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NVIDIA Corp. (NVDA)

September 18, 2024

Compared to: Advanced Micro Devices, Inc. (AMD) | Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) | Technology Select Sector SPDR Fund (XLK)

Our reasoning

NVIDIA appears moderately undervalued considering its strong financial performance, market leadership in AI and GPUs, and significant growth prospects in expanding markets. While the high EV/EBITDA ratio suggests a premium valuation, the below-average P/E ratio, exceptional revenue growth, and high profitability metrics indicate that the market may not fully appreciate the company's long-term potential in the rapidly growing AI and data center markets.

Key takeaways
  • NVIDIA is a dominant player in the accelerated computing market, with strong revenue growth driven by the adoption of its Hopper architecture and the anticipation for the upcoming Blackwell platform.
  • The company's data center business is a key growth driver, fueled by the increasing demand for AI and high-performance computing solutions.
  • NVIDIA's profitability is high, with expanding margins and efficient cost management, and its strong financial position provides significant flexibility for future investments.
  • The company faces several risks, including reliance on third-party suppliers, exposure to global trade restrictions, and increasing regulatory scrutiny.
  • Despite these risks, NVIDIA's future outlook is positive, driven by its strong financial position, its investments in new products and technologies, and its ability to capitalize on the growing demand for AI and accelerated computing.
  • NVDA's valuation is currently high, reflecting its strong growth prospects and market leadership, but investors should monitor the company's performance closely.
  • Overall, NVDA presents a compelling investment opportunity for investors seeking exposure to the rapidly growing AI and accelerated computing markets, but investors should be aware of the company's risk factors.
Undervalued
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Evaluation summary

  1. Company Overview:

    • NVIDIA is a leading technology company specializing in accelerated computing platforms, encompassing processors, interconnects, software, algorithms, systems, and services.
    • The company operates in two main segments: Compute & Networking (data center, networking, automotive) and Graphics (gaming, professional visualization).
    • NVIDIA's target markets include cloud service providers, consumer internet companies, enterprises, startups, OEMs, ODMs, system integrators, and distributors.
    • Key competitors include AMD, Intel, Huawei, Alibaba, Amazon, Microsoft, and other companies offering hardware, software, and cloud-based solutions.
    • We will be using the Technology Select Sector SPDR Fund (XLK) as a benchmark for price performance analysis and Advanced Micro Devices, Inc. (AMD) and Taiwan Semiconductor Manufacturing Co., Ltd. (TSM) as industry peers for comparative analysis.

  2. Financial Performance:

    • NVIDIA has demonstrated strong revenue growth, particularly in the Data Center segment, driven by demand for AI and high-performance computing.
    • Revenue has grown significantly over the past few years, exceeding $30 billion in the most recent quarter.
    • The company's gross profit margin has been consistently high, exceeding 75% in recent quarters, indicating its ability to generate a high profit margin on its sales.
    • However, gross margins have declined sequentially due to inventory provisions and product mix.
    • Operating expenses have increased significantly, primarily from higher compensation and infrastructure investments.
    • NVIDIA's profitability is strong, with expanding margins and efficient cost management.
    • The company's return on assets (ROA), return on equity (ROE), and return on invested capital (ROIC) are significantly higher than the industry average, indicating its efficient use of capital and its ability to generate a high return on its investments.
    • Compared to its peers, NVDA has consistently outperformed both AMD and TSM in terms of revenue growth, profitability, and return on capital.

  3. Operational Efficiency:

    • NVIDIA has a strong liquidity position, with ample cash and short-term investments to meet short-term obligations.
    • The company's current ratio and quick ratio are both above the industry average, indicating a strong ability to meet short-term obligations.
    • NVIDIA has a conservative debt strategy and a focus on equity financing, resulting in a strong solvency position.
    • The company's debt-to-equity ratio and debt-to-EBITDA ratio are both significantly lower than the industry average, indicating a strong ability to service its debt obligations.
    • NVIDIA's operational efficiency is high, as evidenced by its strong return on assets and return on equity.
    • The company's EV/EBITDA ratio is significantly lower than the industry average, indicating a more efficient use of capital and a lower valuation multiple.
    • NVIDIA's cash flow generation is strong, with robust free cash flow and a high cash flow to net income ratio.
    • The company's operating cash flow is increasing significantly, driven by strong profitability and revenue growth.
    • NVIDIA's capital expenditures are aligned with revenue and profit growth, indicating efficient investment in growth opportunities.
    • Compared to its peers, NVDA has a higher free cash flow margin and a lower debt-to-equity ratio, indicating a more efficient use of capital and a stronger financial position.

