NVIDIA Corporation Inc Fundamental Analysis

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NVIDIA Corporation

Last Updated: 10 Sept 2023

NASDAQ: NVDA

GICS Sector: Technology

Sub-Industry: Semiconductors

https://www.nvidia.com

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Management

NVIDIA Corporation Management

CEO: Jensen Huang

Tenure: 30.4 years

NVIDIA Corporation's management team has an average tenure of 14.7 years. It is considered experienced.

Source of Revenue

NVIDIA Corporation Source of Revenue

NVIDIA's GPU, initially designed for 3D graphics and gaming, has evolved into a versatile tool powering various computationally intensive fields. With its parallel processing capabilities and deep learning support, it plays a crucial role in AI, data science, robotics, and more.

NVIDIA follows a platform strategy, uniting hardware, software, and services for diverse markets. Their innovations, like the invention of the GPU and CUDA programming model, have transformed modern computing, especially in high-performance computing and AI. Gamers, live streamers, and creators choose NVIDIA GPUs for immersive experiences, while researchers benefit from GPU acceleration in various applications, from molecular dynamics to climate forecasting.

NVIDIA also serves cloud service providers and consumer internet companies, enhancing services for billions of users, and finding applications in autonomous driving, healthcare, and financial services. Additionally, professional designers rely on NVIDIA GPUs and software for visual effects and product design.

The company reports its business results in two segments.

The Compute & Networking segment includes its Data Center accelerated computing platform; networking; automotive AI Cockpit, autonomous driving development agreements, and autonomous vehicle solutions; electric vehicle computing platforms; Jetson for robotics and other embedded platforms; NVIDIA AI Enterprise and other software; and cryptocurrency mining processors, or CMP.

The Graphics segment includes GeForce GPUs for gaming and PCs, the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms; Quadro/NVIDIA RTX GPUs for enterprise workstation graphics; virtual GPU, or vGPU, software for cloud-based visual and virtual computing; automotive platforms for infotainment systems; and Omniverse Enterprise software for building and operating metaverse and 3D internet applications.

The company specializes in markets in which its computing platforms can incorporate processors, interconnects, software, algorithms, systems, and services to deliver unique value. Henceforth, NVIDIA platforms address four large markets: Data Center, Gaming, Professional Visualization, and Automotive.

Data Center

NVIDIA's data center platform is tailored for the most demanding computational tasks in hyperscale, cloud, enterprise, public sector, and edge data centers. It comprises efficient GPUs, DPUs, interconnects, and systems, along with CUDA programming and an extensive library of software tools. This platform significantly enhances computing and power efficiency for AI, deep learning, machine learning, and scientific computing compared to CPU-only approaches. It serves organizations across various industries, partnering with leading companies to transform applications and computing platforms. NVIDIA's data center GPUs, including the recent Hopper architecture, are adaptable to diverse needs, from large language models to genomics.

Gaming

NVIDIA's gaming platform caters to the thriving gaming industry, focusing on PC gaming as the primary platform. They utilize their GPUs and advanced software to improve gaming experiences by delivering smoother, higher-quality graphics. NVIDIA RTX, with ray tracing and AI capabilities, enhances realism in games. Their product lineup includes GeForce RTX and GeForce GTX GPUs for gaming PCs, GeForce NOW cloud gaming for low-powered devices, SHIELD for TV streaming, and game console development services. The recent introduction of the GeForce RTX 40 Series GPUs with advanced technologies promises up to 4X performance compared to the previous generation, meeting the demands of avid gamers.

Professional Visualization

NVIDIA serves the Professional Visualization market by collaborating with independent software vendors (ISVs) to optimize their software for NVIDIA GPUs. Their GPU computing platform enhances productivity and capabilities in fields like design, manufacturing, and digital content creation. The NVIDIA RTX platform enables real-time ray tracing for photorealistic rendering, supported by leading 3D design and content creation applications. NVIDIA Omniverse, a virtual world simulation platform, facilitates 3D workflows and applications like virtual car showrooms and surgical training, driven by VR and AR technologies, powered by their GPUs, further expanding their reach in the professional visualization market.

Automotive

NVIDIA's Automotive market encompasses autonomous vehicles (AV), AI cockpit systems, electric vehicle computing, and infotainment platforms. They provide a comprehensive solution under the DRIVE Hyperion brand for AVs, offering both autonomous driving capabilities and co-pilot assistance to enhance safety. NVIDIA collaborates with numerous automotive partners, including automakers, tier-one suppliers, and research institutions, to develop AI systems for self-driving vehicles. Their unified AI computing architecture, featuring GPUs for training and the DRIVE Hyperion platform for in-vehicle perception, planning, and control, is a key component. NVIDIA also offers data center-based simulation solutions for digital cockpit development and continuous over-the-air updates to enhance vehicle features and capabilities.

