Thematic evaluation
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NVIDIA Corp. (NVDA)

October 17, 2024

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

Our reasoning

NVIDIA's current valuation appears to be fair, balancing its strong financial performance, market leadership in AI and data center solutions, and significant growth prospects against potential risks such as regulatory challenges and supply chain dependencies. The company's high P/E ratio is offset by its lower EV/EBITDA and exceptional growth rates, suggesting that the premium valuation is justified by its market position and future potential.

Key takeaways
  • 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 the company's strong growth prospects and market leadership.
  • The company's stock price has consistently outperformed the Technology Select Sector SPDR Fund (XLK) over all periods analyzed, indicating a stronger growth trajectory.
  • However, NVDA's high volatility and larger drawdowns suggest that it is a more volatile and potentially riskier investment than XLK.
  • Overall, NVDA is a high-growth, high-risk investment with a strong financial position and a promising future outlook.
Fairly valued
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Evaluation summary

  1. Company Overview:

    • NVIDIA is a leading technology company specializing in accelerated computing, designing and manufacturing graphics processing units (GPUs), chipsets, and related multimedia software.
    • The company operates in two main segments: Compute & Networking (data center, networking, automotive) and Graphics (gaming, professional visualization).
    • NVIDIA's platforms incorporate processors, interconnects, software, algorithms, systems, and services to deliver unique value across its target markets, including cloud service providers, consumer internet companies, enterprises, startups, OEMs, ODMs, system integrators, and distributors.
    • Key competitors include AMD, Intel, Huawei, Alibaba, Amazon, Microsoft, and others 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 grew 122% year-over-year in the most recent quarter, reaching $30 billion.
    • Data center revenue accounted for $26.3 billion, representing a record high and a 154% year-over-year increase.
    • Gaming revenue also saw growth, reaching $2.88 billion, up 16% year-over-year.
    • Gross margins have been impacted by inventory provisions and product mix, resulting in a sequential decline to 75.1% in the most recent quarter.
    • Operating expenses have increased significantly, primarily due to higher compensation-related costs.
    • NVIDIA's profitability remains strong, with a high return on assets (ROA) of 78.66% and a return on equity (ROE) of 123.77% in the most recent quarter.
    • Compared to its peers, NVDA has consistently outperformed AMD and TSM in terms of revenue growth and profitability.

  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 low debt-to-equity ratio and debt-to-EBITDA ratio.
    • 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.
    • Capital expenditures are aligned with revenue and profit growth, indicating efficient investment in growth opportunities.
    • NVIDIA's operational efficiency is high, as evidenced by its strong return on assets and return on equity.
    • Compared to its peers, NVDA has consistently offered a better risk-adjusted return than AMD and TSM, as indicated by its higher Sharpe Ratio.

  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, such as Blackwell and Hopper, to address the 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, cloud computing, and the metaverse.
    • The company is making significant investments in R&D to develop new products and technologies, including its NVIDIA AI Enterprise platform, which is expected to reach a $2 billion annual run rate by the end of the year.
    • NVIDIA's capital allocation strategies are aligned with its growth objectives, with a focus on investing in R&D, expanding its product portfolio, and acquiring strategic assets.

  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 is also facing challenges in managing supply chain, product transitions, and new product introductions, which are impacting financial results.
    • NVIDIA's competitive landscape is intense, with several established players and emerging competitors vying for market share.

  6. Valuation Analysis:

    • NVIDIA's valuation metrics are currently high, reflecting the company's strong growth prospects and market leadership.
    • The company's P/E ratio is significantly higher than the industry average, indicating a premium valuation.
    • However, NVDA's EV/EBITDA ratio is lower than the industry average, suggesting a more efficient use of capital.
    • Compared to its peers, NVDA's valuation is higher, reflecting its strong growth and market dominance.
    • Potential catalysts for NVDA's valuation include continued strong demand for its data center and AI solutions, the successful launch of the Blackwell platform, and the expansion of its software and services business.

  7. Price Performance:

    • NVDA's stock price has consistently outperformed the Technology Select Sector SPDR Fund (XLK) over all periods analyzed, indicating a stronger growth trajectory.
    • NVDA has delivered significantly higher annualized returns than XLK, indicating a higher potential for growth.
    • However, this comes with a higher level of risk, as evidenced by NVDA's significantly higher annualized volatility and larger drawdowns.
    • NVDA's high beta suggests that it is a riskier investment than XLK.
    • Compared to its peers, NVDA has consistently outperformed AMD and TSM over all periods, with particularly strong performance in the 2-year and 3-year periods.
    • NVDA has also been more volatile than AMD and TSM, as evidenced by its higher annualized volatility.

