between the ranges of 95-98.3 The chart below illustrates the change in the DXY over the past three years.

U.S. Dollar Index (DXY)

Source: Market Watch In FY2017, NVIDIA reported only $904 million of revenues generated in the United States, $659 million in Europe, $486 million in other Americas, $2.55 billion in Taiwan, $1.31 billion in China, and $1.01 billion in other Asia Pacific countries. If the value of the U.S dollar increases relative to foreign currencies, it would make the products of NVIDIA more expensive. If the value of the U.S. dollar decreases in relation to other countries, NVIDIA’s suppliers might raise prices. A falling U.S. dollar

would also increase NVIDIA’s operating expenses. However, NVIDIA considers their direct exposure to fluctuation in exchange rates to be minimal. NVIDIA currently holds foreign currency forward contracts to minimize the impact of currency fluctuations.13

Employment: The unemployment rate is a measure of the percent of jobless individuals searching for jobs in the labor force. This rate is highly correlated to economic strength because a strong economy creates job growth, which decreases the unemployment rate. It is also valuable to consider the employment rate when analyzing changes in employment. The employment rate is a ratio measuring the number of employed individuals to the working age population (15 to 64). Together, these two rates are valuable to technology firms, because they shadow economic strength and revenue growth. In addition, the technology industry requires highly educated individuals, which creates problems within the industry when companies are all competing for the same talented individuals. The October U.S. unemployment rate was recorded at 4.1%, a .1% decrease from September’s recorded 4.2%. Overall, the unemployment rate has been decreasing since 2009 when the unemployment rate was 10%, October’s unemployment rate being a 17 year low. The charts below show the monthly unemployment rate over the past four months and nine years.

Source: Trading Economics We predict unemployment rate to average 4.4% over the next six months, as we expect the labor force to increase as strong economic conditions continue. Over the next three years, we expect unemployment to increase to 4.4 to 4.8 percent. We believe that low unemployment rate will make finding qualified workers more difficult for companies since there is only a small portion of the labor force seeking jobs. Overall, this 17 year low unemployment rate will increase.

Capital Market Outlook: Overall, we believe the technology sector will continue to display robust growth. This is due to increasing real GDP, consumer confidence, consumer spending and low unemployment within the U.S. We do expect the US dollar to strengthen which will cause potential revenue losses for the technology companies earning foreign revenue. However, the industry growth will increase revenues more than the exchange rates will devalue the foreign revenue.

Source: Statista The bar chart above illustrates adverting expenditure growth in emerging markets compared to the U.S. The driver of this growth is increasing economic development and increasing middle class. Together, these factors present large growth opportunities for the Technology industry because foreign revenues will increase. We believe that with these economic forecasts NVIDIA and the technology sector will perform as expected due to the success the sector has demonstrated this year.

Industry Analysis

Industry Overview “A materials product - usually comprised of silicon - which conducts electricity more than an insulator but less than a pure conductor, such as copper and aluminum. Semiconductors are usually very small and complex devices, and can be found in thousands of products such as computers, cell phones, appliances, and medical equipment”.9 The semiconductor industry is fairly versatile, in the aspect that they can be put into many different products and can have slight variations based on customer need. This is why we expect strong growth for the industry in the future. We believe that new technology products will incorporate semiconductors and expand their customer base as time goes on. Trends The main trend in the semiconductor industry is that it is very cyclical. This is generally unavoidable within the industry. The success of semiconductor companies is primarily driven by the

demand for PCs, smartphones, and tablets. When sales of these items slow it can have catastrophic results on a semiconductor company’s sales. However, when there is a large demand for a new product, like when the iPhone X came out, semiconductor companies can charge a premium. We believe this cyclical trend will continue in the future. Business Segments In the semiconductor industry, there are two different segments. The industry is divided by semiconductor type. The two types are titled intrinsic and extrinsic. Intrinsic:

Intrinsic semiconductors function when the semiconductor has an equal number of electrons and holes in the conduction band. The number of electrons equals the number of holes because they have been thermally excited, causing them to move from the valence band through the conduction band. The conduction band is where the electrons can move freely causing energy.4/14

Extrinsic:

Extrinsic semiconductors function when there are more electrons than holes in the conduction band. This is due to only some of the electrons being manually forced through the conduction band. Depending on the force that does this, extrinsic conductors can be P-type or N-type.4

Product Segments The semiconductor industry can be broken down into four major product categories. The categories consist of memory, microprocessors, commodity integrated circuit, and complex system on a chip (SOC). Memory chips work like temporary storehouses for data and transport information through computer devices. Microprocessors contain basic logic for performing tasks. Commodity integrated circuits or “standard chips” are produced on a larger scale and are used in routine processing. Complex SOC is basically an integrated circuit chip containing an entire system’s capability; the market for these is driven by the increasing demand for consumer products that combine new features at competitive prices.9

Source: Singapore Business The chart above depicts the broad product types semiconductors go into. We expect to see some changes in these percentages in the future. As self-driving cars become a standard in the automotive industry, we expect a large jump in the percentage of semiconductors that go into the automotive industry. As semiconductors increase use within the automotive industry, we expect the percentage of semiconductors in PCs to drop. We predict this drop, not because of a drop in PC use, but just a stagnation or lack of increase in PC sales. Porter’s 5 Forces Threat of new entrants: low There are high costs associated with entering the semiconductor industry, such as buying the machinery to produce semiconductors. Intellectual property is heavily protected in this industry, making it difficult to compete with established companies. Therefore, the concern for companies entering this industry is reserved for companies like Alphabet and Apple. These companies have large sums of cash and could buy any resources they might need to enter the industry. However, we don’t predict this happening in the future. We believe that these large technology companies will stay in their primary market. Threat of substitutes: low For a lot of products, like smartphones and some medical devices, there are no substitutes for the semiconductors in those products. This forces companies to use semiconductors in their products. We believe that as newer electronic devices are invented, they will increasingly use semiconductors. We have a positive outlook for the industry as a whole. Competition in the industry: moderate What keeps the competition from being high, is the high cost to switch suppliers. If a company wants to switch semiconductor suppliers, they will have to pay a large premium to their new supplier at first, so that company can change their production method to produce the type and variant of semiconductor the customer needs. We believe semiconductor companies will be able to find ways to make this switching process in the future.

This will cause competition to rise in the industry, as the ease of switching semiconductor suppliers increases. Bargaining power of buyers: low This high switching cost previously mentioned, gives the buyers low bargaining power. Unless the buyer’s semiconductor company has extremely high costs, it will be more cost effective to pay the higher prices than to switch suppliers. Bargaining power of suppliers: moderate Silicon is used in almost all semiconductors and is the second most abundant element on Earth. However, the process of refining silicon into a usable substance is an expensive process. This is what gives the suppliers moderate bargaining power. It would be costly for these semiconductor companies to refine silicon on their own in addition to their usual operations.7

This analysis shows us that going forward, the market leaders in the semiconductor industry are likely to maintain their positions, but at moderate risk of current competitor infringement. These competitors will take some of the revenue share because they will likely cut prices to get customers while trying to gain their loyalty. Then, they will attempt to maintain these customers while increasing prices to counteract the previous price cut. Successful companies like NVIDIA will struggle to maintain their high rate of growth. Market and Competition Landscape While competition is moderate now, we expect competition to pick up in the future. Companies will soon able to adapt their production setups to produce multiple types of semiconductors easily and cost efficiently. A large driver in the industry leading to competition is product performance. In the technology sector, performance and speed are everything. Customers are very willing to change their products if there are ones that clearly perform better. Therefore, if one semiconductor company clearly performs better than another, their customers will switch to the other producer and lose that business.

Risks Impact on Fundamentals Weak economy and/or product environment

Shipment volumes may be negatively affected

Delayed delivery of products

Loss of revenues, profits and competitive position; potential reduction in demand for current chips

Server price competition Shrinking profit margins

Failure to keep up with technology

Increasing chip complexity requires more advanced processes to keep costs under control

Source: Investopedia The chart above shows some of the risks that semiconductor companies need to be aware of. Like most of the technology

sector, semiconductor companies need to keep research and development a large focus, so they don’t fall behind the demanding and fast-changing technology space. Since semiconductors are primarily used in luxury products like smartphones and tablets, in weaker economies their sales can decline. We feel that these semiconductor companies realize this and will try expanding their businesses into more recession-proof products like medical devices. Major Players The two big players in the semiconductor industry are Intel and Samsung. They are very well placed because they are not solely semiconductor companies. This diversity allows them to better absorb temporary declines in sales. These companies are also considerably larger than any other company in the industry. This allows them to more easily acquire companies or intellectual property. Key Investment Positives and Negatives We see semiconductors starting to be implemented into more technology as they are invented. This increase in potential products that use semiconductors will increase revenue. Also, if these products have different sale cycles, the semiconductor industry could possibly lose its cyclical nature and become more consistent. One investment negative we projected is the possibility of semiconductors becoming obsolete upon the invention of a better, more effective substitution of them. While we don’t see this happening soon, it is a risk to consider. Another investment negative is that perhaps future devices will be able to function without semiconductors. This would almost certainly collapse the industry, with the exception of companies like Intel and Samsung who have other business segments to keep them afloat. We factored this possibility into our model because the current rate at which technology changes is extremely fast.

