Nvidia (NVDA, Financial) has rallied by a staggering 25% in a single day following its latest quaterly earnings report. This brings its total price increase to a staggering 156% since the start of 2023.
Is this all due to unmerited hype and exuberance for the AI industry, or does Nvidia really have a strong competitive position? Let's take a look.
Nvidia provides the building blocks for AI
Nvidia is the world's leading provider of high performance Graphical Processing Units (GPUs). These have many applications including gaming computers and of course data centers.
There is a major shift now occurring towards “accelerated computing” and AI large language models, which require huge amounts of compute resources. Nvidia effectively provides the building blocks to make this transition possible.
Nvidia’s latest GPU model (H100) has up to 30 times greater performance than the A100 in a LLM AI model use case. This is the same type of model which powers Open AI’s ChatGPT as well as a supercomputer being developed by Meta Platforms (META, Financial).
CNBC’s Jim Cramer recently referenced his conservation with Nvidia CEO Jensen Huang, who he called a “visionary." Cramer said that data centers are currently compromised of 90% CPUs and 10% GPUs, but this ratio is expected to flip, giving a 10-year runway of captial expenditure which Nvidia is poised to benefit from.
AI powered quarter
Nvidia reported excellent financial results for its fiscal first quarter of 2024. Its revenue was $7.19 billion, which surpassed analyst forecasts by close to 10%. However, Nvidia’s revenue is still down 13% year over year, as the company is still facing the brunt of a cyclical decline in the gaming industry, so why the huge boost in stock price?
Nvidia’s management gave some jaw-dropping guidance, estimating $11 billion in revenue for the fiscal second quarter of 2024. That would be a staggering 55% higher than the $7.1 billion previously expected and would be a record quarterly result for Nvidia.
This is expected to be provided by the tailwinds in the AI industry, which look to be beyond just hype as cloud providers are engaging in a land grab for AI chips.
Nvidia also reported strong demand from enterprises across various industries. Examples inclue AT&T (T, Financial) for fleet dispatches and Deloitte using it for logistics and customer service application. AI is even set to change health care with companies such as Amgen (AMGN, Financial) looking to adopt Nvidia chips for protein engineering.
Nvidia scored a partnership with software provider ServiceNow (NOW, Financial). Given over 1,000 enterprises run on the ServiceNow platform, Nvidia is set to leverage these connections to sell its AI software solution and hardware.
Nvidia’s gaming segment is also improving as revenue increased by 22% quarter over quarter to $2.24 billion. This was despite being down 38% year over year, due to the aforementioned cyclical industry pullback.
Its latest GeForce RTX GPUs have been immensely popular and Nvidia has already started to sell these inside its own gaming laptops. Nvidia also deepened its partnership with Microsoft (MSFT, Financial), offering Xbox PC games to its GeForce Now service. This will bring its total number of games available to over 1,600 which is substantial.
Nvidia has also enabled an integration between its “Omniverse” and Microsoft Office 365 applications. The idea is to enable companies to digitize their workflows from design to engineering. This has been popular with the automotive industry already.
Nvidia’s automotive segment has also continued to boom with a rapid 114% year over year increase in revenue to $296 million. This was driven by its “DRIVE Orin” platform which has been a popular technology for connected vehicles and even self-driving.
Nvidia has a solid pipeline of orders close to $14 billion, which is great news for investors.
The company reported an earnings per share beat and a 70% sequential increase in operating income to $2.14 billion, which was solid. This was driven by solid top line growth and a 3% decline in operating expenses.
Nvidia’s balance sheet continues to be robust with $15.3 billion in cash and short term investments compared to total debt of $11.9 billion.
The valuation is spicy
Nvidia’s valuation has expanded massively since the huge run up in its stock price. Its forward price-earnings ratio is over 90 and its enterprise-value-to-sales ratio is 25, which is 66% higher than its historical average. The GF Value chart indicates a fair value of $246 per share and thus the stock is “significantly overvalued."
Guru Investors such as Tiger Management (Trades, Portfolio), Jim Simons (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) were all buying the stock in the first quarter of 2023 according to their 13F reports. However, the average price for the stock during the quarter was ~$216 per share, close to 75% cheaper than where the stock trades at the time of writing. Of course those purchases were made before the recent guidance. I believe Nvidia's intrinsic value has expanded, but not as much as the stock price.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Final thoughts
Nvidia is a company I have researched extensively over the past two years, and I’ve always admired its business model. Prior to the AI hype, Nvidia was a solid play on the future of gaming and visualization. However, now its AI credentials have become more apparent, this has made its business model even more lucrative. The stock is now closing in a trillion-dollar valuation. The question is how much of Nvidia’s prospects are based on exuberance around the AI industry and how much will materialize into real long-term revenue. It is clear to me that there are real tangible changes for the company to grow, but of course a little froth enhanced the price further.