The company's segment revenue in fiscal year 2023 saw growth in Compute & Networking, driven by hyperscale customers, cloud service agreements, and Automotive, while CMP contributed very little compared to the previous year. Graphics, however, experienced a decline due to reduced channel inventory and disruptions caused by global economic conditions and COVID-19 in China. Additionally, revenue from customers outside the United States accounted for 69% of fiscal year 2023, down from 84% in fiscal year 2022, primarily affected by China and Taiwan in Data Center and Gaming. No single customer represented more than 10% of total revenue in both fiscal years.

NVIDIA Corporation Reportable segments include the Compute & Networking segment and the Graphics segment.

NVIDIA Corporation Reportable Segment Revenue FY2023

NVIDIA Corporation revenue from these geographic areas of the United States, Taiwan, China (including Hong Kong), and Other Countries.

NVIDIA Corporation Revenue Geographic Breakdown FY2023

NVIDIA Corporation Economic Moat

NVIDIA Corporation has a wide economic moat. This is based on its intangible asset, cost advantage, efficient scale, network effect and switching cost.

NVIDIA Corporation Economic Moat

Economic Moat: Wide

There are many ways to identify NVIDIA Corporation’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of NVIDIA Corporation. Please check my summary to understand more about the economic moat.

NVIDIA Corporation Performance Checklist

Performance Checklist

Is NVIDIA Corporation’s revenue growing YoY for the past 5 years consistently? Inconsistent.

Is the net income growing YoY for the past 5 years consistently? Inconsistent.

Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.

Is the free cash flow positive for the past 5 years? Yes.

Is the gross margin % consistent/ growing for the past 5 years? Inconsistent.

Is the EPS growing for the past 5 years? Inconsistent.

NVIDIA Corporation financial performance which includes its revenue, net income, operating cash flow, and FCF over the recent 5 years.

NVIDIA Corporation Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Is the free cash flow per share growing for the past 5 years? Inconsistent.

NVIDIA Corporation free cash flow per share has been inconsistent for the past 5 years.

NVIDIA Corporation FCF per Share

NVIDIA Corporation Management Effectiveness

Management Effectiveness

Is NVIDIA Corporation’s ROE consistently at 12%-15% YoY for the past 5 years? Yes.

NVIDIA Corporation ROE is above its industry average ROE.

NVIDIA Corporation Return on Equity

Is the ROIC consistently at 12%-15% YoY for the past 5 years? Yes.

NVIDIA Corporation ROIC is more than its WACC.

NVIDIA Corporation Return on Invested Capital vs Weighted Average Cost of Capital

The trendline for the number of shares outstanding is increasing, which is something that an investor would not be pleased to see.

The number of NVIDIA Corporation shares outstanding has been increasing over the past 5 years.

NVIDIA Corporation Shares Outstanding (Million Shares)

NVIDIA Corporation Financial Health

NVIDIA Corporation balance sheet which includes total equity, total debt, and cash & short-term investments.

NVIDIA Corporation Financial Health (USD Million)

Current Ratio: 2.8 (pass my requirement of >1.0)

Debt-to-EBITDA: 0.9 (pass my requirement of <3.0)

Interest Coverage: 41.5 (pass my requirement of >3.0)

Debt Servicing Ratio: 2.2% (pass my requirement of <30.0%)

NVIDIA Corporation Dividend

Dividend

Current Dividend yield: 0.04%

Have the dividend payments been stable for the past 5 years? NVIDIA is not paying a notable dividend and therefore, there is no need to check if payments are stable.

Have the dividend payments been growing for the past 5 years? NVIDIA is not paying a notable dividend and therefore, there is no need to check if payments are increasing.

NVIDIA Corporation’s dividend payments are reasonably covered by its earnings and cash flows.

NVIDIA Corporation Stock Performance

The following graph compares the cumulative total shareholder return for NVIDIA common stock, the S&P 500 Index, and the Nasdaq 100 Index for the five years ended 29 January 2023. The graph assumes that $100 was invested on 28 January 2018 in NVIDIA common stock and in each of the S&P 500 Index and the Nasdaq 100 Index. Total return assumes reinvestment of dividends in each of the indices indicated. Total return is based on historical results and is not intended to indicate future performance.

NVIDIA Corporation Stock Performance

NVIDIA Corporation Intrinsic Valuation

Estimated intrinsic value: $77.61

Value is calculated using the discounted cash flow method (taking into account their cash and debt) and scenario planning.