Company Analysis General Information NVIDIA (NVDA) focuses on three primary areas: personal computer graphic design, graphics processing design, and artificial intelligence. The company operates through GPU and Tegra Processors. The graphics processing unit was initially just used for visuals in video games and movies but has expanded its use. GPUs are now able to simulate viruses to predict weak spots in software. NVIDIA uses AI to create software that can write itself and algorithms that can learn from past data. Recently, NVIDIA’s AI is being utilized in the development of self-driving cars. NVIDIA’s corporate strategy is to focus on four main markets: Automotive, Datacenters, Gaming, and Professional Visualization¹. NVIDIA’s strategy has placed them is a competitive position for future trends. The company’s early start on the AI needed for self-driving cars put NVIDIA ahead of

their competition as the self-driving car market begins to ramp up. The recent adoption of the company’s Volta chips might mark the beginning of large sales from AI and driverless cars. We also believe that as the amount of global data exponentially increases, NVIDIA will be able to capitalize on the associated demand for data centers. Analysis of Recent Earnings As of November 9, 2017, NVIDIA reported EPS of $1.33, beating expectations by 39 cents and revenue of $2.64 billion. The company raised their dividend by 7 percent, leaving it at 15 cents per share. NVIDIA announced that they intend to return $1.25 billion to shareholders, in fiscal year 2019, through share repurchases and dividends.15 Data center revenue more than doubled in the past one year ending at $501 million. GPU revenue grew 25 percent on a year-on-year basis to $1.56 billion, and Tegra processor revenue grew 74 percent to $419 million. NVIDIA also announced that Amazon, Microsoft, Google, Baidu, Alibaba, Tencent, and Oracle showed support for Volta. The support of every major cloud producer along with every major server computer maker reflects in our optimistic revenue predictions in our model.18

Source: NVIDIA Inc. GAAP net income for the quarter reported was $838 million, up 55 percent Y/Y. NVIDIA’s CEO attributed their growth to the accelerated adoption of AI from industries across the world. He stated, “Our Volta GPU has been embraced by every major internet and cloud service provider and computer maker. Our new TensorRT inference acceleration platform opens us to growth in hyperscale datacenters. GeForce and Nintendo Switch are tapped into the strongest growth dynamics of gaming. And our new DRIVE PX Pegasus for robotaxis has been adopted by companies around the world.” We believe that NVIDIA’s recent earnings and guidance support our model’s predictions for continued revenue growth.13

Marketing Strategy NVIDIA’s main marketing strategy is to partner or work closely with companies that either use their products or make devices that use their products¹. A part of this networking strategy is to give their large customers extreme attention to keep them satisfied. This leads to them having fewer customers because they focus on a few key companies. We believe this strategy

could leave them vulnerable, if a competitor were to take one of their customers. For example, ASUSTeK Computer Inc. made up 12% of NVIDIA’s 2017 fiscal year revenue¹. If this customer terminated their business with NVIDIA it would severely hurt the company. This scenario also gives customers more bargaining power to negotiate prices. The partnership NVIDIA has with its customers allows them to leverage these companies to develop products that are compatible with NVIDIA’s products. As an industry leader, NVIDIA is able to use a skimming price policy. Their innovation allows them to collect higher revenues from new products before adjusting prices to attract new customers and compete with immerging competitors. The company also hopes to increase brand awareness via television, magazines, and social media advertisement. As the company has grown it has maintained a positive public image by donating and interacting with global and local communities.5

Production and Distribution

NVIDIA does not do any manufacturing of their products, and they hire suppliers for the majority of the materials needed. They outsource the production of all their products to companies that specialize in each phase of production¹. For example, a semiconductor NVIDIA designed might go to 3 separate companies before it gets to the customer. One company may supply the materials, the next would manufacture the product, and the last company would test and ship the product. This allows NVIDIA to avoid purchase and depreciation costs for most of the equipment required to produce their products. The labor costs associated with the production of their products remain lower through outsourcing, as opposed to producing in the United States.

However, NVIDIA does own warehouses to store half-finished products. NVIDIA’s customers demand quick access to the purchase and delivery of semiconductors. NVIDIA attempts to meet this demand by having semiconductors almost finished when purchase orders come in¹. We believe that this exposes them to inventory risks and increases our projected potential expenses.

Semiconductors that are half finished can be made into various products, depending on the second half of the production process. This allows NVIDIA to avoid excess unusable inventory. They can more easily adapt their current inventory to demand. NVIDIA’s most common suppliers are Taiwan Semiconductor Manufacturing Company Limited, and Samsung Electronics Co. NVIDIA’s usual manufacturers are BYD Auto Co. Ltd. and Quanta Computer. For testing of their products and delivery NVIDIA typically uses companies like Advanced Semiconductor Engineering or Siliconware Precision Industries Company LTD¹.

Over the most recent 5 years, NVIDIA has kept an average inventory as a percent of sales of 9.92%. This is composed of 2.87% raw materials, 2.3% work-in-process, and 4.74% finished goods (percentages are all of revenue). Based on the company’s production strategies, we model that NVIDIA will maintain this structure going forward.

NVIDIA has been working with some of the largest names in technology and technology-related industries. In April, NVIDIA and Facebook entered into a partnership to collectively improve Caffe2 via artificial intelligence. In 2017, the company also began working with Baidu, IBM, and Microsoft. We believe this is an indicator that NVIDIA is a market leader with diverse technology. They have also signed partnerships or agreements with Mercedes-Benz, Audi, Volvo Car Corporation, and others to develop and use AI in the automotive industry. In January, they announced that they have an agreement with Audi to put advanced AI cars on the road by 2020.6

Competitive Environment

NVIDIA operates in a highly competitive market. Their primary competitors include Advanced Micro Devices, Intel Corporation, ARM Holdings Plc., Broadcom Corporation, Freescale Semiconductor Inc., HiSilicon Technologies Co., Ltd., Imagination Technologies Ltd., Marvell Technology Group Ltd., Mediatek, Qualcomm Incorporated, Renesas Technology Corp., Samsung Electronics Co. Ltd., ST Microelectronics, and Texas Instruments Incorporated.6 Intel is one of the leading companies in the semiconductor industry and shows a free cash flow margin of 13.1% compared to NVIDIA’s 29.2%. In the most recent 5 years, Intel only grew in revenue by 2.5% indicating they might lack the ability to increase shareholder value in the future.

A major competitor, AMD increased revenue in 2017-Q2 from 984M to 1.22B; this implies growth of 24.19%. Compared to 15% growth for NVIDIA. In 2017 Q2 year over year growth for AMD was 19% making it a strong competitor based only on recent growth. However, in the last five years, sales for AMD have decreased by -6.3% annually. In the most recent 12 months, AMD reported an average operating loss margin of -6.5%. In conclusion, AMD has shown strong recent growth but is unlikely to see long-term growth.

Source: AmigoBulls This chart above demonstrates NVIDIA’s rapid growth of net income in comparison to stagnant competitors: LLTC and PXLW. Net income and revenue comparisons, that include Intel, diminish the clarity of NVIDIA’s growth. However, recent Q3 earnings calls reported that NVIDIA grew revenue by 32 percent in the year. Intel’s Q3 earnings call stated that their revenues grew by 6 percent in the year, excluding McAfee, which supports our belief that Intel holds the title of largest company in

the semiconductor industry, threatening NVIDIA’s ability to sustain future growth. Intel believes that their future growth will heavily derive from their data-centric business. Intel also believes they will continue to grow their PC-centric business. This is less of a threat to NVIDIA, and accordingly, our model reflects our belief that PC related revenue will not be a major category of growth for NVIDIA.18 In April 2017, Advanced Micro Devices acquired a provider of wireless chips. The capabilities of Nitero, the acquired company, could allow AMD to improve their virtual reality (VR) and artificial reality (AR).6 Additionally, AMD and Intel have announced that they are in the process of teaming up to develop a new computer semiconductor. Although this is in the preliminary stages of development, the alliance factors into our model through two avenues. The competing companies pose a serious threat to NVIDIA’s revenue from sales related to gaming computers. NVIDIA’s rapid growth and growing market share most likely provoked AMD and Intel to team up. However, we also see their recent announcement as an indicator that NVIDIA’s competitors view them as an industry leader and reaffirm that NVIDIA is likely to continue growing in the next five years and beyond year 2022.5

Source: ycharts NVIDIA currently has the highest PE ratio of the selected similar companies. Although AMD is one of NVIDIA’s closest competitors, they are not included due to their negative earnings per share. NVIDIA is trading at $205 with an EPS (TTM) of 3.52. The other five companies below have an average PE Ratio of 31.38. The application of that multiple with NVIDIA’s EPS concludes a suggested price of $110.46.

