NVIDIA Corporation has emerged as a global leader in the field of graphics processing units (GPUs) and artificial intelligence (AI) technology. The company's products and services are utilised across various industries, including gaming, data centres, automotive, and healthcare. Thanks to the emergence of AI, NVIDIA stock has skyrocketed over 300% in less than a year, and now it trades around 450 USD. In this article, we briefly discuss NVIDIA and its key to success that has brought it into the AI spotlight and evaluate its stock from a technical and fundamental perspective to conclude whether NVIDIA may still be a viable investment.
NVIDIA has a long-standing reputation for innovation in GPU technology. The company continuously develops cutting-edge hardware and software solutions, maintaining a competitive edge in the market. This innovation has led to the development of GPUs that excel not only in gaming but also in high-performance computing and AI applications. The company's strategic diversification into data centres, automotive, and professional visualisation has reduced its reliance on the volatile gaming market. This diversification has contributed to consistent revenue growth and financial stability.
The rapid expansion of AI applications, particularly in data centres, has created a significant growth opportunity for NVIDIA. As AI becomes more integrated across industries, NVIDIA's AI-focused hardware and software solutions are in high demand. For example, NVIDIA's expertise in AI and autonomous driving technology positions the company well to capitalise on the growing market for autonomous vehicles. Partnerships with automotive manufacturers and advancements in autonomous vehicle platforms may drive future revenue growth. Furthermore, the trend towards edge computing, where processing occurs closer to the data source, creates opportunities for NVIDIA to provide GPUs for real-time AI processing at the edge, benefiting industries such as IoT and telecommunications.
Some of the negative aspects to consider:
- NVIDIA relies heavily on Original Equipment Manufacturers (OEMs) to integrate its graphics processing units (GPUs) into various devices, including laptops and desktops. This dependence exposes the company to supply chain disruptions and fluctuations in demand.
- The technology industry is highly competitive, and NVIDIA faces competition from both traditional rivals like AMD and emerging players in AI and GPU markets. This competition may erode its market share and pricing power over time.
- The global regulatory landscape regarding technology and AI is evolving rapidly. NVIDIA may face regulatory challenges related to antitrust concerns, data privacy, and national security, potentially impacting its operations and partnerships.
- NVIDIA's reliance on gaming and data centre segments makes it vulnerable to market cyclicity. Economic downturns or shifts in consumer behaviour could affect demand for its products.
The most recent quarter led by the AI
Due to the persistent buzz surrounding artificial intelligence, expectations were set high for NVIDIA's most recent quarter earnings results. And the company lived up to expectations. The company exhibited significant sales growth, which was not unexpected, considering the guidance provided during the prior earnings release already hinted at a substantial sales surge. In fact, NVIDIA delivered remarkable revenue growth of over 100% compared to the same quarter in the previous year. However, it's worth noting that the preceding year's quarter was not particularly strong. Even if we compare the most recent quarter's performance with the best quarter until now (1Q 2023), the company still achieved a remarkable revenue growth rate of 63%. The sequential revenue growth was equally impressive, standing at almost 90%.
Unsurprisingly, the lion's share of this revenue surge has been driven by investment in AI. The rise of AI technologies, spurred partly by the prominence of models like ChatGPT, has attracted considerable attention, with various companies eager to harness AI's potential. Many of these enterprises are channelling resources into data centres and the development of their own AI models and tools, spanning diverse sectors such as large language models and autonomous driving technology. These AI programs and algorithms require significant computing power, and NVIDIA chips have emerged as the preferred choice for handling these demanding tasks.
Although NVIDIA faces competition in this area, its dominance in AI has significantly boosted its revenue performance, which had been sluggish in previous quarters due to factors such as a slowdown in consumer spending, which negatively impacted NVIDIA's gaming GPU business. However, the explosive growth in the AI sector has more than compensated for these headwinds, with data centre revenue surging by an astounding 171% year-over-year. This robust performance effectively offset the weaker results seen in other segments, such as Professional Visualization, where revenues declined by over 20% compared to the previous year. While not every facet of NVIDIA's operations is thriving, the exceptional performance of its flagship business segment has elevated the company's overall results to an impressive level.
Furthermore, NVIDIA not only achieved substantial revenue growth but also managed to enhance its profit margins. While the expansion of operating margins was almost a certainty due to the anticipated revenue growth, NVIDIA also witnessed robust growth in its gross margins. It appears that customers may be so eager to acquire AI hardware that they are willing to pay premium prices. This surge in demand propelled NVIDIA's adjusted gross margin from 46% to 71% over the past year. Such a margin expansion is rare and underscores NVIDIA's formidable position in the AI hardware sector at present. NVIDIA would likely not achieve these remarkable margins if the market had more competitors or if demand were not as strong. However, at least for now, NVIDIA is enjoying profitable growth.