  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.
    • Analyst estimates for NVDA's future performance are generally positive, with consensus expectations for continued strong revenue growth and profitability.

  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 the company's strong growth prospects and market leadership.
    • The company's stock price has consistently outperformed the Technology Select Sector SPDR Fund (XLK) over all periods analyzed, indicating a stronger growth trajectory.
    • However, NVDA's high volatility and larger drawdowns suggest that it is a more volatile and potentially riskier investment than XLK.
    • Compared to its peers, NVDA has consistently outperformed AMD and TSM over all periods, with particularly strong performance in the 2-year and 3-year periods.
    • NVDA has also been more volatile than AMD and TSM, as evidenced by its higher annualized volatility.
    • Overall, NVDA is a high-growth, high-risk investment with a strong financial position and a promising future outlook.
    • Investors should carefully consider their risk tolerance and investment goals before making any investment decisions.
Peer fundamentals 
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 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-16)
Technology Select Sector SPDR Fund (XLK)
  • Performance Comparison: NVDA has consistently outperformed XLK over all the periods analyzed, indicating a stronger growth trajectory. This outperformance is particularly notable in the longer-term periods, suggesting that NVDA's business model and growth strategy have been successful in driving shareholder value.
  • Risk and Return Analysis: NVDA has delivered significantly higher annualized returns than XLK, indicating a higher potential for growth. However, this comes with a higher level of risk, as evidenced by NVDA's significantly higher annualized volatility and larger drawdowns. NVDA's volatility has been consistently higher than XLK's, suggesting that NVDA's price movements are more unpredictable and potentially riskier. NVDA's maximum drawdown was 66.34% in Q3 2022, while XLK's maximum drawdown was 33.56% in Q3 2022, indicating that NVDA is more susceptible to significant price declines 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. This suggests that NVDA's higher returns have been achieved with a reasonable level of risk. NVDA's high beta suggests that it is a riskier investment than XLK. Investors should be aware of the potential for larger price swings in NVDA's stock.
  • Overall Assessment: NVDA has demonstrated strong growth and outperformance compared to XLK, but this comes with a higher level of risk. NVDA's higher volatility and larger drawdowns suggest that it is a more volatile and potentially riskier investment than XLK. However, NVDA's consistently higher Sharpe Ratio indicates that it has offered a better risk-adjusted return over the period. Investors should carefully consider their risk tolerance and investment goals before making any investment decisions.
Peers Price History(as of 2024-10-16)
Advanced Micro Devices, Inc. (AMD)Taiwan Semiconductor Manufacturing Co., Ltd. (TSM)
  • Performance Comparison:
    • NVDA has consistently outperformed AMD and TSM over all periods, with particularly strong performance in the 2-year and 3-year periods. This suggests that NVDA has been a strong growth stock, benefiting from the increasing demand for semiconductors and the growth of the gaming and data center markets.
  • Risk and Return Analysis:
    • NVDA has provided higher annualized returns than AMD and TSM over all periods. This is consistent with its strong performance and growth potential.
    • NVDA has also been more volatile than AMD and TSM, as evidenced by its higher annualized volatility. This suggests that NVDA is a riskier investment than AMD and TSM.
    • NVDA has experienced the largest maximum drawdown of 66.34% in October 2022, compared to 65.45% for AMD and 56.62% for TSM. This indicates that NVDA is more susceptible to market downturns than AMD and TSM.
  • Risk-Adjusted Performance:
    • NVDA has consistently offered a better risk-adjusted return than AMD and TSM, as indicated by its higher Sharpe Ratio. This suggests that NVDA has been able to generate higher returns for the level of risk taken.
    • NVDA's beta value has been consistently above 1, indicating that it is more sensitive to market movements than AMD and TSM. This suggests that NVDA is a riskier investment than AMD and TSM.
  • Overall Assessment:
    • NVDA has been a strong growth stock with high returns, but it has also been more volatile and riskier than AMD and TSM. NVDA's high beta suggests that it is more sensitive to market movements, which could lead to larger drawdowns during market downturns. However, NVDA's higher Sharpe Ratio indicates that it has been able to generate higher returns for the level of risk taken.
    • Investors should consider their risk tolerance and investment goals when evaluating NVDA. If they are seeking high growth potential, NVDA may be a suitable investment. However, if they are risk-averse, they may prefer AMD or TSM.
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.