The price to earnings ratio shows what investors will pay for one dollar of the company’s earnings. We believe NVIDIA trades at a premium because of elevated expectations for future growth. Announcements from the company, like their intent to return $1.25 billion to investors in FY2019, support this conclusion.

Catalysts for Growth/Change:

NVIDIA identified 3 major drivers that they believe will facilitate growth. These consisted of AI, gaming, and self-driving cars. They currently receive the most revenue from gaming, which brought in over four billion dollars in 2017, but large possibilities of growth derive from the self-driving car market. NVIDIA projected that by 2025 the total available market for self-driving cars will include 5 million units with an opportunity of five billion dollars³. NVIDIA’s AI enables vehicles to operate safely and automatically. NVIDIA’s AI technology is also expanding online gaming and helping healthcare professionals with their DGX-1 supercomputer.

We also believe NVIDIA is likely to benefit from the cloud-based computing market. In 2015 the market was at $66 billion but is projected to expand at a CAGR of 35.1%, reaching $297.2 billion by 2020. Over that period the market share is projected to split into the following geographic divisions; North America (60.3%), Europe (20.6%), Asia Pacific (13.5%), Central and Latin America (4.2%), Middle East and Africa (1.4%). NVIDIA has already begun efforts to grow their cloud services market share. The company created strategic partnerships Foxconn, Inventec, Quanta, and Wistron, all of which are original design manufacturers.

NVIDIA has shown a strong aptitude for developing new innovative technology and we expect them to continue creating products that exceed the quality of competitors. NVIDIA’s ability to create unmatched products allows them to charge a premium during early periods. We identify this as a necessity for technology companies to excel. In FY2016 NVIDIA launched the first AI supercomputer in a box along with several other products such as; the GeForce GTX 1050 and 1050 Ti Pascal-based GPUs, Xavier complete system-on-chip (SOC), and an AI computing platform that assists AutoCruise functions. In May 2017, the company reinforced their reputation for creating innovative technology for AI inferencing when they launched their Volta-based processor, the Tesla V100 data center GPU.6

Negatives Patent Infringement NVIDIA faces future risk from patent infringement issues. These risks could potentially turn into lawsuits with heavy fines and penalties. If lawsuits occur, NVIDIA’s public image could be damaged resulting in harm to business operations. Polaris filed a lawsuit against NVIDIA in December 2016 regarding patent infringement. NVIDIA could be forced to discontinue their use of certain technology and pay damages. Security Breaches NVIDIA’s business operations require the transmission and storage of proprietary information. The company has been the target of several cyber-attacks. In 2016, 298,728 internet crimes were processed; these crimes resulted in $1.3 billion in losses. NVIDIA is, and will likely remain, at risk of internet fraud due to their business model. These risks could result in an increase in cybersecurity costs. Rapid Market Changes Quick and regular changes in market conditions, industry standards, and product or service introductions/alterations require investments to meet customer needs. If NVIDIA fails to effectively compete and introduce new products, they are at high risk of losing market share.6 Research and Development Companies competing in the semiconductor industry are required to spend substantial portions of their revenue on R&D to remain competitive. Intel spends close to $3 billion on R&D quarterly. We believe that historical data indicates NVIDIA might be allocating research and development funds more efficiently than competitors. We predict that this will give them, a competitive advantage going forward, but the company may be unable to increase efficiency.

Source: ycharts The above chart displays research and development costs as a percent of revenue over the past three years for NVIDIA, AMD, Intel, and Qualcomm (NVIDIA in blue). NVIDIA has been

Company Market Cap PE Ratio

NVIDIA Corp $129,684.00 61.40

Texas Instruments Inc $95,540.23 22.65

Qualcomm Inc $95,186.79 39.13

Intel Corp $213,314.40 15.94

Analog Devices Inc $32,939.35 42.87

Microchip Technology Inc $21,416.38 36.33

reducing the quantity they spend on research and development as a percent of revenue but the results have been far from a reduction in revenue or market share. In 2014 NVIDIA spent over 32% of their revenue on R&D and by next year we forecast that they will only be spending 18%. At the end of FY2017, NVIDIA had 10,299 employees. At that time, 7,282 of those employees were engaged in R&D.13

Valuation Analysis Based on economic, industry, and company-specific research we developed financial models for NVIDIA. Our models utilize discounted cash flow, economic profit, relative valuation, and dividend discount analyses. Our research and models concluded that NVIDIA is trading at a price above its intrinsic value prompting a sell rating. Our model contains historical data, current data, and projections for the next five years, at which point, we believe NVIDIA will reach a steady state of growth. Our projected steady state of growth predicts a rate of 5.5% and begins in FY2022. Revenue Growth NVIDIA’s revenue derives from two segments titled “GPU and Tegra Processor.” Their proprietary processors fulfill demands in four lucrative markets: Gaming, Professional Visualization, Data Center, and Automotive. Those markets require specialized GPU-based visual computing and accelerated computing platforms. The chart below depicts our projected revenues for NVIDIA in the fiscal year 2022.

Gaming Gaming is currently NVIDIA’s largest source of revenue. From 2015 to 20`17, gaming revenue grew from $2.06 billion to $4.60 billion. Although we don’t project NVIDIA to sustain those rates of growth, we do project considerable increases in gaming revenue for the next five years. In FY2018 our gaming estimates include strong sales from SOC modules for the Nintendo Switch. However, we also forecast that YOY growth will be less than the previous year. We believe previous gaming revenue growth was inflated by NVIDIA’s launch of Pascal. NVIDIA has remained hesitant to provide guidance on their gaming revenue derived from the cryptocurrency market. The volatility and uncertainties associated with cryptocurrencies led to our decision to model

NVIDIA’s revenue without any considerable future effects from cryptocurrencies. Professional Visualization In this past year alone, NVIDIA’s professional visualization technology has enabled production houses to live stream 360-degree videos and released Holodeck which provides a virtual collaboration space through physically simulated VR. Data Center NVIDIA has provided substantial evidence that it will experience considerable growth in revenue from the data center market. We project growth of 115% in FY2018, followed by favorable estimates until FY2022. NVIDIA’s ability to fulfill cloud service and high-performance computing demands. NVIDIA’s data center revenue growth is currently driven by their Tesla V100 GPU. The Tesla V100 GPU was released this year and has shown promising returns so far. NVIDIA is the inventor of the GPU and has historically released a GPU with new architecture approximately once every two years. We believe they will release a new GPU with similar results in FY2020, resulting in revenue growth of 65%. By FY 2022, we forecast that NVIDIA’s data center revenue will have reached just under $4 billion. At that point, we believe it is unlikely for the company to continue to see growth rates at historical levels and will more likely continue to grow at approximately 4%. Automotive The automotive industry in at the starting point of what we believe will provide high revenue growth for NVIDIA. NVIDIA holds contracts with several major automotive manufacturers. Our research suggests that most automotive revenue growth will occur in FY2020, where we forecast a 75% increase in automotive revenue. We believe an influx of revenue from this market just beginning this year. On November 9, 2017, the company announced NVIDIA DRIVE PX Pegasus, an AI system that enables a new class of driverless robotaxis without pedals or steering wheels. While this is an exciting market with billions in potential revenue, our model conservatively predicts future revenue inflows due to the lack of evidence that NVIDIA will continue to control this market with the success that it has had in other markets. OEM & IP The final revenue sector for NVIDIA is OEM & IP. OEM & IP revenues are attributed older components for PCs. The company has given little guidance regarding growth for this market but does intend to continue collecting revenue from it. Because of this, we projected negative revenue growth of 1% for each of the next five years.

