Company Overview

Nvidia Corporation (NVDIA), a technology company founded in 1993, provides Graphics Processing Units (GPU) for personal computers, workstations, game consoles and mobile devices. Its array of products includes GeForce, Quadro graphics, Tesla computing solutions and Tegra computer-on-chip products. The company’s shares are listed on NASDAQ in the United States of America.

NVIDIA made a series of acquisitions to improve its competencies in interconnect, graphics and multimedia technologies. Some of the companies acquired included 3DFX (2000), Media Q (2003), Ageia Technologies (2009) and Mellanox (2020). NVIDIA has two business segments, namely Graphics, and Compute & Networking. The Graphics segment comprises the GPUs, automotive platforms and software for 3D designs and virtual worlds; the Compute & Networking segment includes data centre platforms, automotive AI Cockpit, automotive vehicle solutions, and networking and interconnect solutions.

Chris Malachowsky and Jensen Huang founded NVIDIA in 1993. Huang has doubled as president and chief executive officer since the company was formed. Malachowsky is the senior technology executive for NVIDIA.

Investment Thesis

NVIDIA pioneered the production of GPU and launched GeForce 256 in 1999; apart from gaming, GPU is used in robots, computers and autonomous vehicles. The company has expended a significant amount of money on artificial intelligence and robotics. Consequently, it has been able to offer innovative products with better performance to meet the growing needs of consumers across diverse industries that include energy, financial services, game development, healthcare and life science, manufacturing, media and entertainment. Its products are relevant to data science, cloud computing, self driving vehicles, design, visualisation and robotics.

NVIDIA does not manufacture its products directly; it outsources the manufacturing of its products to third parties such as Taiwan Semiconductor Manufacturing Corporation; this reduces set up and maintenance costs of production facilities. The only activities undertaken by the company are: design, marketing, additional quality assurance and customer service. Therefore, profits have been declared by NVIDIA for twelve straight years. The Company witnessed revenue decline in two out of those twelve years (2014 and 2020). Gross and net earnings of NVIDIA have increased at a 10-Year Compound Annual Growth Rate (CAGR) of 21% and 32.6% respectively.

The performance of the company in the last two fiscal years has been impressive. Revenue growth was largely driven by gaming and data centre. Gaming and data centre collectively accounted for 85.7% of total revenue in 2022 (2021: 86.7%). Sales revenue from gaming and data centre has grown at a compound rate of 25.9% and 53.5% respectively over the past three years. Revenue from professional visualisation doubled between 2021 and 2022. Automotive products gained a revenue of 5.6% on a year-over-year basis. However, the revenue of $566 million produced by automotive products was equivalent to a 3-Year CAGR decrease of 4.1%. Besides, the contribution of automotive solutions to total revenue fell from 6.4% in 2020 to 2.1% in 2022. We expect its collaboration with electric and autonomous vehicle makers to pay off soon. The NVIDIA DRIVE solutions are driving the programmable and intelligent capabilities of electric and autonomous vehicles. The company has agreements with Jaguar Land Rover, Mercedes-Benz, Volvo Cars, Hyundai Motor Group, Lucid Group, BYD, NIO and DiDi.

Investment in NVIDIA, in our opinion, should be rewarding in the medium term. But it appears overpriced at the present moment.

Valuation

NVIDIA should trade between $133.20 and $153.57 per share. However, it is currently trading above our fair value estimate.

Financial Overview

2022 was yet another year when NVIDIA’s performance improved. Revenue jumped by 61.4% to $26.9 billion in 2022 from $16.7 billion in year before. The Graphics business segment produced most of the revenue increase; it grew revenue by 61.4% to $15.9 billion while the Compute & Networking segment achieved a year-over-year revenue growth of 61.5% to close at $11 billion as at 30th January 2022. The operating income from Graphics, and Compute & Networking increased by 84.1% and 80.5% respectively.

The profitability of NVIDIA improved. The gross profit of $17.5 billion was equivalent to a year-over-year rise of 68.1%. Income before taxes was $9.9 billion in 2022, 125.5% up from $4.4 billion declared in the prior fiscal year. Net income for the year was $9.8 billion or 125.1% better than the previous year’s performance. Gross profit margin has been increasing owing to a continuous drop in the cost of revenue or direct cost. The gross profit margin of 64.9% in 2022 exceeded the 16-year average gross profit margin by 12.6%. Operating profit margin was 37.3% in 2022 compared to 27.2% achieved a year ago. Net income margin hit a 16-year peak of 36.2% in the fiscal year under review.

The total assets of NVIDIA grew 53.5% to $44.2 billion while total equity added 57.5 percentage points year-over-year. Earnings Per Share expanded by 122.2% from $1.76 to $3.91; Book Value Per Share leaped to $10.50 from $6.73. Current and acid test ratios stood at 6.7 and 6.1 times respectively. Though total debt has been on the rise, NVIDIA generates adequate operating income and operating cash flow to settle its debt obligations. The debt of the company is manageable; total debt was 26.5% of total assets and 43.9% of total equity.

Business Risk

The fast pace of technology means that NVIDIA has to be on top of its game. It has to continuously spend on Research and Development (R&D). It has spent close to 20% of its revenue on R&D over the past sixteen years. Huge investment in R&D, coupled with competitive pressure, could have an adverse effect on profit margins going forward. Besides, emerging technologies such as artificial intelligence, robotics and 3D graphics are prone to privacy breaches, compliance/regulatory and reputational risks.

Recommendation: Overpriced