Nvidia Corp. (NVDA, Financial) had one of its most remarkable quarters yet, with earnings exceeding already high expectations. The stock reached record highs in after-hours trading on May 22, achieving a market cap of around $2.50 trillion.
The company reported non-GAAP earnings of $6.12 per share, surpassing consensus estimates by approximately 10%. Revenue reached $26.04 billion, a 262% year-over-year increase, exceeding forecasts by $1.45 billion. A significant portion of this revenue, $22.60 billion, came from the data center segment, which saw 427% growth year over year.
Key drivers of this explosive growth include Nvidia's H100 products, with the next generation of artificial intelligence products expected from the H200, Blackwell and InfiniBand and Ethernet solutions. The H200 nearly doubles the inference performance of the H100, a crucial factor as AI growth shifts from training to inference stages, where superior inference performance could lower the total cost of AI deployments for enterprise customers. The company's price gains are not solely based on the irrational positive sentiment on generative AI, but are matched by extraordinary earnings and revenue growth. IT has recorded three consecutive quarters of over 200% revenue growth, while profits increased by 628% year over year, as recorded in the most recent earnings release.
Figure 1: Nvidia has consistently beaten consensus expectations over the last four quarters
Sources: Schwab and Nvidia investor relations
Nvidia's recent strategic initiatives, including a dividend increase and a proposed 10-to-1 stock split, indicate further positive developments on its outlook, potentially driving it to outperform in 2024 and 2025. The upcoming stock split is anticipated to boost momentum in the short term as it will be more accessible to retail investors, potentially leading to a significant increase in the stock price.
Financials
Figure 2: Nvidia income statement (FY21-FY24)
Source: GuruFocus
In fiscal 2024, Nvidia reported unprecedented financial results, underscoring its leadership in the accelerated computing and generative AI sectors. The company achieved a record revenue of $60.90 billion, reflecting an extraordinary 126% year-over-year growth - a testament to its successful penetration and dominance in a market experiencing explosive demand across various sectors and geographies. Nvidia's earnings per share figures highlight its exceptional profitability and growth trajectory, with the GAAP diluted earnings soaring to $11.93, a remarkable 586% surge from the prior year. On a non-GAAP basis, which excludes certain non-recurring items, the earnings per share reached $12.96, marking an impressive 288% increase.
Nvidia's industry, characterized by rapid technological advancements and expanding applications of AI, positions it for sustained high growth. The company has achieved a staggering rate of earnings per share growth, significantly outpacing its 10-year average of 34.30%. Given the dynamic landscape and increasing adoption of AI technologies, I believe Nvidia is well-positioned to sustain an EPS growth rate of 20% or higher over the next decade (reflected in my intrinsic valuation below).
In terms of Nvidia's free cash flow dynamics, the company experienced an extraordinary surge, increasing by 269.10% over the past year. Over the past decade, Nvidia has maintained an average annual FCF growth rate of 28.50%, underscoring its financial resilience and strong cash generation capabilities. These robust cash flow dynamics are crucial for sustaining future growth, funding research and development in addition to returning capital to shareholders through dividends and share buybacks, which is expected to add more value to holding the stock.
Market growth and potential
Looking forward, it is crucial to consider the current market and its expected growth. Nvidia is the leading beneficiary of this expansion given its leading position and competitive advantages. Its Blackwell architecture could deliver up to 4 times faster training than H100, potentially expanding the GPU market to 2.5 times its current size. The Blackwell platform represents a further push toward a future where AI becomes a commodity, though Nvidia is not producing commoditized hardware. This integrated approach likely helps sustain Nvidia's valuation. With $47 billion in revenue from its data center segment in 2024, it is reasonable to assume that with market expansion, Nvidia could potentially generate revenue exceeding $100 billion annually in data center revenue in the near term.
Competitive landscape
Figure 3: Nvidia dominating the AI race, recording significant data center growth versus peers
Source: Nvidia investor relations
In terms of its peers, Nvidia is currently leading the market by a landslide. Its data center business has been growing much faster than those of Advanced Micro Devices Inc. (AMD, Financial) and Intel Corp. (INTC, Financial) over the past few quarters. Several factors contribute to its market leadership, primarily the CUDA toolkit, which enables engineers to fully leverage the GPU's computing power to accelerate applications.
Once applications are built on CUDA, it becomes challenging for customers to switch platforms. While Intel has just started producing and developing its Gaudi 3 GPU accelerator, which uses the same process node as Nvidia's H100, Nvidia has already begun production of its Blackwell products, the next generation of accelerators. This means competitors are at least one generation behind.
Diminished Chinese exposure
Regarding exposure to China, I believe this no longer poses significant risks to Nvidia as its Chinese revenue is now in the mid-single digits, down from around 25% previously. This makes the current growth rates even more impressive. A return of China's revenue is now an option if and when U.S.-China relations improve. However, a commonly discussed risk is whether cutting China off from semiconductor supplies, whether from Nvidia or ASML Holding N.V. (ASML, Financial), increases the likelihood of Chinese competitors emerging. However, if AMD and Intel (being well established players) still lags Nvidia's performance and innovation, I do not see how Chinese competitors could be a threat in the near to medium term.
Investment thesis and price target
Figure 4: Nvidia up 173% in the past year
From a valuation perspective, Nvidia might not appeal to value investors as both the intrinsic and relative valuation measures suggest it is not attractive (on conservative/normalized growth estimates). Despite its stock being up over 170% in the past year, the company's consistent performance and significant revenue increases justify its current price levels. The company's performance is not just hype from the AI industry; it is backed by substantial revenue increases and improving margins. In the case of Nvidia, intangible investments are increasingly important in delivering shareholder value, making traditional valuation tools less relevant. The most crucial metric is how management rewards shareholders, best shown by the return on invested capital versus the weighted average cost of capital. According to this metric (as shown below), Nvidia's price gains are justified.
Figure 5: Nvidia's ROIC-WACC
For those seeking a price target, I am confident Nvidia will maintain its leadership in the GPU market, driven by innovations such as H200 and Blackwell, along with its unique CUDA software platform. Therefore, I have established a one-year target price of $1,377 per share for Nvidia, reflecting its robust growth prospects and ongoing market-driving innovations. Some may argue this estimate is overly optimistic, but I firmly believe in its validity since we are still in the early stages of the AI revolution, and Nvidia is strategically positioned at the forefront to reap substantial benefits from this transformative wave.
Figure 6: DCF valuation upon my aggressive estimates given AI growth potential
Source: GuruFocus and author estimates
Final thoughts
Nvidia's recent financial performance has been nothing short of extraordinary, with the company's innovative strides in AI and accelerated computing driving record-breaking revenue and earnings. While some investors might argue the stock is overvalued given its remarkable price surge over the past year, I firmly believe this is merely the beginning of its growth trajectory. Nvidia's stock price reflects not only its current operational performance, but also its future potential in a rapidly expanding market. As AI continues to evolve and integrate into various industries, Nvidia's role as a pivotal enabler of these technologies positions it to deliver sustained growth and value to shareholders.