Operating Expenses Cost of Goods Sold NVIDIA reports cost of revenue net of cost of goods sold, depreciation expense, and amortization expense. To increase the transparency of this forecast, we have decided to separate the depreciation and amortization expenses from cost of revenues. We forecasted NVIDIA’s cost of goods sold to increase as 37% of revenue. After analyzing the historical growth of cost of goods sold, we decided to take the average of the last three years as a percent of revenue, which was 39%. We then accounted for additional factors. We believe that as a technology company, NVIDA’s cost of goods sold will increase with revenue, but at decreasing rate due to economies of scale. We also attempted to account for inflation throughout our model, which we projected as 2.2%. This left our models with a cost of goods sold projecting at 37% of revenue times .95 going forward. Depreciation and Amortization Depreciation and amortization are calculated and projected separately in our model. Depreciation was estimated by calculating the historical depreciation rate (24%) and multiplying that by the company’s net PP&E from the previous year. We projected amortization by following NVIDIA’s amortization schedule within their 10-k. Research and Development In FY2014 NVIDIA’s research and development expenses were 32% of revenue and by FY2017 NVIDIA had decreased this to 21%. We believe NVIDIA will decrease this percentage even more in FY2018 and beyond. Specifically, our model uses 18% of revenue to forecast future years. Our logic behind this calculation is that NVIDIA’s revenue drastically increases and therefore R&D as an output must fall to remain a reasonable price. At that percentage, our model forecasts R&D to increase by $214 million in FY2018 and by over $263 million each year after until FY2022. We believe NVIDIA has proven themselves as a company that utilizes their R&D funds in a highly efficient manner. However, the competitive nature of their industry requires that they continue increasing R&D funding to retain market share. Sales, general, and administrative expenses We forecasted sales, general, and administrative expenses to increase as a percent of revenue. We considered two segments when forecasting NVIDIA’s SGA. We modeled fixed costs tied to salaries and wages with a rise connected to a 2.2% inflation rate. We also believe NVIDIA will incur variable costs linked directly to their increased revenue. These factors led us to calculate future SGA as 8.5% of revenue times .93. We expect labor prices to increase and talent acquisition/retention to become more competitive and costly. We also expect advertising expenses to increase over the next five years as competition for market share increases. As the size of NVIDIA increases, we expect them to follow industry and historical tendencies to lower SGA as a percent of revenue.

WACC The risk-free rate we chose to use for our WACC calculation was the 30-year Treasury yield, which is 2.88% We chose to use a geometric average risk premium of the S&P from 1928-2016 for the equity risk premium. We chose to use the geometric average instead of the arithmetic average because the geometric accounts for compounding earnings, while the arithmetic does not. The value we got for the market equity risk premium was 4.65%. To calculate the beta, we took an average of the raw 2 year weekly and monthly, 1 year weekly, and 5 year weekly betas. We believe this is the most accurate beta to use going forward. The average gave us a value of 1.87 for NVIDIA’s beta. We then used the variety of factors to come to the cost of equity for NVIDIA. We multiplied the risk-free rate by the equity risk premium and added that value to beta. This gave us a value of 9.72% for the cost of equity. NVIDIA does not have a 30-year bond so we had to use a proxy company to determine the pre-tax cost of debt for NVIDIA. The best proxy we could find in terms of a company with a similar debt rating, size, and having technology is an integral part of their day to day operations was Teva Pharmaceutical. Their 30-year bond yield was 5.88%. The marginal tax rate we derived from NVIDIA’s 10-K was 14.65%. To then calculate the after-tax cost of debt for NVIDIA we multiplied the pre-tax cost of debt times (1-marginal tax rate) to get 5.02%. Next, we calculated the values of debt and equity. Then we added them together and found their respective weights. To get the value of equity we took the current stock price and multiplied it by the number of shares outstanding. This gave us a value of $126,441.90. To get the value of debt we added the value of long-term debt from the 10-K to the value of the present value of operating leases. This gave us a value of $6,533.37. After adding them together and getting their weights, we got that the weight of equity financing is 95.09% and debt was 4.91%. Lastly, to calculate the WACC we took the cost of debt and equity and multiplied it by their weights. This process gave us a WACC of 9.48%. Relative Valuation Models Price to Earnings NVIDIA trades at a higher price to earnings multiple than any of its comparable companies. We calculated multiple PE ratios to compare different groups to NVIDIA. We concluded that our most applicable model includes AMD, INTC, MRVL, QCOM, MU, and TXN. After averaging their PE ratios, we multiplied the average by our EPS. This suggested that NVIDIA should be trading at $106. As mentioned in our competitive environment analysis, we believe NVIDIA should be trading at a premium due to its position for growth and investment risk. However, the PE analysis supports our decision that NVIDIA is trading at a higher price than its intrinsic value implies.

Dividend Discount Model (DDM) We believe that because NVIDIA is a dividend paying stock that the DDM is a decent way to value the company. However, we feel the value of the stock produced by this model is a little overvalued. We feel that our chosen dividend payout ratio of .145 is fair. However, this ratio leads to some solid forecasted dividends ranging from .58 up to .79. These higher dividends being the key value driver in this model is why we feel this method gives the stock price that is too high for NVIDIA because this model doesn’t take into account NVIDIA’s rising costs. This method gives us a partial year adjusted price of $234.46. Based on this model NVIDIA would be currently undervalued. DCF and EP This is the approach that we feel is the most appropriate for NVIDIA. This approach uses two financial statements, income statement and balance sheet, instead of just one like other valuation methods. We feel that this model takes into account most necessary information. The factors included in DCF/EP valuation method gave us a partial year adjusted stock price of $171.28. This led us to believe that NVIDIA is currently overvalued and should have a sell rating. Sensitivity Analysis

WACC169.79$ 9.10% 9.20% 9.30% 9.34% 9.40% 9.50% 9.60%

2.00% 102$ 101$ 99$ 99$ 98$ 96$ 95$ 2.50% 108$ 107$ 105$ 104$ 103$ 102$ 100$ 3.00% 116$ 114$ 112$ 111$ 110$ 108$ 106$ 3.50% 124$ 122$ 120$ 119$ 118$ 116$ 114$ 4.00% 135$ 132$ 129$ 128$ 127$ 124$ 122$ 4.50% 147$ 144$ 141$ 139$ 138$ 135$ 132$ 5.00% 163$ 159$ 155$ 153$ 151$ 148$ 144$ 5.69% 191$ 186$ 181$ 178$ 175$ 171$ 166$ 6.60% 254$ 244$ 235$ 231$ 226$ 218$ 211$ 6.70% 264$ 253$ 243$ 239$ 234$ 225$ 217$ 6.80% 274$ 263$ 252$ 248$ 242$ 233$ 224$ 6.90% 286$ 273$ 262$ 257$ 251$ 241$ 232$ 7.00% 299$ 285$ 272$ 267$ 261$ 250$ 240$ 7.10% 312$ 297$ 284$ 278$ 271$ 260$ 249$

The data table above shows our tests of a WACC ranging from 9.10% to 9.60% against a CV growth of NOPLAT ranging from 2% to 7.1%. This shows us that CV NOPLAT growth has a considerable effect on NVIDIA’s stock price and how changes in WACC correlate. We don’t see NVIDIA’s capital structuring changing in the future drastically and that is why we chose to test smaller incremental changes for the WACC.

CV SGA (FY2022)171.28$ 900 1000 1100 1213 1300 1400 1500

2200 (28)$ (34)$ (42)$ (55)$ (71)$ (101)$ (164)$ 2300 (34)$ (42)$ (54)$ (74)$ (101)$ (164)$ (381)$ 2400 (42)$ (54)$ (71)$ (107)$ (164)$ (381)$ 1,848$ 2500 (54)$ (71)$ (101)$ (178)$ (381)$ 1,848$ 290$ 2600 (71)$ (101)$ (164)$ (456)$ 1,848$ 290$ 163$ 2700 (101)$ (164)$ (381)$ 1,072$ 290$ 163$ 116$

2800 (164)$ (381)$ 1,848$ 263$ 163$ 116$ 92$ 2875.6 (291)$ (4,863)$ 362$ 172$ 125$ 97$ 80$

3000 1,848$ 290$ 163$ 112$ 92$ 77$ 67$ 3100 290$ 163$ 116$ 89$ 77$ 67$ 59$ 3200 163$ 116$ 92$ 75$ 67$ 59$ 54$ 3300 116$ 92$ 77$ 65$ 59$ 54$ 49$ 3400 92$ 77$ 67$ 58$ 54$ 49$ 46$ 3500 77$ 67$ 59$ 53$ 49$ 46$ 43$

After reviewing the results from the first sensitivity analysis, we concluded it would be beneficial to test SGA expenses in year 2022, which we ranged from 900 to 1500, with R&D expenses at the same period, ranging from 2200 to 3500. We did not find this a particularly useful analysis because almost half of the stock prices here are negative but this showed severe volatility from slight changes, like changing CV R&D from 2800 to 2875.6.

