Rationale of Investment
Strong financial performance
Maintaining the momentum of superior financial performance in the past, the company delivered robust performance during the fourth quarter and fiscal year ended January 28, 2024 on the back of strong demand for accelerated computing and generative AI across companies, industries and countries. It reported GAAP revenue of $22,103mn for Q4FY24 against the previous quarter of $18,120mn and $6,051mn for the same quarter last year thereby registering 22% QoQ and 265% YoY growth. The period of Q4FY24 also witnessed improvement in gross margin which stood at 76.0% as against 74.0% in the previous quarter and 63.3% in the same quarter last year. A sharper rise in revenue amid relatively lower growth in operating expenses helped the company to record operating income of $13,615mn for Q4FY24 against $10,417mn in the previous quarter and $1,257mn in the same quarter last year thereby registering growth of 31% on QoQ and 983% on YoY basis. Diluted EPS for Q4FY24 stood at $4.93 against $3.71 in the previous quarter and $0.57 in the same quarter last year thereby exhibiting growth of 33% on QoQ basis and 765% on YoY basis.
GAAP revenue for the full financial year FY24 stood at $60,922mn against $26,974mn in FY23, reflecting a growth of 126% on YoY basis. Gross margin for FY24 was at 72.7% as against 56.9% in FY23, demonstrating an improvement of 15.8 pts. Operating income in FY24 grew by 681% to $32,972mn against $4,224mn in FY23. Diluted EPS for FY24 came in at $11.93 against $1.74 in FY23, exhibiting 586% increase on YoY basis.
Going ahead, strong demand for Data Center by enterprise software and consumer internal applications, and multiple industry verticals, including automotive, financial services and healthcare to drive revenue and profitability for the company.
A Leading player in data center and AI markets
NVDA Corp enjoys leadership position in the data center and AI markets which have been contributing majorly to overall revenue of the company. The company’s products such as DGX, Cloud and AI have been key drivers of revenue. The company’s technical prowess is evident from the fact that its GPU and networking solutions power is over 75% of the supercomputers on the global TOP500 list.
Effectively addressing diverse requirements of markets
The company has a platform and strategy that brings together hardware, systems, software, algorithms, libraries, and services to create unique value enabling it to address diverse requirements of market. It leverages on its GPs networking and software stacks. The company can support several markets with the same underlying technology by using a variety of software stacks. The company specializes in markets where computing platforms can provide acceleration for applications. Its platforms address markets like, Data Center, Gaming, Professional Visualization, Automotive where company’s expertise is critical. The large and growing numbers of developers and installed base across its platform strengthen its eco system and increases the value of its platform.
Focused on innovation
Realizing the significance of innovation to modern computing, the company has been investing billions of dollars in research and development since its inception. Its invention of GPU in 1999 resulted in surge in demand for the PC gaming market and redefined the computer graphics. Further, the introduction of the CUDA programming model in 2006 opened the parallel processing capabilities of its GPU to a broad-range of compute-intensive applications which paved the way for modern AI. In 2012, AlexNet neural network which is trained on NVIDIA GPU, won the imageNet computer image recognition competition. In 2017, the company introduced its first Tensor Core GPU and its first autonomous driving system-on-chips or SoC. The company acquired Mellanox in 2020 which expanded its innovation canvas to networking that led to introduction of a new processor class – the data processing unit or DPU.
Over the past five years, the company has built full software stacks that run on top of its GPU and CUDA to bring AI to the world’s largest industries, including NVIDIA DRIVE stack for autonomous driving, Clara for healthcare, and Omniverse for industrial digitisation, and NVIDIA AI Enterprise software – necessary for operating system for enterprise AI applications. In 2023, the company introduced its first data center CPU, Grace which was built for giant scale AI and high-performance computing.
The company with its strong engineering culture, driving fast product and technology innovations in all dimensions of computing.
Tapping opportunities in new markets
The company with its accelerated computing system has been tapping opportunities in several under penetrated geographies. The company’s revenue from sales to customers outside of the United States accounted for 56% of total sales of FY23 revenue and 69% of total sales of FY24 revenue. Given the company’s expertization in AI with a wide range of industries, it has been penetrating into new markets by tailoring its offerings thereby creating new revenue streams.