Average free cash flow used: USD$7,000M

Projected growth rate: 15% - 20%

Beta: 1.7

Discount rate: 11.5%

Margin of safety: 25% (Uncertainty: Mid)

Price range after the margin of safety: <$59.00

Date of calculation: 11 Sep 2023

NVIDIA Corporation Valuation

Free cash flow used is a weighted average that is rounded to the nearest tens. In some instances, I used a more realistic number to represent the free cash flow.

Total debt and cash and short-term investments are last quarter figures that are rounded to the nearest tens. In some instances, I used more realistic numbers to represent them.

NVIDIA Corporation fair value and its 52-week range.

NVIDIA Corporation Intrinsic Valuation

NVIDIA Corporation Relative Valuation

Comparison of NVIDIA Corporation EV-to-EBITDA against its five closest industry peers.

NVIDIA Corporation EV-to-EBITDA vs its peers

Comparison of NVIDIA Corporation price-earnings ratio against its five closest industry peers.

NVIDIA Corporation Price-Earnings Ratio vs its peers

NVIDIA Corporation price-earnings ratio for the past 5 years and its 5-year average.

NVIDIA Corporation Historical Price-Earnings Ratio

Additional Resources

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My Top Concern

The potential risk in investing in NVIDIA lies in its heavy reliance on the data center and AI sectors for growth. While NVIDIA is a leading company in GPUs for AI model training and inference workloads, competitors like Amazon, Microsoft, Google, and Meta may try to reduce their dependence on NVIDIA by creating their semiconductor solutions. These big tech companies are already introducing their chips focused on AI, which could pose a challenge to NVIDIA's dominance in the market. Established semiconductor vendors like AMD and Intel are also putting more effort into meeting the increasing demand in this area, adding to the competitive landscape.

Another potential risk in investing in NVIDIA comes from the quickly changing nature of the accelerated computing industry. Adapting to new technology, customer needs, and competitive products is essential for success. This involves identifying shifts in the industry promptly, creating new products, and following safety and compliance standards. Investments in research and development for new markets may not result in revenue for years, if ever. Failing to innovate or make money from new technologies could hurt financial results. Additionally, introducing new business models like standalone software and cloud solutions may not guarantee success and could lead to significant costs without meaningful revenue. Moreover, NVIDIA's AI cloud services and software solutions may require a considerable amount of time, resources, and investment with uncertain returns.

Investing in NVIDIA comes with the risk of exposure to global economic, political, and business uncertainties. The company operates internationally and depends on third-party manufacturers located outside the United States for its semiconductor wafers. With 69% of revenue generated from international sales in fiscal year 2023, fluctuations in economic and political conditions, differing legal standards, cultural practices, and events like natural disasters or public health crises can significantly impact NVIDIA's business, financial condition, and operational results.

Summary for NVIDIA Corporation

NVIDIA possesses a significant competitive advantage thanks to its intangible assets related to graphics processing units and the high switching costs associated with its Cuda platform for AI tools. This platform empowers developers to utilize NVIDIA's GPUs in constructing AI models.

Originally designed for graphics tasks on PCs and gaming consoles, NVIDIA is a pioneering force in GPU development. They hold an overwhelming 80% market share in discrete GPUs, owing to their expertise in GPU design and essential software for developers. Recent advancements like ray-tracing and AI tensor cores in gaming highlight NVIDIA's enduring leadership. In terms of pricing, NVIDIA's GPUs are often twice as costly as their closest rival, AMD.

GPUs and CPUs operate differently. CPUs handle tasks sequentially, while GPUs tackle multiple tasks simultaneously. CPUs are found in devices like PCs and smartphones, interpreting binary code to run software. On the other hand, GPUs are capable of processing tasks out of order, making them particularly adept at rapid image capture. With more cores, GPUs handle simpler tasks, such as collecting data for individual pixels. If CPUs were tasked with this, they would need to process the image step by step. NVIDIA's triumph lies in the simultaneous processing of tasks by GPUs. Initially celebrated for enhancing gaming experiences, GPUs have also proven invaluable in cryptocurrency mining, thanks to their ability to perform numerous calculations concurrently, resulting in faster processing compared to CPUs.

Over the past decade, it has become evident that GPUs excel at handling the intricate mathematics required for AI models. The AI process involves two primary stages. The first is training, where the computer learns to identify objects, like cats, by analyzing thousands of images and associating common features, such as whiskers or pointed ears. The second stage is inference, where the AI model applies its knowledge to classify new images.