Beta169.79$ 1.17 1.27 1.37 1.47 1.57 1.67 1.77

2.22% 359$ 288$ 241$ 206$ 181$ 160$ 144$ 2.32% 341$ 277$ 232$ 200$ 176$ 157$ 141$ 2.42% 325$ 266$ 225$ 194$ 171$ 153$ 138$ 2.52% 310$ 256$ 217$ 189$ 167$ 150$ 135$ 2.62% 296$ 246$ 211$ 184$ 163$ 146$ 133$ 2.72% 284$ 238$ 204$ 179$ 159$ 143$ 130$ 2.82% 273$ 230$ 198$ 174$ 155$ 140$ 127$ 2.92% 262$ 222$ 193$ 170$ 152$ 137$ 125$ 3.02% 252$ 215$ 187$ 166$ 148$ 134$ 123$ 3.12% 243$ 208$ 182$ 162$ 145$ 132$ 120$ 3.22% 235$ 202$ 177$ 158$ 142$ 129$ 118$ 3.32% 227$ 196$ 173$ 154$ 139$ 127$ 116$ 3.42% 220$ 191$ 168$ 151$ 136$ 124$ 114$ 3.52% 213$ 185$ 164$ 147$ 133$ 122$ 112$

Above is a sensitivity analysis between potential Betas and the risk-free rate of return (30-year Treasury bond). Between these two changes, Beta has a larger effect on the stock price than the risk-free rate does. While we predict the risk-free rate to remain more stable than NVIDIA’s Beta, this leads us to believe there could be some price volatility in the future.

Pre-Tax Cost of Debt169.79$ 5.58% 5.68% 5.78% 5.88% 5.98% 6.08% 6.18%

2.00% 96$ 96$ 96$ 96$ 96$ 96$ 96$ 2.50% 102$ 102$ 102$ 102$ 101$ 101$ 101$ 3.00% 108$ 108$ 108$ 108$ 108$ 108$ 108$ 3.50% 115$ 115$ 115$ 115$ 115$ 115$ 115$ 4.00% 124$ 124$ 124$ 124$ 124$ 124$ 124$ 4.50% 135$ 134$ 134$ 134$ 134$ 134$ 134$ 5.00% 147$ 147$ 147$ 147$ 147$ 147$ 146$

5.69% 170$ 170$ 170$ 170$ 170$ 169$ 169$ 6.60% 218$ 217$ 217$ 217$ 216$ 216$ 216$ 6.70% 225$ 224$ 224$ 224$ 223$ 223$ 223$ 6.80% 232$ 232$ 231$ 231$ 231$ 230$ 230$ 6.90% 240$ 240$ 240$ 239$ 239$ 238$ 238$ 7.00% 249$ 249$ 248$ 248$ 247$ 247$ 247$ 7.10% 259$ 258$ 258$ 257$ 257$ 256$ 256$

As seen above the pretax cost of debt variations have minimal effect on the stock price of NVIDIA. This is due to NVIDIA having a low weight of debt. The y-axis of the chart shows the change in CV NOLPLAT growth. This shows some fair variation in stock price as CV NOPLAT growth changes from 2-7.1%.

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Important Disclaimer This report was created by students enrolled in the Security Analysis (6F:112) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

NvidiaKey Assumptions of Valuation Model

Ticker Symbol NVDACurrent Share Price $216.14Current Model Date 11/10/2017FY End (month/day) Jan. 29

Pre-Tax Cost of Debt 5.88%Beta 1.47Risk-Free Rate 2.92%Market Equity Risk Premium 4.65%CV Growth of NOPLAT 5.69%CV Growth of EPS 6.33%Current Dividend Yield 34%Marginal Tax Rate 14.65%Effective Tax Rate 12.50%WACC 9.52%Inflation Rate 2.2%

NvidiaRevenue Decomposition

Fiscal Years Ending Jan. 29 2015 2016 2017 2018E 2019E 2020E 2021E 2022CVGaming 2058 2818 4060 5359 6163 6903 7386 7718

Growth Rate 36.9% 44.1% 32.0% 15.0% 12.0% 7.0% 4.5%

Professional Visualization 795 750 835 902 974 1052 1104 1160Growth Rate -6% 11% 8% 8% 8% 5% 5%

Datacenter 317 339 830 1785 2141 3533 3781 4007Growth Rate 6.9% 144.8% 115.0% 20.0% 65.0% 7.0% 6.0%

Automotive 183 320 487 580 869 1521 2206 2426Growth Rate 74.9% 52.2% 19.0% 50.0% 75.0% 45.0% 10.0%

OEM & IP 1329 783 698 691 684 677 670 664Growth Rate -41.1% -10.9% -1.0% -1.0% -1.0% -1.0% -1.0%

Total Revenues 4682 5010 6910 9316 10832 13686 15147 15976Growth Rate 7.0% 37.9% 34.8% 16.3% 26.4% 10.7% 5.5%

NVIDIA Corp (NMS: NVDA)Income Statement

Report Date 2015 2016 2017 2018E 2019E 2020E 2021E 2022CVScale Millions Millions Millions Millions Millions Millions Millions MillionsRevenue 4,682 5,010 6,910 9,316 10,832 13,686 15,147 15,976 Cost of revenue other than Depr. & Amrtzn. 1,862 2,002 2,660 3,447 4,008 5,064 5,604 5,911 Depreciation 143 124 119 126 122 126 131 138 Amortization 77 73 68 54 26 16 7 1 Total Cost of revenue 2,082 2,199 2,847 3,627 4,156 5,206 5,743 6,050 Gross profit (loss) 2,599 2,811 4,063 5,689 6,676 8,480 9,404 9,926

Research & development expenses 1,360 1,331 1,463 1,677 1,950 2,464 2,727 2,876 Sales, general & administrative expenses 481 602 663 708 823 1,039 1,150 1,213 Restructuring charges & other operating expenses - 131 3 - - - - - Total operating expenses 1,840 2,064 2,129 2,384 2,772 3,503 3,877 4,089 Income (loss) from operations 759 747 1,934 3,305 3,904 4,977 5,527 5,837 Interest income 28 39 54 61 64 66 69 72 Interest expense 46 47 58 164 123 128 136 141 Other income (expense), net 14 4 (25) - - - - - Income (loss) before income tax 755 743 1,905 3,203 3,845 4,916 5,461 5,768 Total current income tax expense (benefit) 26 (17) 42 469 563 720 800 845 Deferred income tax expense (benefit) - federal 84 134 199 199 199 199 199 199 Charge in lieu of taxes attributable to employer S.O 16 12 - - - - - - Income tax expense (benefit) 124 129 239 668 762 919 999 1,044 Net income (loss) 631 614 1,666 2,535 3,082 3,997 4,462 4,724

Weighted average shares outstanding - basic 552 543 541 582 578 576 574 571Year end shares outstanding 545 539 585 579 577 575 573 570Cash dividends declared & paid per common share 0.34 0.40 0.49 0.63 0.77 1.01 1.13 1.20Basic earnings per share 1.14 1.13 3.08 4.35 5.33 6.94 7.78 8.27

NVIDIA Corp (NMS: NVDA)Balance Sheet

Report Date 2015 2016 2017 2018E 2019E 2020E 2021E 2022CVScale Millions Millions Millions Millions Millions Millions Millions MillionsAssets

Cash & cash equivalents 496.7 596.0 1766.0 2199.0 3511.5 5608.0 8144.7 10920.2Marketable securities 4126.7 4441.0 5032.0 5233.3 5442.6 5660.3 5886.7 6122.2Accounts receivable, net 473.6 505.0 826.0 997.7 1160.0 1465.7 1622.1 1710.8Raw materials 156.8 105.0 252.0 267.5 311.0 393.0 434.9 458.7Work in-process 91.8 103.0 176.0 214.4 249.3 315.0 348.6 367.7Finished goods 234.3 210.0 366.0 442.0 513.9 649.3 718.6 757.9Inventories 482.9 418.0 794.0 923.9 1074.2 1357.3 1502.1 1584.3Prepaid expenses & other current assets 70.2 93.0 118.0 166.0 193.0 243.9 269.9 284.7Deferred income taxes 63.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total current assets 5713.3 6053.0 8536.0 9519.9 11381.3 14335.2 17425.7 20622.2

Total property & equipment, gross 1179.3 1100.0 1191.0 1355.6 1520.2 1684.7 1849.3 2013.9Accumulated depreciation & amortization 622.0 634.0 670.0 849.6 997.7 1139.7 1278.1 1416.9Property & equipment, net 557.3 466.0 521.0 505.9 522.5 545.1 571.2 597.0Net PPE & intangible assets 779.0 632.0 625.0 663.9 706.5 745.1 778.2 805.0Goodwill 618.2 618.0 618.0 618.0 618.0 618.0 618.0 618.0Prepaid taxes, long term 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Prepaid maintenance, long term 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Lease deposits 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Investment in non-affiliates 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Deferred income taxes, long term 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Other assets 90.9 67.0 62.0 104.1 121.0 152.9 169.2 178.5