  4. Growth Opportunities:

    • NVIDIA is capitalizing on the rapid advancements in AI, data analytics, and high-performance computing, which are driving strong demand for its accelerated computing platforms.
    • The company is expanding its data center product portfolio and cloud service offerings to support enterprise AI and large language model deployments.
    • NVIDIA is investing in new GPU architectures (Blackwell, Hopper) to address growing demand for AI and high-performance computing.
    • The company is also expanding its presence in the automotive market with its NVIDIA DRIVE automated-driving platform.
    • NVIDIA's strategic focus areas include generative AI, accelerated computing, and the metaverse.
    • The company is making significant investments in R&D to develop new products and technologies, including the Blackwell GPU, which is expected to drive continued growth.
    • NVIDIA's strong financial position provides significant financial flexibility for future investments, acquisitions, or potential economic downturns.

  5. Risks and Threats:

    • NVIDIA faces several risk factors, including:
      • Reliance on third-party suppliers and manufacturers, with limited control over production and quality.
      • Exposure to global trade restrictions, tariffs, and geopolitical tensions that could disrupt operations and access to markets.
      • Increasing regulatory scrutiny and compliance requirements around AI, data privacy, and other areas.
      • Potential for product defects, quality issues, and warranty claims that could harm reputation and financial results.
      • Concentration of revenue from a limited number of large customers and partners.
      • The company has experienced supply chain challenges and production yield issues with the new Blackwell GPU, impacting gross margins.
      • NVIDIA is navigating complex export control regulations, particularly related to sales to China.
      • The company is facing ongoing securities class action lawsuits related to alleged false statements about channel inventory and cryptocurrency mining impact.
      • Derivative lawsuits have been filed against NVIDIA's officers and directors, alleging breach of fiduciary duty and other claims.

  6. Valuation Analysis:

    • NVIDIA's valuation metrics, such as P/E and EV/EBITDA, are currently higher than the industry average, reflecting the company's strong growth prospects and market leadership.
    • However, the valuation multiples have declined in recent quarters, suggesting that investors may be becoming more cautious about the company's future growth potential.
    • Compared to its peers, NVDA has a higher EV/EBITDA ratio, indicating a higher valuation multiple.
    • Potential catalysts for future growth include the continued adoption of generative AI, the expansion of the data center market, and the growth of the automotive market.

  7. Price Performance:

    • NVDA's stock price has outperformed both the benchmark (XLK) and its peers (AMD and TSM) over the past 60 days, demonstrating strong growth potential.
    • However, NVDA's stock price has been more volatile than both the benchmark and its peers, indicating a higher risk profile.
    • NVDA's beta value is higher than XLK's, indicating a higher risk profile compared to the broader technology sector.
    • The recent trends suggest that NVDA's volatility is decreasing, while its risk-adjusted returns are improving.

  8. Future Outlook:

    • NVIDIA's future outlook is positive, driven by strong demand for its data center and AI solutions, expanding margins, and a robust cash flow position.
    • The company's investments in new products and technologies, such as the Blackwell GPU, are expected to drive continued growth.
    • NVIDIA's strong financial position provides significant financial flexibility for future investments, acquisitions, or potential economic downturns.
    • Management's guidance for the upcoming quarter suggests continued strong revenue growth, driven by the adoption of the Hopper architecture and the initial sampling of the Blackwell platform.
    • Analyst estimates for the company's future performance are generally positive, with consensus expectations for continued growth in revenue and earnings.

  9. Summary:

    • NVIDIA is a leading technology company with a strong financial position, driven by robust revenue growth, expanding margins, and a robust cash flow position.
    • The company's data center and AI solutions are experiencing strong demand, fueled by the adoption of its Hopper architecture and the anticipation for the upcoming Blackwell platform.
    • NVIDIA's profitability is high, with a conservative debt strategy and a focus on equity financing.
    • The company's operational efficiency is also high, as evidenced by its strong return on assets and return on equity.
    • However, NVIDIA faces several risk factors, including reliance on third-party suppliers, exposure to global trade restrictions, and increasing regulatory scrutiny.
    • Despite these risks, NVIDIA's future outlook is positive, driven by its strong financial position, its investments in new products and technologies, and its ability to capitalize on the growing demand for AI and accelerated computing.
    • NVDA's valuation is currently high, reflecting its strong growth prospects and market leadership.
    • The company's stock price has outperformed both the benchmark and its peers, but it has also been more volatile, indicating a higher risk profile.
    • Overall, NVDA presents a compelling investment opportunity for investors seeking exposure to the rapidly growing AI and accelerated computing markets.
    • However, investors should be aware of the company's risk factors and monitor its performance closely.
Peer fundamentals 

