VALUATION HIGHLIGHTS

1. GPUs constitute 64% of the Trefis price estimate for nVIDIA's stock.
2. Tegra Processors constitute 35% of the Trefis price estimate for nVIDIA's stock.

WHAT HAS CHANGED?

Q3 2023 Earnings

Nvidia posted lower net sales of $5.93 billion in Q3 2023, down from $7.1 billion in Q3 2022. Further, a hefty rise in operating expenses and COGS saw operating income drop from $2.67 billion to $601 million over this period. Due to this, EPS dropped from $0.99 in Q3 '22 to $0.27 in Q3 '23.

Note: Nvidia's FY'22 ended on January 30, 2022. Q3 FY'23 refers to the quarter that ended on October 30, 2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Nvidia's value that present opportunities for upside or downside to the current Trefis price estimate for Nvidia:

Tegra Processors

• Faster Than Expected Growth In Automotive & Shield Tegra Processors: We currently forecast Nvidia's Tegra revenue to increase from $11 billion in FY 2022 to $27 billion by the end of the Trefis forecast period. Mobile computing has been a key focus area and the largest segment for Nvidia’s Tegra business over the last few years. However, the company claims that automotive and SHIELD (Nvidia’s gaming device) now represent most of its Tegra revenue. Nvidia has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth. In the last few years, Nvidia has significantly expanded its Shield lineup, which includes the Shield Android handheld console, the Shield tablet, and an Android TV console. Given its strong graphics and processing capabilities, the company can deliver a compact, powerful, optimized system to eager gamers. Suppose Nvidia can increase its Tegra revenue base to over $40 billion and improve EBITDA margins to 60% (higher revenue contribution from automotive could significantly improve margins). In that case, our valuation for the company will increase by 15%.

Graphic Processors

• GPU Revenue: We currently forecast Nvidia’s GPU Revenue to increase rapidly to almost $40 billion by the end of the forecast period. However, the market opportunity for Nvidia in the Artificial Intelligence domain is huge ~ $70 billion. The company's GPUs have a clear edge over other chips in enabling parallel computing. There is a chance that our estimates may turn out to be conservative. In a scenario where Nvidia's GPU revenue increases to ~$70 billion by the end of our forecast period, our price estimate can see an upside of nearly 20%.

For additional details, select a driver above or select a division from the interactive Trefis split for Nvidia at the top of the page.

BUSINESS SUMMARY

Nvidia designs and develops Graphics Processing Units (GPUs) - high-performance processors that generate realistic and interactive graphics on PCs. A computer's Central Processing Unit (CPU) offloads the graphics processing burden to GPUs. In this way, a dedicated GPU and CPU work in tandem to increase a system's overall speed and performance. The GPU market is typically segmented into discrete and integrated GPUs. Integrated GPUs, once found in most PCs, have been replaced by Intel and AMD's APUs. However, discrete GPUs are preferred by customers such as gamers or design professionals for high-performance and 3D graphics. Within discrete GPUs, high-end discrete GPUs form the professional graphics cards market in which Nvidia has a significant market share. Nvidia sells its products directly to PC manufacturers like Dell, HP, Toshiba, and Sony. In addition, the company also sells some of its high-end GPUs directly to consumers through retailers such as Best Buy. The company also has a data center division which includes Tesla for AI utilizing deep learning and accelerated computing, leveraging the parallel computing capabilities of GPUs for general purpose computing, and GRID to provide the power of NVIDIA graphics through the cloud and datacenters.

Nvidia also earns revenue from products based on Tegra SOC and modem processor technologies, which includes Tegra for automotive computers, including infotainment and navigation systems, and gaming devices, including Project SHIELD. While mobile computing has been a key focus area and the largest segment for Nvidia’s Tegra business in the last few years. However, the company claims that automotive and SHIELD (Nvidia’s gaming device) now represents the vast majority of its Tegra revenue. Nvidia expects the two segments to be the biggest growth drivers for its Tegra division.

SOURCES OF VALUE

Graphics Processing Units (GPUs) are the company's major revenue sources. GPUs are used by gamers or design professionals for high-performance and 3D graphics. Nvidia's GPU lineup includes GeForce for PC gaming, GeForce NOW for cloud-based game-streaming service, Quadro for design professionals working in computer-aided design, video editing, special effects, and other creative applications, Tesla for AI utilizing deep learning and accelerated computing, leveraging the parallel computing capabilities of GPUs for general purpose computing, and GRID to provide the power of NVIDIA graphics through the cloud and datacenters.

KEY TRENDS

Nintendo Sales Aiding Tegra Processors Segment Growth

Nvidia's solid growth for its Tegra Processors segment in the recent quarters can partly be attributed to growth in its SOC modules for consoles, such as Nintendo Switch. Note that Nintendo Switch has been a very successful console, and more than 40 million units have been sold since its launch in 2018. The console uses Nvidia’s SOC modules, and further growth in the demand for consoles will bode well for Nvidia.

Increasing Adoption of Deep Learning Across Multiple Industries to Drive Nvidia's Data Center Growth

GPU-accelerated data centers are expanding in both High Performance Computing (HPC) and the cloud, driven by the growth of deep learning and Big Data. GPUs have become the accelerator of choice for hyper-scale data centers due to their superior programmability, competitive performance, and power efficiency. The launch of VR can lead to potential growth in the enterprise segment across multiple industries. Nvidia powers IBM lesson and Facebook’s big source server form Artificial Intelligence (AI). It is present in AI platforms at hyperscale giants such as Microsoft, Amazon, Alibaba, and Baidu for training as well as real-time influence. Nvidia is engaged with nearly 3,500 companies and organizations in developing deep learning technology.

Expansion in Gaming

Growth in gaming is expected to be fueled by the continued anticipation of new blockbuster games, the rise of eSports, the emergence of new technologies like virtual reality (VR) and Direct X, and the expansion in developing countries. Nvidia’s gaming platform has been growing at a >30% rate for the last four years. Since Nvidia has still not fully penetrated the market, it believes there is ample scope for growth.

Expansion of Advanced Driver Assistance Systems (ADAS) & Self-Driving Car Technologies To Drive Growth in the Automotive Segment

The automotive segment is the fastest growing sub-segment of Nvidia’s Tegra business and offers higher gross margins (compared to devices). The company has been working on building its automotive computing platform for over a decade and is in a strong position to leverage this growth. The company’s automotive platforms remain on a sharp upward trajectory. Nvidia has shipped almost 5-6 million devices for cars (with its Advanced Driver Assistance Systems) and has an additional 20-25 million such devices to ship in its pipeline. In addition to its infotainment cockpit business, Nvidia is working with over 80 companies developing self-driving car technologies using NVIDIA DRIVE PX. These include car manufacturers, Tier 1 OEMs, start-ups, and research institutions.