Total assets 7201.4 7370.0 9841.0 10797.9 12666.8 15659.2 18785.1 22015.7

LIABILITIESAccounts payable 293.2 296.0 485.0 659.1 666.0 841.5 931.3 982.3Accrued liabilities & other current liabilities 602.8 642.0 507.0 683.5 794.8 1004.2 1111.4 1172.2Convertible short-term debt 0.0 1413.0 796.0 796.0 796.0 796.0 796.0 796.0

Total current liabilities 896.0 2351.0 1788.0 2138.6 2256.7 2641.7 2838.7 2950.4

Long-term debt 1384.3 0.0 1983.0 1291.1 1377.0 1511.4 1599.3 1666.6Deferred income tax liability 232.3 301.0 141.0 134.0 127.3 120.9 114.8 109.1Income tax payable 121.0 78.0 96.0 267.2 304.8 367.6 399.5 417.5Deferred revenue from Intel cross license ag 107.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0Contributions payable 0.0 0.0 10.0 10.0 10.0 10.0 10.0 10.0Deferred revenue 0.0 44.0 4.0 4.0 4.0 4.0 4.0 4.0Interest rate swap 0.0 7.0 0.0 0.0 0.0 0.0 0.0 0.0Asset retirement obligations 7.4 1.0 0.0 0.0 0.0 0.0 0.0 0.0Other long-term liabilities 20.4 22.0 20.0 20.0 20.0 20.0 20.0 20.0Capital lease obligations, long term 14.1 10.0 6.0 3.0 1.5 0.8 0.4 0.2

Total liabilities 2783.4 2814.0 4048.0 3867.9 4101.3 4676.3 4986.8 5177.8

Stockholders EquityConvertible debt conversion obligation 0.0 87.0 31.0 0.0 0.0 0.0 0.0 0.0Common equity 3856.1 4171.0 4709.0 4699.1 4689.2 4679.3 4669.4 4659.5Treasury stock, at cost 3394.6 4048.0 5039.0 6030.0 7021.0 8012.0 9003.0 9994.0Accumulated other comprehensive income (l 7.8 -4.0 -16.0 -16.0 -16.0 -16.0 -16.0 -16.0Retained earnings (accumulated deficit) 3948.9 4350.0 6108.0 8276.9 10913.3 14331.6 18148.0 22188.5

Total stockholders' equity 4418.0 4469.0 5762.0 6930.0 8565.5 10982.8 13798.3 16837.9Total liabilities, SE, and Converatble Debt 7201.4 7370.0 9841.0 10797.9 12666.8 15659.2 18785.1 22015.7

NVIDIA Corp (NMS: NVDA)+A1:K24Statement of Cash Flows

Report Date 2013 2014 2015 2016 2017Scale Millions Millions Millions Millions MillionsCash flows from operating activities:

Net income (loss) 563 440 631 614 1,666 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation & amortization 226 239 220 197 187 Stock-based compensation expense 137 136 158 204 247 Restructuring & other charges - - - 45 -Amortization of debt discount - 5 28 29 25 Loss (gain) on sale of long-lived assets & investments - (10) (17) (6) (3) Loss on early debt conversions - - - - 21 Deferred income taxes 32 15 83 134 197 Tax benefit (deficit) from stock based compensation (69) (26) (18) (10) -Other adjustments 48 24 24 19 11 Changes in operating assets and liabilities, net of effects of acquisitions:Accounts receivable (119) 29 (49) (32) (321) Inventories (79) 25 (95) 66 (375) Prepaid expenses & other current assets (20) 7 - - -Deposits & other assets 9 5 - - -Prepaid expenses & other assets - - 4 (16) (18) Accounts payable 11 (20) (27) (11) 184 Accrued liabilities & other current liabilities - - 5 39 (135) Accrued liabilities & other long-term liabilities 86 (32) - - -Other long-term liabilities - - (41) (97) (14)

Net cash flows from operating activities 824 835 906 1,175 1,672

Cash flows from investing activities:Proceeds from sales of marketable securities - 1,927 1,372 2,102 1,546 Proceeds from maturities of marketable securities - 585 865 1,036 969 Proceeds from sales & maturities of marketable securities 1,817 - - - -Proceeds from sale of long-lived assets & investments - 25 21 7 7 Purchases of marketable securities (2,378) (3,065) (2,862) (3,477) (3,134) Purchases of property & equipment & intangible assets (183) (255) (122) (86) (176) Acquisition of businesses, net of cash & cash equivalents - (17) - - -Reimbursement of headquarters building development costs from ban - - - 24 -Other investing activities 0 (5) (1) (6) (5)

Net cash flows from investing activities (744) (806) (727) (400) (793)

Cash flows from financing activities:Proceeds from issuance of notes, net - - - - 1,988 Proceeds from issuance of convertible notes, net - 1,478 - - -Purchase of convertible note hedges - (167) - - -Proceeds from the sale of common stock warrants - 59 - - -Payments related to repurchases of common stock (100) (887) (814) (587) (739) Repayment of convertible notes - - - - (673) Dividend paid (47) (181) (186) (213) (261) Net proceeds (payments) related to employee stock plans 65 70 153 120 (9)

- - - - (8) Tax benefit from stock based compensation 69 26 18 10 -Payments under capital lease obligations (2) (2) (3) (3) -Other financing activities - (5) (3) (3) (7)

Net cash flows from financing activities (15) 390 (834) (676) 291

Change in cash & cash equivalents 65 419 (655) 99 1,170 Cash & cash equivalents at beginning of period 668 733 1,152 497 596 Cash & cash equivalents at end of period 733 1,152 497 596 1,766

NVIDIA Corp (NMS: NVDA)+A1:K24Statement of Cash Flows Forecasted

Report Date 2018E 2019E 2020E 2021E 2022CVScale Millions Millions Millions Millions MillionsCash flows from operating activities:Net income (loss) 2,535 3,082 3,997 4,462 4,724 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 126 122 126 131 138 Amortization 54 26 16 7 1 Change in recievables (172) (162) (306) (156) (89) Changes in operating assets and liabilities, net of effects of acquisitions:Inventories (130) (150) (283) (145) (82) Prepaid expenses & other current assets (48) (27) (51) (26) (15) Accounts payable 174 7 176 90 51 Accrued liabilities & other current liabilities 177 111 209 107 61 Deferred income tax liability (7) (7) (6) (6) (6) Income tax payable 171 38 63 32 18

Net cash provided by operating activities: 2,879 3,040 3,941 4,496 4,801

Cash flows from investing activities:Marketable securities (201) (209) (218) (226) (235) Purchases of property & equipment & intangible assets (165) (165) (165) (165) (165) Change in intangible assets 54 26 16 7 1 Other Assets (42) (17) (32) (16) (9)

Net cash used for investing activities: (354) (365) (398) (400) (408)

Cash flows from financing activities:Long-term debt (692) 86 134 88 67 Capital lease obligations, long term (3) (2) (1) (0) (0) Convertible debt conversion obligation (31) - - - - Change in AOCI - - - - - stock issued (10) (10) (10) (10) (10) stock repurchased (991) (991) (991) (991) (991) Dividend paid (366) (446) (579) (646) (684)

Net cash flows from financing activities: (2,092) (1,363) (1,446) (1,559) (1,617)

Change in cash & cash equivalents 433 1,312 2,097 2,537 2,775 Cash & cash equivalents at beginning of period 1,766 2,199 3,511 5,608 8,145 Cash & cash equivalents at end of period 2,199 3,511 5,608 8,145 10,920