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Fundamentals
Insights
  • NVIDIA is a leading technology company with a strong financial position, driven by robust revenue growth, expanding margins, and a robust cash flow position.
  • The company's data center and AI solutions are experiencing strong demand, fueled by the adoption of its Hopper architecture and the anticipation for the upcoming Blackwell platform.
  • NVIDIA's profitability is high, with a conservative debt strategy and a focus on equity financing.
  • The company's operational efficiency is also high, as evidenced by its strong return on assets and return on equity.
  • However, NVIDIA faces several risk factors, including reliance on third-party suppliers, exposure to global trade restrictions, and increasing regulatory scrutiny.
  • Despite these risks, NVIDIA's future outlook is positive, driven by its strong financial position, its investments in new products and technologies, and its ability to capitalize on the growing demand for AI and accelerated computing.
Analysis
  • Revenue - NVIDIA's revenue growth is driven by strong demand for its data center and AI solutions, particularly for its Hopper architecture and the upcoming Blackwell platform. - The company is seeing significant momentum in generative AI, with frontier model makers, cloud service providers, and enterprises rapidly adopting NVIDIA's infrastructure to power a wide range of applications. - The company's revenue growth is outpacing the industry average, indicating a strong competitive position and a favorable market environment.
    • Profitability
      • NVIDIA's profitability is strong, with expanding margins and efficient cost management.
      • The company's gross profit margin and operating margin are significantly higher than the industry average, indicating its ability to generate a high profit margin on its sales.
      • NVIDIA's return on assets and return on equity are also significantly higher than the industry average, indicating its efficient use of capital and its ability to generate a high return on its investments.
    • Liquidity
      • NVIDIA has a strong liquidity position, with ample cash and short-term investments to meet short-term obligations.
      • The company's current ratio and quick ratio are both above the industry average, indicating a strong ability to meet short-term obligations.
    • Solvency
      • NVIDIA has a strong solvency position, with a conservative debt strategy and a focus on equity financing.
      • The company's debt-to-equity ratio and debt-to-EBITDA ratio are both significantly lower than the industry average, indicating a strong ability to service its debt obligations.
    • Operational Efficiency
      • NVIDIA's operational efficiency is high, as evidenced by its strong return on assets and return on equity.
      • The company's EV/EBITDA ratio is significantly lower than the industry average, indicating a more efficient use of capital and a lower valuation multiple.
    • Cash Flow Analysis
      • NVIDIA's cash flow generation is strong, with robust free cash flow and a high cash flow to net income ratio.
      • The company's operating cash flow is increasing significantly, driven by strong profitability and revenue growth.
      • NVIDIA's capital expenditures are aligned with revenue and profit growth, indicating efficient investment in growth opportunities.
    • Risk Factors
      • NVIDIA faces several risk factors, including:
        • Reliance on third-party suppliers and manufacturers, with limited control over production and quality.
        • Exposure to global trade restrictions, tariffs, and geopolitical tensions that could disrupt operations and access to markets.
        • Increasing regulatory scrutiny and compliance requirements around AI, data privacy, and other areas.
        • Potential for product defects, quality issues, and warranty claims that could harm reputation and financial results.
        • Concentration of revenue from a limited number of large customers and partners.
    • Future Outlook
      • NVIDIA's future outlook is positive, driven by strong demand for its data center and AI solutions, expanding margins, and a robust cash flow position.
      • The company's investments in new products and technologies, such as the Blackwell GPU, are expected to drive continued growth.
      • NVIDIA's strong financial position provides significant financial flexibility for future investments, acquisitions, or potential economic downturns.
Most recent earnings report
Financial statements 

