NVIDIA Corporation (NASDAQ: NVDA)- Research Note

Introduction-

NVIDIA Corporation, founded in 1993, is a full-stack computing company developing Central Processing Units (CPU), Data Processing Units (DPUs), Graphic Processing Units (GPUs), and Artificial Intelligence (AI) software that fuel data center-scale computing solutions. The company is headquartered in Santa Clara, California, and is a pioneer of GPU-accelerated computing, specializing in products and platforms for the massive gaming markets, professional visualization, data centers, and the automotive industry. Over the years, NIVIDIA has been investing heavily to enhance its product portfolio and industry applications to stay at the forefront of technological advancements. They are market leaders in almost all their business segments and are currently the world leader in Artificial Intelligence Computing.

Company History-

Business Model-

1. Research and Development - NVIDIA invests substantial resources into developing and improving its GPU architectures, ensuring they stay at the forefront of technological advancements.
2. Robust ecosystem around their products – By creating a thriving ecosystem, NVIDIA positions itself as a leader in the industry, attracting both customers and partners alike. The company has been building strong relationships with game developers, content creators, and software vendors to ensure compatibility and optimization for their GPUs and SoCs, which also helps increase brand loyalty and demand for their products.
3. Collaboration and partnerships – NVIDIA works closely with software developers and system integrators to optimize applications and solutions for their hardware. By fostering these relationships, it ensures that its powerful GPUs and SoCs are seamlessly integrated into various software ecosystems. This collaborative approach creates a win-win situation for both NVIDIA and its partners.

NVIDIA works on a platform strategy, combining hardware & systems, software, algorithms & libraries, and services to create unique value. The company caters to four large markets: Gaming, Data Centers, Professional Visualization, and Automotive.

NVIDIA's impressive growth has come from various factors, including rising product demand, strategic market positioning, and a wider adoption of artificial intelligence (AI) technologies.

• Increasing Demand for NVIDIA Products, especially gaming GPUs, professional visualization, data centers, and automotive industries. NVIDIA's GPUs are crucial not only for gaming but also for AI applications, cloud computing, and other areas, all driving the company's revenue growth and competitive edge.
• Advancements in AI and Technological Innovations: The surge in AI has played a significant role in driving NVIDIA's expansion. The cutting-edge GPU technology offered by the company is central to AI advancements, supporting various applications from data centers to self-driving cars and deep learning projects. By focusing strategically on AI initiatives, NVIDIA has benefited from the rapid growth in this field, establishing itself as a leading provider of vital AI computing infrastructure.
• Global Growth and Product Diversification: Despite encountering challenges like export restrictions in China that could impact specific markets, the company has taken proactive steps to navigate regulatory environments and introduce new products that comply with international regulations, ensuring ongoing access to key markets.

Industry & Competition-

The Artificial Intelligence market is expected to expand on a massive scale over the next decade, with PWC estimating AI to contribute around $15.7 trillion to the global economy by 2030.

During the Q4 conference call on 21st February this year, NVIDIA CFO Colette Kress said, "Countries around the world are investing in AI infrastructure to support the building of large-language models based on domestic data, and in support of their local research and enterprise ecosystems."

According to Bloomberg Intelligence (BI), with the influx of consumer generative AI programs like Google's Bard and OpenAI's ChatGPT, the generative AI market is poised to explode, and grow to $1.3 trillion over the next ten years from a market size of only $40 bn in 2022.

Advanced Micro Devices estimates that the market for AI accelerators could jump to $400 bn in 2027 from $45 bn in 2023.

Boston Consulting Group (BCG) recently surveyed more than 1,400 C-suite executives. These corporate leaders spanned 14 industries and 50 markets. Despite their varied backgrounds, most executives said they would-

1. Increase their organization's investments in artificial intelligence (AI) and generative AI in 2024.
2. Rank AI and generative AI as one of their top three technology priorities for 2024.

Due to the large business opportunity and critical nature of the accelerator chips, NVIDIA's competitive landscape is anticipated to become increasingly intense going forward. NVIDIA's top rival, Advanced Micro Devices (AMD), launched the most direct competition to NVIDIA's high-performance GPUs, citing a forecast of around $4 bn for the AMD's new MI300 GPU. The competition also comes from several of NVIDIA's largest and most important customers, such as Amazon, Microsoft Meta, Google, etc.

Over the last year, the boom in generative AI exposed just how dependent big tech companies were on NVIDIA. They cannot build chatbots and other AI systems without a special kind of chip that NVIDIA has mastered over the past several years. They have spent billions of dollars on NVIDIA's systems, and the chipmaker has not kept up with the demand. So, Amazon and other industry giants, including Google, Meta and Microsoft, are building AI chips of their own. Amazon has its AI chips for training and inference, Microsoft recently announced its Maia AI chip, and Google continues to innovate on its Tensor Processing Units (TPUs). Oracle and Meta are also developing AI chips in-house. With these chips, the tech giants could control their destiny, rein in costs, eliminate chip shortages, and eventually sell their chips to businesses that use their cloud services.

However, despite the efforts of NVIDIA's rivals, the chip giant is expected to maintain an 80-90% market share over the next 2-3 years, primarily because-

1. The company has the best accelerator chips and, more importantly, has an incredible ecosystem, making it very difficult for customers to use a new kind of AI chip quickly.
2. The chips are the fastest in the market, and the company will continue to improve its speed.
3. Rewriting software code to be used in a new chip is difficult & time-consuming, and hence many companies don't even venture into it.
4. Launch of new products:
   
   1. In Jan’24, NVIDIA revealed GeForce RTX 4080 Super, which individuals can use to run AI applications right on their desktops and laptops. The card can be used for gaming, creating large language models (LLMs), customizing generative AI models, and even inferencing applications. NVIDIA claims that its new RTX 4080 Super graphics card "generates AI video 1.5x faster and images 1.7x faster than the GeForce RTX 3080 Ti GPU."
   2. During the GTC in Mar’24, the company introduced NVIDIA Blackwell platform, which is 30X AI Inference, 4X faster AI Training, uses 25X lower energy and 25X lower TCO (vs Hopper). Part of NVIDIA AI Enterprise suite, NVIDIA NIM is a set of easy-to-use microservices designed to accelerate deployment of generative AI models across cloud, data centers, and workstations.
5. New affiliations and geographical expansions.

Financial Performance-

ROA & ROE increased to 55.67% & 91.46%, respectively, signalling a substantial return on shareholder equity. ROIC at 69.81% indicates efficient use of capital.

During FY21 – FY24, NVIDIA's revenue and EBITDA increased at 54% and 81% CAGR, respectively. Moreover, its net income and EPS grew at CAGRs of 90.1% and 90.3% during the same period. In addition, the company's levered free cash flow rose at a CAGR of 74.6% over the same time frame.

NVIDIA's financial metrics over the last few years reveal a dynamic valuation landscape and improving earnings. The P/E ratio peaked at 116.95 in Q4FY22, indicative of high growth expectations, before normalizing to 56.53 recently due to the massive earnings growth. The P/S ratio followed a similar trajectory, currently standing at 27.58, down from a high of 35.75 in Q1FY23.

Conclusion-

NVIDIA anticipates Q1FY25 revenue to grow by $24.0 bn with a gross margin of 77%, which may look ambitious but reflects the company's confidence in its ability to continue leading the artificial intelligence and cutting-edge technology market. The company has topped the revenue and EPS estimates in all four trailing quarters.

The consensus revenue estimate of $110.57 bn for FY25 reflects an 81.5% YoY increase. Similarly, the company's EPS for FY25 is expected to grow 90.3% from the previous year to $24.66. In terms of forward non-GAAP P/E, NVIDIA is trading at 36.85x, 48.2% higher than the industry average of 24.87x.

Though the valuation may look expensive compared to the industry average, the company warrants the premium given the leadership advantage. NVIDIA enjoys the ecosystem they have created, and while the company's revenue and profits soar, the management remains steadfast with investments into new products.

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