Is NVIDIA still a buy?
Thanks to the recent boost in the AI field and supported by the exceptionally good earnings results announced by NVIDIA for the most recent quarter, its stock has surged over 321% since its recent low of 108.06 USD per share on October 13, 2022, until the moment of writing this article.
Despite the announcement of spectacular quarterly results, NVIDIA stock did not move as much as one might have expected. After announcing the results after market hours on August 23, 2023, the stock started trading on August 24 at an all-time high of 502.12 USD. However, the hype did not last long, and the stock finished the day trading at 471.59 USD. Since then, NVIDIA stock has not climbed over the 500 USD level.
Round numbers are known to provide resistance to stocks. However, it may be worth considering the possibility that the recent run-up in NVIDIA's stock price has already priced in most of the company's earnings growth potential for the foreseeable future. If so, NVIDIA stock may return to more sustainable valuation levels as the AI hype subsides.
NVIDIA has undeniably improved its earnings numbers; therefore, some stock price increase is justified and welcome. However, let us review its past, current, and forecasted financial data to evaluate the viability of the current stock price.
Many have questioned NVIDIA's extremely high P/E and other valuation indicators for NVIDIA. Its current stock price stands over 100 versus the industry average of 25.09 and its own historical average of 74.87. However, if we take a look at the forward P/E ratio, it drops to 47.02, which is still almost twice as high as the industry average but considerably lower than the NVIDIA historical average. EV/EBITDA presents a similar picture: current value (89.73) drops more than twice when evaluated using forward data (39.71), which is still above the industry average (15.12) but drops below NVIDIA's historical average (57.64).
Now, the Price-to-sales (P/S) ratio looks slightly different. Firstly, the current P/S (34.19) is almost twice as large as NVIDIA's historical average (18.98), and its forward ratio is the only reviewed valuation ratio that exceeds the historical one. When compared to the industry average (2.66), the forward P/S ratio (20.63) is nearly 8 times higher, while other reviewed valuation indicators are no more than 3 times the respective industry average.
This may be related to NVIDIA's considerably improved margins over the recent quarter. In addition to the already mentioned gross margins, the EBITDA margin currently stands at 37.88% versus an industry average of 9.15%, and the net income margin stands at 31.60% versus an industry average of 2.03%. Net income margin has increased from 26.03% a year ago and from 18.52% in the previous quarter. However, we may find even higher margins looking back to NVIDIA's historical data. For example, in the twelve months ending on 31/01/2022, NVIDIA's net income margin reached an all-time high of 36.23%.
And just as a reminder, we have just discussed TTM (twelve-trailing-months) margins, not forward or strictly last quarter's data. This means that, as NVIDIA moves further away from its relatively slower 12 months between April 2022 and March 2023, its margins may grow even further, assuming NVIDIA is able to deliver on its forecast earnings growth.
What is expected in the near future?
NVIDIA expects to reach a 16 billion turnover in the Q3 of its fiscal year of 2024 (quarter ending on 31/10/2023), delivering an 18% increase from the previous quarter and a whopping 169% increase from the respective quarter one year ago. Its forecast EPS currently stands at 3.28, a 32% increase from the previous quarter and 11.14 times bigger than the respective quarter one year ago. Furthermore, NVIDIA is known to be conservative with its forecasts and prefers upward revisions or positive surprises at the time of earnings release. The most recent earnings report delivered a 30% earnings beat and a 21% revenue beat. However, investors cannot rely on past results to expect similar results in the future.
Technically, the stock looks overvalued and is now experiencing a pullback and trading around 450 USD per share, which may provide an advantageous moment for accumulating the stock. Fundamentally, valuation ratios, especially the Price-to-Sales ratio, indicate overvaluation using current (TTM) data. However, looking at the same valuation ratios using forward data, the current stock price seems less extreme. Indeed, forward data are only estimates and may differ significantly from the actual data. Still, NVIDIA has proved that it can deliver even better-than-expected results thanks to the wave of artificial intelligence.
As long as NVIDIA manages to keep its close-to-monopoly position in the AI revolution, it may be expected to reap most of the benefits, including skyrocketing earnings. To sustain and expand its market dominance, NVIDIA must remain agile in a competitive landscape and continue to drive innovation in the ever-evolving technology industry.
Santa Zvaigzne-Sproge, CFA, Head of Investment Advice Department at Conotoxia Ltd. (Conotoxia investment service)
Materials, analysis, and opinions contained, referenced, or provided herein are intended solely for informational and educational purposes. The personal opinion of the author does not represent and should not be constructed as a statement, or investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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