Nvidia (NASDAQ: NVDA) posted an exceedingly strong set of Q2 FY’24 results on Wednesday and issued upbeat guidance for the current quarter. Technology companies and developers have been scrambling to deploy generative AI into their applications and this is driving a windfall of sorts for Nvidia, whose high-end graphics processing chips, such as the A100 and H100,. remain the go-to products for AI workloads. Over Q2, Nvidia’s revenue roughly doubled year-over-year to $13.51 billion, beating its own guidance of about $11 billion. Nvidia is also turning incredibly profitable due to the AI surge. Net income rose over 5x compared to last year to $6.7 billion, as gross margins rose to 71.2% from 45.9% in the year-ago quarter. The company has attributed the increase in margins to higher sales of complex data center products as well as bundled software.
Notably, NVDA stock had a Sharpe Ratio of 1.1 since early 2017, which is higher than the figure of 0.6 for the S&P 500 Index over the same period. Compare this with the Sharpe of 1.2 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
The momentum is expected to hold up. For Q3, Nvidia has guided that revenues could surge by 170% year-over-year. It also appears that Nvidia is in a favorable position with respect to supply. The company has substantially larger commitments from its suppliers to meet demand and has indicated that it expects supply to increase each quarter through next year. Moreover, the broader semiconductor market appears to be lackluster with TSMC – Nvidia’s vendor and the world’s largest foundry player – indicating that demand for nearly all semiconductor product categories had weakened except for AI chips. This could potentially give foundry players more room to scale up GPU output. Despite this, Nvidia apparently sold out of its higher-end H1 chips till at least early 2024 per some estimates.
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Now the growth runway for GPUs in AI applications appears long. Artificial intelligence workloads require a considerable amount of computing capacity, shifting the power balance away from central processing units made by the likes of Intel, to Graphics processors, a market which Nvidia dominates. For perspective, advanced AI computers today have as many as eight GPUs but just one or two CPUs, and this trend is only likely to scale through the computing industry as more applications use generative AI capabilities. Nvidia’s chips remain meaningfully ahead of the curve, beating rivals such as AMD and Google’s Tensor processing units. Moreover, the company has been looking to develop an ecosystem of sorts around its AI tools, with its own programming languages, and software, which are helping the company to better lock in customers. This means that customers who buy into Nvidia’s GPUs will likely continue to remain customers in the long run.
While we have raised our price estimate for Nvidia from $256 per share to $408 per share, to account for the stronger outlook for the data center business, we think investors should be cautious about the stock at current levels of about $510 per share, based on the after-market price on Wednesday. Nvidia stock trades at about 60x forward earnings and about 28x revenues. This compares to the broader semiconductor industry average price-to-sales multiple of about 4.5x. Even Tesla stock didn’t trade at P/S multiples of these levels at its peak in 2020-2021. Although Nvidia remains in pole position on the market for AI chips, competition in the AI market could mount, with traditional chipmakers such as Intel and AMD potentially inventing to catch up in this space given the high stakes. Moreover, big tech players such as Google are also doubling down on AI and machine learning-related silicon. For example, Google’s Tensor Processing Units are specialized integrated circuits focused on machine learning. See our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NVDA stock. Also, see our analysis of Nvidia Revenue
|S&P 500 Return||-4%||14%||96%|
|Trefis Reinforced Value Portfolio||-5%||29%||564%|
 Month-to-date and year-to-date as of 8/24/2023
 Cumulative total returns since the end of 2016