Nvidia: Another Strong Quarter Reaffirms Investment Case
Contributor since 2020 / 10294 Followers
Summary:
- Nvidia Corporation’s strong growth continues, supported by supply constraints in the market, largely derisking the investment case.
- Earnings results and outlook exceeded expectations, driven by growth in the data center segment.
- Intel and AMD’s competitive offerings pose minimal financial implications for Nvidia in the near- to medium-term.
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Investment Thesis
Even a year after the strong growth began for Nvidia Corporation (NASDAQ:NVDA), it still seems to continue at quite a pace. Meanwhile, the stock’s valuation is at least matched by the company’s growth. Given the reports regarding the supply constraint environment, the main thesis is that these have derisked the investment case in the near- to medium-term.
Background
In March, I revised my stance on the stock, with an upgrade to buy. What caused this change from the hold rating in January was (1) the realization that net income and FCF had been growing much faster than overall revenue due to increased leverage, allowing the stock to grow readily into its increased valuation after the initial spike in H1 ’23, (2) indeed, the valuation that had remained quite flat further through the year despite continued beats and raises, and (3) the outlook for continued growth that was quite assured given that the CEO had basically confirmed the supply limited outlook even far into 2025.
While the stock had already rallied quite a lot in early 2024, in the last few months the rally has resumed.
Earnings results and outlook
Revenue of $26B was up 262%, beating by $1.5B. Non-GAAP EPS of $6.12 also beat by $0.54, representing another outperforming quarter. Net income margin remained over 55%, 57% FCF margin, and gross margin above 75%.
Most of the growth is attributable to the data center segment, which with $22.6B revenue was up 23% from Q4, which represents strong sequential growth (in typically a seasonally down quarter) off what is already a large base. Basically, this segment has been growing at about $4B per quarter, and the solid guidance of $28B revenue (which also beat estimates) leaves room for continuing this trend if it beats those numbers again by some margin.
Obviously, investors have to acknowledge that even if this linear growth trend continues (which seems the best-case, since the quarterly addition in revenue does not seem to grow), that does imply that the rate of growth will slow down over time.
Market updates
Another part of the thesis was that Nvidia’s growth in the near- to even medium-term looks unchallenged.
Intel (INTC) has announced Gaudi3 for Q3 launch, and more recently also announced pricing, with $125k for a system with 8 chips, doubling from the price of a Gaudi2 system. The chip looks competitive, returning to process node parity. Nevertheless, Intel has only guided for $500M in revenue for the year (second half). Intel has also acknowledged that the chip (apparently) isn’t as programmable, and has pointed to Falcon Shores in late 2025 to finally start challenging Nvidia completely.
As mentioned previously, any further details regarding Falcon Shores remain absent, notably its (as initially announced) possible usage of Intel’s “angstrom-era” process technology. This refers to 20/18A, likely 18A, but so far, only Clearwater Forest and Panther Lake have been announced as such.
Advanced Micro Devices (AMD) has updated its guidance for MI300 to $4B for the year, perhaps somewhat below expectations, but still vastly outpacing Intel. On the other hand, it did announce an annual cadence going forward.
Nvidia also announced an annual cadence alongside a roadmap through 2027, and introduced Blackwell for launch later in the year. The more cynical view regarding Blackwell may be that it is merely two Hopper-like chips glued together. However, as discussed previously, Nvidia’s margins are so high that this larger silicon footprint (representing a bill of materials of at most a very low single digit % of the overall chip or system end-cost) does not really affect the fundamental economics at all. Simply put, the higher performance will allow for a higher sales price (as has been discussed in the media), which could drive some further revenue upside in 2025 and beyond.
Of these developments, the most significant would be Falcon Shores if it indeed uses 18A. For comparison, given Nvidia’s announced roadmap and annual cadence, this suggests that Rubin on N3 would arrive in late 2026, followed by a N2 product in late 2027, a full two years behind Intel (by which time it may already have moved to 14A). Even in the GAI space, process technology remains as relevant as ever, possibly providing a substantial advantage.
Overall, while each company is executing on its roadmap, the medium-term financial implications for Nvidia remain rather negligible. Even its own Blackwell chip. While it could drive additional demand, in the near-term Nvidia’s revenue should largely be a function of the continued general market dynamics.
Valuation
One analyst discussed how FCF could grow to $80B in 2026. Based on the current market cap, that would represent a 35x multiple. Given the rate of growth, approaching a $40B quarterly run rate certainly doesn’t seem impossible within a few years, which given the margins could even imply around $100B FCF/NI, resulting in a sub-30 multiple.
In any case, the current forward P/E multiple stands at 43x, which remains quite manageable given the strong growth. While the law of large numbers implies that “surely” forward returns likely won’t be as strong, the downward risk seems reasonably low (given the continued supply constraint environment).
Risks
Recently, a tweet pointed out that the industry spent $50B on Nvidia hardware in 2023 (and even much more so in 2024) while generating (allegedly) only $3B in GAI revenue. This is indeed a risk, representing possible uncertainty regarding the longer-term demand, that prevented a buy rating in prior coverage. So far, though, the continued strong quarterly growth trend has disproved any such concerns, making a possible reduction in demand a black swan event currently.
Another point, made for example in the analyst coverage mentioned above, is that $1 of capex results in $5 of cloud revenue in four years, seemingly making the case for the value Nvidia’s chips provide. Nevertheless, this does not (sufficiently) address the concerns about the lack of tangible GAI revenue, as it neglects the ROI for the (actual) cloud user, as well as internal (non-cloud) usage of those chips (if anything, it suggests that buying the chip on-prem would be favorable over renting in the cloud).
Overall, the bear scenario remains (a confluence of) a reduction in demand and market share, and reduced ASPs from competitive pressure. Another scenario would be that it reaches a peak in the next few years, followed by some decrease, similar to for example the PC and smartphone markets.
Investor Takeaway
Despite the continued rally, Nvidia remains a buy after another strong quarter, although perhaps a less strong buy than earlier in the year.
Despite Nvidia’s financials clearly showing that it is very readily monetizing its chips, most customers simply keep buying them, seemingly disregarding the TCO (total cost of ownership, due to lower cost) advantages competitive solutions could offer. So, while there are some risks, those seemingly remain absent for now.
In conclusion, while the stock is a possible buy, the investment case remains more for the near- to medium-term as the strong growth unfolds, which may not last indefinitely, and competitive concerns may also become more relevant further out.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of INTC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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