NVIDIA Corp

NVIDIA Corporation (NASDAQ: NVDA) is a company that specializes in personal computer (PC) gaming. Graphics and Compute & Networking are two of the company's segments. GeForce graphics processing units (GPUs) for gaming and PCs, game streaming services and related infrastructure, solutions for gaming platforms, automotive platforms for infotainment systems, and Omniverse software for creating three-dimensional (3D) designs and virtual worlds are all part of the Graphics segment. Data Center platforms and systems for artificial intelligence (AI), high-performance computing (HPC), accelerated computing, cryptocurrency mining processors (CMP); Jetson for robotics; and NVIDIA AI Enterprise are all part of the Compute & Networking sector.

Key Highlights and updates

• NVIDIA on May 23, 2022, announced that Taiwan’s leading computer makers are set to release the first wave of systems powered by the NVIDIA Grace CPU Superchip and Grace Hopper Superchip for a wide range of workloads spanning digital twins, AI, high-performance computing, cloud graphics, and gaming. Starting in the first half of 2023, ASUS, Foxconn Industrial Internet, GIGABYTE, QCT, Supermicro, and Wiwynn will release a slew of server models.
• On May 25, 2022, NVIDIA released its financial results for the first quarter of FY23, revealing that despite several macroeconomic problems, the company achieved record revenue for the period.

Important financials from the Q1 FY23 results

• Total sales of USD 8.3 billion was a new high, rising 8% sequentially and 46% year over year. Data Center has grown to become the company's largest market platform, and it is expected to continue to grow in the future, also with gaming revenue of USD 3.6 billion up 6% sequentially and 31% year over year, thanks to the GeForce RTX 30 Series product cycle.
• Because of the company's ability to overcome increased expenses and supply chain challenges, GAAP gross margin for the first quarter was 65.5 percent and non-GAAP gross margin was 67.1 percent, up 90 basis points from a year ago and up 10 basis points sequentially.
• A USD 1.35 billion purchase termination fee relating to the ARM merger affected GAAP operating margin to 22.5 percent. The non-GAAP operating margin came in at 47.7%.
• The quarter's GAAP profits per diluted share were USD 0.64, down 16 percent year over year and 46 percent from the prior quarter and included an after-tax effect of USD 0.52 from the USD 1.35 billion Arm acquisition termination penalty. Non-GAAP profits per diluted share were USD 1.36, up 49% year over year and 3% higher than the prior quarter.

Balance sheet position

• Cash and cash equivalent showed a reduction of almost a billion dollars from USD 21.20 billion on Jan 30, 2022, to levels of USD 20.33 billion USD as of May 01, 2022.
• The company had a long-term debt balance of USD 10.95 billion at the end of the quarter which did not change much from the previous quarter.

Other key financial informations from Q1 FY23

• NVIDIA returned USD 2.10 billion in share repurchases and cash dividends to stockholders in the first quarter of fiscal 2023. The company's share repurchase program was raised and extended by the board of directors on May 23, 2022, to repurchase further common shares up to a total of USD 15 billion until December 2023.
• NVIDIA's next quarterly cash dividend of USD 0.04 per share will be paid to all shareholders of record on June 9, 2022, and on July 1, 2022.

Risk analysis

• Rising Competition: The rising ecosystem of indigenous chipmakers, which includes Amazon's AWS, Microsoft, and Alphabet building AI chips, is the final big competition for Nvidia. Nvidia has benefited from a lack of competition in this market, and it's difficult not to envision these businesses' chip development affecting Nvidia's company in the long run.
• Interest rate risk: Under the current macro-economic scenario with increasing interest rates, the company faces a big risk in terms of interest payment on its USD 10.95 billion long-term debts. Hence making interest rate risk a major factor under current circumstances.

Outlook for Q2 FY23

• The company expects revenue of USD 8.10 billion, plus or minus 2%. This includes a USD 500 million drop in Russia and the COVID lockdowns in China, according to estimates, while gross margins are estimated to be 65.1 percent GAAP and 67.1 percent non-GAAP, plus or minus 50 basis points, respectively.
• GAAP and non-GAAP operational expenditures are estimated to be around USD 2.46 billion and USD 1.75 billion, respectively, resulting in a USD 40 million charges in both GAAP and non-GAAP other income and expenses, excluding gains and losses from non-affiliated investments.
• Without any discrete events, GAAP and non-GAAP tax rates are estimated to equal 12.5 percent, plus or minus 1%.

Valuation Methodology: Price/Earnings Per Share Multiple Based Relative Valuation

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation

Over the past six months, NVDA's share price has corrected by 46.14%. The stock is currently leaning towards the lower end of its 52-week range of USD 154.60 to USD 346.47. We have valued the stock using the Price/Earnings Per Share multiple-based relative valuation method and arrived at a target price of USD 210.18. We believe that the company is trading at a premium from its peer's average considering being an industry leader, strong fundamentals and a robust cash position gives bullish estimates for the upcoming near future.

Considering the strong fundamentals, big share repurchase program, healthy top-line results, associated risks, positive outlook even with Ukraine-Russia war adjustments, and current valuation, we give a "Hold" recommendation on the stock at the current price of USD 176.15 up 3.77%, as of May 26, 2022, at 08:20 AM PDT.

1-Year Technical Chart (as of May 26, 2022, at 08:20 AM PDT). Data Source: REFINITIV, Analysis by Kalkine Group

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.