Edwin Tan
Article paper
NVIDIA Corporation (NASDAQ: NVDA) reported its latest quarterly results on Wednesday afternoon. The company handily beat expectations and posted strong guidance.The market reacted positively to these results, but with fairly high valuations, I believe It’s not a bad idea to err on the side of caution.
Summary of previous reports
I last covered NVIDIA two months ago in June, giving it a “hold” rating. The article focuses on potential export restrictions on certain types of chips and the potential impact of such export restrictions on NVIDIA.i think it’s a Potential The company faces threats, but NVIDIA also has major advantages, such as benefiting from increased spending on artificial intelligence.The theme of chip export restrictions has since faded and hasn’t attracted much attention, so it seems There is no meaningful threat to NVIDIA in the foreseeable future, and the topic of AI exposure has been gaining traction.
In this article, we’ll focus on NVIDIA’s most recent quarterly results, outlook, valuation, and the massive improvement in NVIDIA’s fundamentals.
what happened?
After the market close on Wednesday afternoon, NVIDIA Corporation reported its latest quarterly results. The main figures of the company can be seen in the screenshot below:
looking for alpha
The company beat expectations on both lines, and it did quite well. Revenue soared more than 100%, and Nvidia’s earnings performance was even better. The market pushed up NVIDIA’s stock price in after-hours trading – as of this writing, NVIDIA’s stock price is over $500 per share, up more than 7% in after-hours trading.
NVIDIA’s quarterly results
Expectations were pretty high thanks to the continued hype around artificial intelligence and NVIDIA’s strong guidance for the quarter. The company’s sequential sales growth came as no surprise, as guidance announced during the last earnings release had already hinted at substantial sales growth. In fact, NVIDIA did deliver over 100% year-over-year revenue growth, although it’s worth noting that last year’s quarter wasn’t particularly strong. Even compared to NVIDIA’s best quarter to date, which is the first quarter of 2022, the company’s revenue grew by 63%. Sequential revenue growth was also very strong at almost 90%.
Not surprisingly, most of the revenue growth has been driven by AI investments. ChatGPT has drawn widespread attention to AI technology, with companies of all kinds seeking to harness the potential of AI. Many people do this by investing in data centers and developing their own artificial intelligence models and tools, in different fields, such as large language models, self-driving technology, etc. These programs, algorithms, etc. require a lot of computing power, and NVIDIA’s chips are among the best at handling these tasks. While NVIDIA isn’t the only player in this space — AMD (AMD), for example, has also been launching AI-related chips — NVIDIA is a leading player in AI hardware, at least for now. That had a profound impact on NVIDIA’s sales performance, which had lagged until the most recent quarter as factors such as slowing consumer spending hurt NVIDIA’s gaming GPU business. But those headwinds have been offset by massive growth in the AI space, as data centers grew at an incredible 171% year-over-year. This more than offset weakness in markets like professional visualization, which saw revenue decline more than 20% year-over-year. While all is not well for NVIDIA, the super-strong performance of the company’s largest business was enough to make the overall company’s results look strong.
Not only has NVIDIA significantly increased its revenue, but it has also improved its profit margins. While operating margin growth is a sure thing due to operating leverage due to expected revenue growth, NVIDIA has also been able to grow its gross margin substantially. It looks like customers are so eager to buy AI hardware that they’re willing to pay top dollar for it, causing NVIDIA’s adjusted gross margin to jump to 71% from 46% last year — 2,500 basis points Margin increases. This is almost unheard of, and underscores NVIDIA’s current formidable position in AI hardware. If the company had more competitors, or if the market demand wasn’t as strong, NVIDIA wouldn’t be generating those profits. But at least for now, NVIDIA can deliver very profitable growth. Net income soared more than 400%, another very strong performance, thanks to a combination of massive revenue growth, massive gross margin expansion, and operating leverage. Despite a fairly weak profit in the last quarter, NVIDIA posted the highest profit in its history in the most recent quarter, nearly doubling its previous record ($2.70 in Q1 2022 vs. for $1.36).
this quarter will be better
While NVIDIA’s strong performance in the latest quarter wasn’t a surprise, the company also said that the current quarter will perform better than analysts’ forecasts. The company expects revenue at the midpoint of $16 billion, which would imply a 19% sequential increase compared to the most recent quarter. When we consider that NVIDIA did beat its own estimates by a large margin in the most recent quarter, the actual results are likely to be stronger — though that’s certainly not guaranteed.
Taking into account NVIDIA’s guidance for operating expenses, gross margins, etc., the company could reach EPS of around $3.20, which would be a new record and represents a very good sequential growth rate of around 20%. While the guidance implies a sharp slowdown in sequential growth from around 90% to around 20%, the guidance also suggests that the growth story continues – we haven’t seen a peak yet and demand for NVIDIA’s AI chips is strong enough to drive Further growth in sales and profits. Some analysts and market watchers had thought that sales in the latest quarter might have peaked for a while and sales of AI chips would start to wane, but that doesn’t appear to be the case. We’ll have to see if the current quarter turns out to be the “top” quarter, or if NVIDIA continues to grow sequentially past that point, but at least for now, the party is on – both in terms of underlying business growth as far as Nvidia’s is concerned. Share price, the current after-hours price represents an all-time high for the company.
Valuation must be considered
The underlying performance for the most recent quarter was very strong, and the guidance for the current quarter was also excellent. That being said, investors should also consider Nvidia’s valuation. While strong growth can certainly justify premium valuations, investors shouldn’t chase growth stocks.
When we annualize NVIDIA’s most recent quarterly results, we get an annual profit of just under $11. This puts the P/E in the 45x range. That’s pretty expensive considering how the broad market is valued. This valuation is certainly justified if NVIDIA continues to grow profits substantially over the years, but that’s no guarantee. Growth is at least likely to slow next year and beyond, and possibly even stagnate. A potential recession could cause this, and baseline effects (tough comparisons) should also act as headwinds for NVIDIA’s business growth next year.
Anyone who bought NVIDIA at the lows made an excellent call last year when NVIDIA stock was trading just above $100 for a period of time. But that doesn’t mean buying the stock above $500 will be an equally good decision. Shares of companies that bought Tesla (TSLA) at the height of the pandemic have fallen sharply, despite significant growth in business since then. The same is true for those who bought Cisco (CSCO) at an exorbitant valuation during the dot-com bubble. The same isn’t necessarily going to happen to those buying NVIDIA for $500+, but at current levels, several years of substantial earnings growth baked into the stock price makes this a somewhat risky play invest.
final thoughts
NVIDIA had an excellent quarter and a very positive near-term operational outlook. Nvidia bulls were right to buy the stock when it was temporarily out of favor. But that doesn’t necessarily make NVIDIA a great investment over $500 a share — the current valuation is far from cheap. That might make sense in the long run, but when a company is valued well above $1 trillion, then everything has to go well — and there’s no guarantee.