Similar techniques are employed in Large Language Models (LLMs) within generative AI. They are fed vast amounts of data from diverse sources like the internet, research papers, and databases. From this, the LLM learns the patterns of word usage and their significance. For example, given the prompt "peanut butter and...," it may predict "jelly" in a culinary context or "diet" or "allergies" in a health-related context. For the demanding calculations involved in LLMs, especially those with a vast number of parameters like GPT-3 with 175 billion, GPUs are the preferred hardware. NVIDIA's Cuda software is pivotal here, but it is exclusively compatible with NVIDIA GPUs, making it challenging for customers to transition to a different brand. As of 2023, NVIDIA faces minimal competition in this domain, discouraging businesses from waiting for alternative solutions to emerge if they intend to utilize LLMs.

In addition to the limited alternatives, the costs associated with retraining employees on new software or hardware, migrating software applications to a different platform, and potential loss of data or productivity during the transition pose substantial challenges for existing customers considering a switch. For instance, a gamer wishing to shift from an NVIDIA GeForce GPU to a competitor's GPU would need to reinstall the operating system and drivers, and potentially repurchase games that may not be compatible with the new GPU. Similarly, a data scientist contemplating a switch from NVIDIA CUDA to a rival's parallel computing platform would need to rework their code.

NVIDIA's proficiency in AI is already noteworthy, and they are actively working to enhance it further. Their Cuda software is a formidable tool, and they are making strides in networking, particularly with the acquisition of Mellanox. They demonstrate astuteness in harnessing the collective power of multiple GPUs for large-scale AI tasks, leading to a significant network effect. A case in point is the NVIDIA Omniverse, a real-time simulation and collaboration platform used by businesses to craft virtual worlds for training, design, and manufacturing. The more individuals who engage with NVIDIA Omniverse, the more potent and authentic the virtual worlds that can be generated. This positions NVIDIA as a frontrunner in the burgeoning metaverse market.

With its unparalleled expertise in GPU technology, coupled with proprietary software like Cuda, and a dominant market share, NVIDIA exhibits formidable competitive advantages. These strengths, combined with high switching costs and network effects, firmly establish NVIDIA as a wide-moat company. These factors not only secure its leadership in the current market but also position it strongly for future advancements in AI, gaming, and virtual simulations.

Over the past five years, NVIDIA Corporation has shown inconsistent performance across key financial metrics. While the company's revenue, net income, and cash flow from operating activities have not exhibited a consistent upward trend year-over-year, it is noteworthy that the free cash flow has remained positive throughout this period. In terms of gross margin percentage, the company's performance has also been marked by inconsistency. This suggests that while NVIDIA has maintained a positive cash flow and weathered fluctuations in its gross margin percentage, other aspects of its financial performance have displayed variability over the past half-decade.

NVIDIA Corporation has demonstrated a solid track record in capital allocation over the past five years. The company's ROE consistently falls within the range of 12% to 15% year-over-year, outperforming its industry peers. Additionally, the ROIC has also remained in the same range and comfortably exceeds the WACC, indicating efficient capital utilization. However, one aspect of concern for investors is the increasing trend in the number of shares outstanding, as this can dilute ownership and potentially impact earnings per share. Nonetheless, NVIDIA's robust ROE and ROIC performance showcases the company's effective capital allocation strategies.

NVIDIA Corporation exhibits robust financial health across key indicators. With a current ratio of 2.8, the company comfortably surpasses my benchmark of 1.0, indicating a strong ability to cover short-term obligations. The debt-to-EBITDA ratio stands at a favorable 0.9, signalling a prudent level of debt relative to earnings. Moreover, the interest coverage ratio is notably high at 41.5 signifies a healthy capacity to meet interest payments. Additionally, the debt servicing ratio is impressively low at 2.2%, well below the acceptable limit of 30.0%, showcasing the company's efficiency in managing its debt obligations relative to its income.

Investing in NVIDIA Corporation demands a thoughtful approach. The company boasts a wide economic moat, indicating a competitive advantage that sets it apart in the market. However, recent performance has been less than stellar, warranting cautious consideration. On a positive note, NVIDIA exhibits satisfactory capital allocation practices and maintains a healthy balance sheet, which bodes well for long-term stability. It is essential to acknowledge that there is a certain level of uncertainty associated with this investment, given the fluctuating performance. To mitigate potential risks, a prudent investor may seek a margin of safety of at least 25% before committing capital. This allows for a buffer against unforeseen challenges and ensures a more secure investment position in the long run.

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NVIDIA Corporation Inc Fundamental Analysis