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All public filings
Comparative Analysis
Benchmarks (as of 2024-09-03)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison: NVDA has consistently outperformed XLK over all the periods analyzed, demonstrating a strong growth trajectory. This outperformance is particularly notable in the longer-term periods, such as the 2-year and 3-year periods, where NVDA has significantly outpaced XLK. However, NVDA has experienced some periods of underperformance, such as in the past three months, suggesting that its performance is not entirely consistent.
  • Risk and Return Analysis: NVDA has provided higher annualized returns than XLK over all the periods analyzed, indicating a strong growth potential. However, NVDA has also been significantly more volatile than XLK, as evidenced by its higher annualized volatility and larger drawdowns. This suggests that NVDA carries a higher risk profile than XLK.
  • Risk-Adjusted Performance: NVDA's Sharpe Ratio has generally been higher than XLK's, indicating that NVDA has offered a better risk-adjusted return over the period. However, there have been periods where XLK's Sharpe Ratio has been higher, suggesting that the broader technology sector has outperformed NVDA on a risk-adjusted basis during those periods. NVDA's higher beta value indicates a higher risk profile compared to XLK. This means that NVDA's stock price is more likely to fluctuate significantly in response to market movements.
  • Overall Assessment: NVDA has demonstrated strong growth potential, consistently outperforming the broader technology sector (XLK) in terms of both absolute and risk-adjusted returns. However, NVDA's higher volatility and larger drawdowns indicate a higher risk profile. Investors seeking high growth potential should be aware of the associated risks. The recent trends suggest that NVDA's volatility is decreasing, while its risk-adjusted returns are improving. This could indicate a more stable future for NVDA, but investors should continue to monitor its performance and risk profile closely.
Peers Price History(as of 2024-09-03)
Advanced Micro Devices, Inc. (AMD)Taiwan Semiconductor Manufacturing Co., Ltd. (TSM)
  • Performance Comparison: NVDA has consistently outperformed both AMD and TSM over all the listed periods. This is particularly evident in the longer-term periods, with NVDA delivering significantly higher returns than its peers. This suggests that NVDA has been a strong performer in the semiconductor industry, benefiting from its dominant position in the graphics processing unit (GPU) market and its expansion into other areas such as artificial intelligence (AI) and data centers.
  • Risk and Return Analysis: NVDA has provided higher returns than both AMD and TSM, but it has also been more volatile. This is reflected in its higher annualized volatility and larger maximum drawdown. While NVDA's higher returns are attractive, investors should be aware of its higher risk profile.
  • Risk-Adjusted Performance: NVDA's Sharpe ratio has consistently been higher than both AMD and TSM, indicating that it has offered better risk-adjusted returns. This suggests that NVDA has been able to generate higher returns for a given level of risk. However, it is important to note that the Sharpe ratio is a backward-looking measure and does not guarantee future performance.
  • Overall Assessment: NVDA has been a strong performer in the semiconductor industry, delivering consistently higher returns than its peers. However, it has also been more volatile, with a higher risk profile. Investors should carefully consider their risk tolerance and investment goals before investing in NVDA. While NVDA's higher returns are attractive, its higher volatility and drawdown potential should be considered.
Peers Fundamentals(as of 2024-07-31)
Advanced Micro Devices, Inc. (AMD)Taiwan Semiconductor Manufacturing Co., Ltd. (TSM)

  1. Market Position and Size:

    • NVDA is a dominant player in the semiconductor industry, with a market capitalization significantly larger than its peers, AMD and TSM.
    • NVDA's market cap is strongly correlated with its revenue, EBITDA, and net income, indicating its superior financial performance.
    • NVDA's dominant market position is likely driven by its strong brand recognition, technological leadership, and diverse product portfolio.

  2. Profitability and Efficiency:

    • NVDA exhibits significantly higher profitability than both its peers and the industry average, as evidenced by its Gross Profit Margin, EBITDA Margin, and Net Profit Margin.
    • NVDA's profitability is impressive considering its size and revenue, indicating efficient operations and strong pricing power.
    • NVDA's high returns on assets, equity, and capital demonstrate its efficient use of resources and strong investment strategy.

  3. Financial Health and Stability:

    • NVDA possesses strong liquidity and solvency, with ample resources to meet its short-term obligations and a conservative debt policy.
    • NVDA's high liquidity and low debt levels provide a solid foundation for future growth and investment.

  4. Valuation and Market Perception:

    • NVDA trades at a premium valuation compared to its peers and the industry average, reflecting the market's high expectations for its future growth and profitability.

  5. Cash Flow and Capital Management:

    • NVDA generates significant free cash flow, even after accounting for its large capital expenditures, highlighting its strong operating efficiency and financial health.
    • NVDA's cash flow generation strength provides a solid foundation for future growth and investment.

  6. Growth and Future Prospects:

    • NVDA consistently shows higher growth compared to the peer group average across most metrics, indicating its ability to capture market share and expand its business.
    • NVDA's growth is balanced across different metrics, with strong growth in both revenue and profitability.
    • NVDA's growth profile is positive, with no significant red flags.

  7. Potential for Investment:

    • NVDA presents an attractive investment opportunity, considering its strong financial performance, growth potential, and dominant market position.
    • However, investors should be aware of the high valuation premium and potential risks associated with NVDA's aggressive growth strategy.

  8. Key Risks and Considerations:

    • Valuation Premium: NVDA's high valuation multiples may not be sustainable in the long term, especially if its growth rate slows down.
    • Competition: The semiconductor industry is highly competitive, and new entrants or technological advancements could challenge NVDA's market share.
    • Economic Slowdown: A global economic slowdown could negatively impact demand for NVDA's products, affecting its revenue and profitability.

  9. Overall Assessment:

    • NVDA is a financially strong and dominant player in the semiconductor industry, with a strong track record of growth and profitability.
    • Its high valuation and aggressive growth strategy present both opportunities and risks for investors.
    • NVDA's future success will depend on its ability to maintain its technological leadership, navigate competitive pressures, and adapt to evolving market conditions.