NvidiaCommon Size Income Statement

Fiscal Years Ending Jan. 29 2015 2016 2017 2018E 2019E 2020E 2021E 2022CVScale Millions Millions Millions Millions Millions Millions Millions MillionsRevenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Depreciation & amortization 3.06% 2.48% 1.72% 1.35% 1.13% 0.92% 0.87% 0.86%Cost of revenue 39.77% 39.96% 38.49% 37.00% 37.00% 37.00% 37.00% 37.00%Gross profit (loss) 55.52% 56.11% 58.80% 61.07% 61.63% 61.96% 62.09% 62.13%Research & development expenses 29.04% 26.57% 21.17% 18.00% 18.00% 18.00% 18.00% 18.00%Sales, general & administrative expenses 10.27% 12.02% 9.59% 7.59% 7.59% 7.59% 7.59% 7.59%Restructuring charges & other operating expenses 0.00% 2.61% 0.04% 0.00% 0.00% 0.00% 0.00% 0.00%Total operating expenses 39.31% 41.20% 30.81% 25.59% 25.59% 25.59% 25.59% 25.59%Income (loss) from operations 16.21% 14.91% 27.99% 35.48% 36.04% 36.37% 36.49% 36.54%Interest income 0.60% 0.78% 0.78% 0.66% 0.59% 0.49% 0.46% 0.45%Interest expense 0.99% 0.94% 0.84% 1.76% 1.13% 0.93% 0.90% 0.88%Other income (expense), net 0.30% 0.08% -0.36% 0.00% 0.00% 0.00% 0.00% 0.00%Income (loss) before income tax 16.12% 14.83% 27.57% 34.38% 35.49% 35.92% 36.05% 36.10%Total current income tax expense (benefit) 0.56% -0.34% 0.61% 5.03% 5.20% 5.26% 5.28% 5.29%Deferred income tax expense (benefit) - federal 1.79% 2.67% 2.88% 2.14% 1.84% 1.45% 1.31% 1.25%Charge in lieu of taxes attributable to employer stock option plans 0.33% 0.24% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Income tax expense (benefit) 2.65% 2.57% 3.46% 7.17% 7.04% 6.71% 6.59% 6.53%Net income (loss) 13.47% 12.26% 24.11% 27.21% 28.46% 29.20% 29.46% 29.57%

NvidiaCommon Size Balance Sheet

Fiscal Years Ending Jan. 29 2015 2016 2017 2018E 2019E 2020E 2021E 2022CVScale Millions Millions Millions Millions Millions Millions Millions MillionsAssets

Cash & cash equivalents 10.61% 11.90% 25.56% 23.60% 32.42% 40.98% 53.77% 68.36%Marketable securities 88.15% 88.64% 72.82% 56.17% 50.25% 41.36% 38.86% 38.32%Accounts receivable, gross 10.48% 10.30% 12.14% 10.91% 10.91% 10.91% 10.91% 10.91%Less allowances 0.36% 0.22% 0.19% 0.20% 0.20% 0.20% 0.20% 0.20%Accounts receivable, net 10.12% 10.08% 11.95% 10.71% 10.71% 10.71% 10.71% 10.71%Raw materials 3.35% 2.10% 3.65% 2.87% 2.87% 2.87% 2.87% 2.87%Work in-process 1.96% 2.06% 2.55% 2.30% 2.30% 2.30% 2.30% 2.30%Finished goods 5.00% 4.19% 5.30% 4.74% 4.74% 4.74% 4.74% 4.74%Inventories 10.31% 8.34% 11.49% 9.92% 9.92% 9.92% 9.92% 9.92%Prepaid expenses & other current assets 1.50% 1.86% 1.71% 1.78% 1.78% 1.78% 1.78% 1.78%Deferred income taxes 1.35% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total current assets 122.04% 120.82% 123.53% 102.19% 105.07% 104.74% 115.04% 129.09%

Total property & equipment, gross 25.19% 21.96% 17.24% 14.55% 14.03% 12.31% 12.21% 12.61%Accumulated depreciation & amortization 13.29% 12.65% 9.70% 9.12% 9.21% 8.33% 8.44% 8.87%Property & equipment, net 11.90% 9.30% 7.54% 5.43% 4.82% 3.98% 3.77% 3.74%Net PPE & intangible assets 16.64% 12.61% 9.04% 7.13% 6.52% 5.44% 5.14% 5.04%Goodwill 13.20% 12.34% 8.94% 6.63% 5.71% 4.52% 4.08% 3.87%Intangible assets, net 4.74% 3.31% 1.51% 0.54% 0.22% 0.06% 0.01% 0.00%Prepaid taxes, long term 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Prepaid maintenance, long term 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Lease deposits 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Investment in non-affiliates 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred income taxes, long term 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other assets 1.94% 1.34% 0.90% 1.12% 1.12% 1.12% 1.12% 1.12%

Total assets 153.83% 147.11% 142.42% 115.91% 116.94% 114.41% 124.02% 137.81%

LIABILITIESAccounts payable 6.26% 5.91% 7.02% 7.07% 6.15% 6.15% 6.15% 6.15%Accrued liabilities & other current liabilities 12.88% 12.81% 7.34% 7.34% 7.34% 7.34% 7.34% 7.34%Convertible short-term debt 0.00% 28.20% 11.52% 8.54% 7.35% 5.82% 5.26% 4.98%

Total current liabilities 19.14% 46.93% 25.88% 22.96% 20.83% 19.30% 18.74% 18.47%

Long-term debt 29.57% 0.00% 28.70% 13.86% 12.71% 11.04% 10.56% 10.43%Deferred income tax liability 4.96% 6.01% 2.04% 1.44% 1.17% 0.88% 0.76% 0.68%Income tax payable 2.58% 1.56% 1.39% 2.87% 2.81% 2.69% 2.64% 2.61%Deferred revenue from Intel cross license agreeme 2.30% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Contributions payable 0.00% 0.00% 0.14% 0.11% 0.09% 0.07% 0.07% 0.06%Deferred revenue 0.00% 0.88% 0.06% 0.04% 0.04% 0.03% 0.03% 0.03%Interest rate swap 0.00% 0.14% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Asset retirement obligations 0.16% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other long-term liabilities 0.44% 0.44% 0.29% 0.21% 0.18% 0.15% 0.13% 0.13%Capital lease obligations, long term 0.30% 0.20% 0.09% 0.03% 0.01% 0.01% 0.00% 0.00%

Total liabilities 59.45% 56.17% 58.58% 41.52% 37.86% 34.17% 32.92% 32.41%

Stockholders Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Convertible debt conversion obligation 0.00% 1.74% 0.45% 0.00% 0.00% 0.00% 0.00% 0.00%Common equity 82.37% 83.25% 68.15% 50.44% 43.29% 34.19% 30.83% 29.17%Treasury stock, at cost 72.51% 80.80% 72.92% 64.73% 64.82% 58.54% 59.44% 62.56%Accumulated other comprehensive income (loss) 0.17% -0.08% -0.23% -0.17% -0.15% -0.12% -0.11% -0.10%Retained earnings (accumulated deficit) 84.35% 86.83% 88.39% 88.85% 100.75% 104.71% 119.81% 138.89%

Total stockholders' equity 94.37% 89.20% 83.39% 74.39% 79.08% 80.25% 91.09% 105.40%

Total liabilities, SE, and Converatble Debt 153.83% 147.11% 142.42% 115.91% 116.94% 114.41% 124.02% 137.81%

NvidiaValue Driver Estimation

Fiscal Years Ending Jan. 29 2015 2016 2017E 2018E 2019E 2020E 2021E 2022EEbit:Revenue 4681.5 5010.0 6910.0 9316.1 10831.8 13686.4 15147.3 15975.6

Cost of revenue other than Depr. & Amrtzn. 1862.0 2002.0 2660.0 3446.9 4007.8 5064.0 5604.5 5911.0Gross profit (loss) 2599.4 2811.0 4063.0 5689.5 6676.0 8480.4 9404.3 9925.9Research & development expenses 1359.7 1331.0 1463.0 1676.9 1949.7 2463.5 2726.5 2875.6Sales, general & administrative expenses 480.8 602.0 663.0 707.5 822.7 1039.4 1150.4 1213.3Implied lease interest 13.3 12.2 10.9 7.1 7.4 7.7 8.0 8.3EBIT 992.2 1087.2 2134.9 3491.8 4059.0 5127.1 5673.8 5984.0

Adjusted TaxesIncome Tax Expense 124 129 239 668 762 919 999 1044-Tax on Interest Income -4 -6 -8 -9 -9 -10 -10 -11+Tax on Interest Expense 7 7 8 24 18 19 20 21Other Income (Expenses) -2 -1 4 0 0 0 0 0Tax on lease interest 2 2 2 1 1 1 1 1Taxes 127 131 245 684 772 929 1010 1055

Change in Deferred Taxes 80 132 -160 -7 -7 -6 -6 -6

NOPLAT 945 1088 1730 2801 3281 4192 4658 4923

Normal Cash (5% of sales) 234 251 346 466 542 684 757 799AR 474 505 826 998 1160 1466 1622 1711INV 483 418 794 924 1074 1357 1502 1584Prepaid Exp 70 93 118 166 193 244 270 285Other Operating CAOperating CA: 1261 1267 2084 2553 2969 3751 4152 4379

AP 293 296 485 659 666 842 931 982Accrued Exp 603 642 507 684 795 1004 1111 1172Income Tax Payable 121 78 96 267 305 368 400 417Non-interest CL: 1017 1016 1088 1610 1766 2213 2442 2572

Net PPE 557 466 521 506 522 545 571 597

Intangible assets, net 222 166 104 50 24 8 1 0PV of Operating Leases 208 186 120 125 130 135 141 146Other LT operating Assets including Leases 222 166 104 90 56 25 15 9

