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Nvidia (NASDAQ:NVDA) