Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported results ahead of analysts' expectations in Q2 FY2024, with revenue up 101% year on year to $13.5 billion. On top of that, next quarter's revenue guidance ($16 billion at the midpoint) was surprisingly good and 28.9% above what analysts were expecting. Nvidia made a GAAP profit of $6.19 billion, improving from its profit of $656 million in the same quarter last year.
Nvidia (NVDA) Q2 FY2024 Highlights:
- Revenue: $13.5 billion vs analyst estimates of $11.1 billion (21.9% beat)
- EPS (non-GAAP): $2.70 vs analyst estimates of $2.09 (29.4% beat)
- Revenue Guidance for Q3 2024 is $16 billion at the midpoint, above analyst estimates of $12.4 billion
- Free Cash Flow of $6.05 billion, up 129% from the previous quarter
- Inventory Days Outstanding: 97, down from 165 in the previous quarter
- Gross Margin (GAAP): 70.1%, up from 43.5% in the same quarter last year
Founded in 1993 by Jensen Huang and two former Sun Microsystems engineers, Nvidia (NASDAQ:NVDA) is a leading fabless designer of chips used in gaming, PCs, data centers, automotive, and a variety of end markets.
Founded with the goal of bringing high end 3D computer graphics processing units (GPUs) to the mainstream PC market, Nvidia ’s business has exploded over the past decade as GPUs’ have changed the computing paradigm by enabling leading edge technologies like artificial intelligence, machine learning, and autonomous driving.
GPUs differ from CPUs (most commonly associated with Intel) in that their multi-core structures are designed to operate in a parallel fashion, which makes them great at performing repeat operations at a fast pace, such as running repeated complex mathematical operations to render 3D graphics for video games. In recent years, technologists began applying GPUs “parallel processing” to new use cases like accelerating computing in data centers, powering artificial intelligence and machine learning, and modeling complex problems like taking in data from car cameras to guide autonomous safety features.
Nvidia’s great differentiation was the introduction of the CUDA programming language back in 2006. Nvidia targeted software developers, giving away CUDA for free to developers, who all used it to code graphics in video games. Importantly, Nvidia kept its CUDA-GPU integration closed, meaning that Cuda could only run on Nvidia’s GPUs, creating a massive barrier to entry for other GPU rivals. In the early to mid 2010s, as developers began using CUDA to program GPUs for the new parallel processing use cases in data centers, Nvidia’s business began expanding dramatically.
The exploding use cases for its GPUs and Nvidia’s proprietary programming language have generated one of the great growth stocks of the 2000s, with Nvidia market cap growing more than 20x. Nvidia now has its eyes on the ARM technology, aiming to pair ARM’s low power low cost CPUs with its GPUs to capture ever greater share in the datacenter from Intel’s x86 architecture CPUs.
Nvidia’s primary competitors are Advanced Micro Devices (NASDAQ:AMD) and Intel (NASDAQ:INTC).Processors and Graphics Chips
Chips need to keep getting smaller in order to advance on Moore’s law, and that is proving increasingly more complicated and expensive to achieve with time. That has caused most digital chip makers to become “fabless” designers, rather than manufacturers, instead relying on contracted foundries like TSMC to manufacture their designs. This has benefitted the digital chip makers’ free cash flow margins, as exiting the manufacturing business has removed large cash expenses from their business models.
Sales Growth
Nvidia's revenue growth over the last three years has been very strong, averaging 39.5% annually. But as you can see below, this quarter wasn't particularly strong, with revenue growing from $6.7 billion in the same quarter last year to $13.5 billion. Semiconductors are a cyclical industry, and long-term investors should be prepared for periods of high growth followed by periods of revenue contractions (which can sometimes offer opportune times to buy).
Nvidia had a fantastic quarter as its 101% year-on-year revenue growth beat analysts' estimates by 21.9%. Nvidia's growth inflected positively this quarter, showing that we may be in the early innings of a new upcycle.
Nvidia returned to positive revenue growth this quarter and its management team expects the trend to continue. The company is guiding to 170% year-on-year growth next quarter, and analysts seem to agree, forecasting 83.9% growth over the next 12 months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) is an important metric for chipmakers, as it reflects a business' capital intensity and the cyclical nature of semiconductor supply and demand. In a tight supply environment, inventories tend to be stable, allowing chipmakers to exert pricing power. Steadily increasing DIO can be a warning sign that demand is weak, and if inventories continue to rise, the company may have to downsize production.
This quarter, Nvidia's DIO came in at 97, which is 11 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.
Pricing Power
In the semiconductor industry, a company's gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor. Nvidia's gross profit margin, which shows how much money the company gets to keep after paying key materials, input, and manufacturing costs, came in at 70.1% in Q2, up 26.6 percentage points year on year.
Over the past year, Nvidia has seen its already robust gross margins rise, averaging 62.9%. These attractive unit economics are indicative of its potent and competitive product offering, pricing power, and efficient inventory management.
Profitability
Nvidia reported an operating margin of 57.6% in Q2, up 37.8 percentage points year on year. Operating margins are one of the best measures of profitability because they tell us how much money a company takes home after manufacturing its products, marketing and selling them, and, importantly, keeping them relevant through research and development.
Nvidia's operating margins have been trending up over the last year, averaging 40.7%. On top of that, the company's margins are some of the highest in the semiconductor industry, driven by its highly efficient operating model and economies of scale.
Earnings, Cash & Competitive Moat
Analysts covering Nvidia expect earnings per share to grow 167% over the next 12 months, although estimates will likely change after earnings.
Although earnings are important, we believe cash is king because you can't use accounting profits to pay the bills. Nvidia's free cash flow came in at $6.05 billion in Q2, up an awesome 634% year on year.
As you can see above, Nvidia produced $10.3 billion in free cash flow over the last 12 months, an eye-popping 26.9% of revenue. This is a great result; Nvidia's free cash flow conversion places it among the best semiconductor companies and, if sustainable, puts the company in an advantageous position to invest in new products while remaining resilient during industry downturns.
Nvidia's average return on invested capital (ROIC) of 55% over the last five years implies that it has a strong competitive position and was able to invest in profitable growth over time.
Key Takeaways from Nvidia's Q2 Results
With a market capitalization of $1.13 trillion, a $16 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Nvidia has the resources needed to pursue a high-growth business strategy.
This was a fantastic quarter for Nvidia with beats across nearly every key metric. We were particularly impressed by its revenue beat, driven by strong performance in the data center segment which houses the company's AI chips division. Furthermore, we were encouraged by Nvidia's revenue guidance for next quarter, which blew past analysts' expectations. Lastly, the company demonstrated its commitment to shareholders by announcing a $25 billion share buyback. This quarter was particularly impressive in the face of sky-high buy-side expectations. The stock is up 6.66% after reporting and currently trades at $502.61 per share.
Is Now The Time?
When considering an investment in Nvidia, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter. There are numerous reasons why we think Nvidia is one of the best semiconductor companies out there. For a start, its superb revenue growth implies that it's winning market share, and that growth rate is even expected to increase in the short term. On top of that, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its high ROIC suggests it is well run and in a strong position for profitable growth.
Nvidia's price-to-earnings ratio based on the next 12 months is 44.0x. Looking at the semiconductors landscape today, Nvidia's qualities really stand out, and we really like it at this price.
Wall Street analysts covering the company had a one year price target of $530.9 per share right before these results, implying that they saw upside in buying Nvidia even in the short term.
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