Generative AI and large language models proving to be a growth catalyst
A surge in demand for generative AI and large language presents a significant business opportunity for the company. Its AI inference platform and NVIDIA DGX Cloud services well-positions it to capitalise on the growing trend. It should continue to innovate and provide cutting-edge solutions for AI model developments and trainings, and maintain its leadership in rapidly evolving market.
Stock performance overview
NVIDIA’s 52-week range is $281.52 - $974.00 while its average volume has been $52,092,761. The company’s market cap as on 10th May 2024 was 2.247T$ whereas 5-year monthly Beta stood around 1.75. PE ratio (TTM) of the company was at 75.21x against industry PE ratio of 28.65x. The EPS (TTM) of the company was at 11.95.
The company’s YTD return stood at 81.50% against S&P 500’s return of 9.49%. The company’s 1-year, 3-year and 5-year returns came in at 214.68%, 509.97% and 2026.86% against S&P’s returns of 26.79%, 23.39% and 81.93%, respectively.
Exhibit: 1 Financial Summary
Operating performance
Return ratios, as shown in below given chart suggests that the company has been generating high returns on shareholders’ fund and borrowed or lease money thereby reflecting on the management’s ability to use funds efficiently.
Solvency ratios, as depicted in below given charts of Debt-to-equity ratio, interest coverage ratio and current ratio, suggest that the company generates enough operating income to meet its debt liabilities and working capital thereby reflecting on healthy balance sheet.
Industry overview
Given the broader understanding that the tech industry will continue to experience growth with generative AI. Industries spending on software and IT services – particularly on AI, cloud computing, and cybersecurity technology is expected to drive the whole tech industry in the upcoming years. On the flip side, given the interconnected nature of the tech industry, disruptions risks arising out of geo-political tensions, supply-chain volatility, raw materials shortage, and new regulations and policies - get heightened.
Key risks to company’s business
Operational risks
The company has worldwide operations which is exposed to different kinds of operational risks. The revenue and profitability of the company may be a hit as a result of natural disaster, extreme weather conditions, supplier disruptions, abrupt regulatory changes which could affect the company’s ability to develop new products and sell existing products.
Client concentration risks
The company receives a significant amount of its revenue from a limited number of partners and distributors, and has manufacturing operations mainly based-out in Asia-pacific region thus, have concentration risk in terms of limited buyers and limited sellers thereby exposing it to concentration risks.
High competition risks
The company’s target market remains highly competitive, and competition is likely to intensify with ever changing technologies and customers need. Rapid technological advancement and evolving industry standard have intensified competition in the GPUs and AI computing market. NVIDIA might lose its market share If competitors could outperform NVIDIA in accelerated computing processor products.
Economic and industry risks
Economic and industry uncertainty caused as a result of recession, inflation, interest rates, fiscal, monetary and trade policies could have negative bearings of revenue and profitability of the company.
Valuation
While NVIDIA’s industry leadership position in GPU technology and AI, paints a rosy picture for the future growth of the company, its continued success will depend on its adaptability and continued innovation to ensure sustained competitive advantage. However, with tech landscape rapidly evolving, potential challenges from other tech giants is likely.
Valuing the stock on 1-yr forward PE ratio where we have the industry’s median PE ratio of 75.21x on TTM basis and company’s FY25 estimated diluted EPS of 19.43, we have arrived the target price of $1,461.6, implying 63% upside on the current market price of $899. Although the company’s five years average PE ratio of 80x (which is above industry median) suggests that the stock is expensive, its improving financial fundamentals justify the higher valuation. However, downside risks to valuation include geo-political tensions leading to supply-chain disruptions and an increase to competitive intensity.
Technical Perspective:
Weekly time-frame
Source: investing.com
Weekly chart as shown above, confirms strong uptrend for the stock as it has been trading above all major exponential moving averages, including 50 period, 100 period and 200 period. The stock has experienced a sharp rally surging from the 30th October 2023 low of $393 to the 4th March 2024 high of $974. From its high, it took correction to the extent of Fibonacci 38.2% level of $753, and again it assumed upward journey which is likely to continue, given the broader support coming from technical indicators such as Volume, MACD and RSI as they seem to be moving in the same direction as the stock.
We anticipate an upward movement for the stock whereby it may have resistance around 50% Fibonacci extension level of $1048 where upper Bollinger band gets converged. On the flip side, if profit taking move intensifies then the stock could have good support around 20 period moving average of $783. Long-term investors can think of entering stock at current level by maintaining a stop-loss around $750 on a closing basis.