Income tax payable 121 78 96 267 305 368 400 417Deffered revenue 0 44 4 4 4 4 4 4Other LT liabilties 20 22 20 20 20 20 20 20Longterm Liablilities 141 144 120 291 329 392 424 441

Invested Capital 881 739 1501 1248 1453 1716 1872 1971

945 1088 1730 2801 3281 4192 4658 4923Change in IC -23 -143 762 -253 205 263 155 100FCF 968 1231 968 3053 3075 3928 4503 4824

NOPLAT 945 1088 1730 2801 3281 4192 4658 4923Beg IC 904 881 739 1501 1248 1453 1716 1872ROIC 104.52% 123.41% 234.27% 186.65% 262.88% 288.48% 271.42% 263.05%

Beg IC 904 881 739 1501 1248 1453 1716 1872ROIC 104.52% 123.41% 234.27% 186.65% 262.88% 288.48% 271.42% 263.05%WACC 9.52% 9.52% 9.52% 9.52% 9.52% 9.52% 9.52% 9.52%EP 859 1004 1660 2658 3162 4053 4495 4745

NvidiaWeighted Average Cost of Capital (WACC) Estimation

Risk Free Rate 2.92%Market Equity Risk Premium 4.65%Beta 1.47Cost of Equity 9.753500%

Pre-Tax Cost of Debt 5.88%Marginal Tax Rate 14.65%After-Tax Cost of Debt 5.02%

Total Shares Outstanding 585Share Price $216.14Value of Equity $126,441.90

Long-Term Debt 6413PV of Operating Leases 120Value of Debt 6,533.37$

Total Value $132,975.27Weight of Equity 95.09%Weight of Debt 4.91%

Cost of Equity 9.75%Cost of Debt 5.02%Weight of Equity 95.09%Weight of Debt 4.91%WACC 9.52%

NvidiaDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 5.69% CV ROIC 263% WACC 9.52% Cost of Equity 9.75%

Fiscal Years Ending Jan. 29 2018E 2019E 2020E 2021E 2022CVDCF ModelNoplat 2801 3281 4192 4658 4923Capital Expeditures -253 205 263 155 100Future FCF 3053 3075 3928 4503CV 125747Discount Factor 1.10 1.20 1.31 1.44 1.44Discounted FCF 2788 2564 2990 3130 87399

Value of Equity 98,871.18$

EP ModelEP 2658 3162 4053 4495 4745

CV 123875Discount Factor 1.10 1.20 1.31 1.44 1.44PV 2427 2636 3085 3124 86099Total 97,371 +Beginning IC 1501Value of Equity 98871 0

Excess Cash 1,420.50$ Marketable Securities 5,032.00$ Plus Value of Non-Operating Assets 6,452.50$

Less Value of Debt 6,413.00$

PV of Operating Leases $ 120.37 ESOP $ 1,394.67 Less Value of Other Liabilitis $ 1,515.04

Value of Equity $ 97,395.63

Stock Price $ 166.49 Partial Year Adjustment 169.79$

Current Model Date 11/10/2017Next FYE 1/29/2018Last FYE 1/29/2017Days in FY 365 Days to FYE 80 Elapsed Fraction 0.219

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Jan. 29 2018E 2019E 2020E 2021E 2022CV

EPS 4.35$ 5.33$ 6.94$ 7.78$ 8.27$

Key Assumptions CV growth 6.33% CV ROE 91.24% Cost of Equity 9.75%

Future Cash Flows P/E Multiple (CV Year) 27.17 EPS (CV Year) 8.27 Future Stock Price 227.35$ Dividends Per Share 0.63 0.77 1.01 1.13 1.20

Present value (DDM) 0.575336726 0.642021929 0.761050674 0.777008107 224.60Intrinsic Value 227.35$ Partial Year Adjustment 231.91$

Model Date 11/10/2017Next FYE 1/29/2018Last FYE 1/29/2017Days in FY 365 Days to FYE 80 Elapsed Fraction 0.219

NvidiaRelative Valuation Models

EPS EPS Est. 5yrTicker Company Price 2017E 2018E P/E 17 P/E 18 EPS gr. PEG 17 PEG 18AMD AMD $11.26 $0.13 $0.35 86.62 32.17 0.1 666.27 247.47 INTC Intel $45.58 $3.25 $3.24 14.02 14.07 8.7 1.61 1.62 MRVL Marvell Technology $20.13 $1.13 $1.26 17.81 15.98 16.1 1.10 0.99 QCOM Qualcomm $64.57 $3.54 $3.79 18.24 17.04 10.5 1.74 1.62 MU Micron Technology $44.78 $7.72 $6.83 5.80 6.56 17.9 0.32 0.37 TXN Texas Instruments $20.00 $4.35 $4.55 4.60 4.40 10.8 0.42 0.41

Average 12.10 11.61 111.91 42.08

NVDA Nvidia $216.14 $4.35 $5.33 49.63 40.52 0.2 227.3 185.6

Implied Relative Value: P/E (EPS17) $ 52.67 P/E (EPS18) 61.90$ PEG (EPS17) 106.43$ PEG (EPS18) 49.01$ P/B 51.58$ P/Tangible BV 42.98$

NvidiaKey Management Ratios

Fiscal Years Ending Jan. 29 2015 2016 2017 2018E 2019E 2020E 2021E 2022CV

Liquidity RatiosCurrent Ratio 6.38 2.57 4.77 4.45 5.04 5.43 6.14 6.99Quick Ratio 5.84 2.40 4.33 4.02 4.57 4.91 5.61 6.45Cash ratio 5.16 2.14 3.80 3.48 3.97 4.27 4.94 5.78

Activity or Asset-Management RatiosReceivables turnover 9.88 9.92 8.37 9.34 9.34 9.34 9.34 9.34Inventory turnover 3.86 4.79 3.35 3.73 3.73 3.73 3.73 3.73Asset turnover 0.65 0.68 0.70 0.86 0.86 0.87 0.81 0.73

Financial Leverage RatiosDebt ratio 0.19 0.19 0.28 0.19 0.17 0.15 0.13 0.11Debt to equity ratio 0.63 0.63 0.70 0.56 0.48 0.43 0.36 0.31Long-term debt to capitalization 0.24 0.00 0.23 0.14 0.13 0.11 0.10 0.09

Profitability RatiosROA 9% 8% 17% 23% 24% 26% 24% 21%ROE 23% 22% 41% 66% 75% 85% 89% 91%Gross profit margin 60% 60% 62% 63% 63% 63% 63% 63%

Payout Policy RatiosDividend payout ratio 6.3% 7.9% 3.8% 14.5% 14.5% 14.5% 14.5% 14.5%

Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014)

Operating Operating Operating OperatingFiscal Years Ending Jan. 29 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2018 42 2017 75 2016 77 2015 742019 36 2018 65 2017 66 2016 712020 20 2019 8 2018 34 2017 612021 17 2020 35 2019 27 2018 292022 12 2021 11 2020 10 2019 2Thereafter 13 Thereafter 20 Thereafter 27 Thereafter 35Total Minimum Payments 140 Total Minimum Payments 214 Total Minimum Payments 241 Total Minimum Payments 272Less: Interest 20 Less: Interest 28 Less: Interest 33 Less: Interest 47PV of Minimum Payments 120 PV of Minimum Payments 186 PV of Minimum Payments 208 PV of Minimum Payments 225

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 7 52Average Time to Maturity (years): 5.40Expected Annual Number of Options Exercised: 1

Current Average Strike Price: 14.46$ Cost of Equity: 15.10%Current Stock Price: $216.14

2017E 2018E 2019E 2020E 2021E 2022EIncrease in Shares Outstanding: 1 1 1 1 0 0Average Strike Price: 14.46$ 14.46$ 14.46$ 14.46$ 14.46$ 14.46$ Increase in Common Stock Account: 19 19 19 19 - -

Change in Treasury Stock 991 991 991 991 991 991Expected Price of Repurchased Shares: 216.14$ 248.78$ 286.34$ 329.58$ 379.35$ 436.63$ Number of Shares Repurchased: 5 4 3 3 3 2

Shares Outstanding (beginning of the year) 585 582 579 577 575 573Plus: Shares Issued Through ESOP 1 1 1 1 0 0Less: Shares Repurchased in Treasury 5 4 3 3 3 2 Shares Outstanding (end of the year) 582 579 577 575 573 570

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol NVDACurrent Stock Price $216.14Risk Free Rate 1.22%Current Dividend Yield 0.29%Annualized St. Dev. of Stock Returns 40.00%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 6 7 14.46 5.4 199.24$ 1,395$ Total 7 14.46$ 5.40 202.62$ 1,395$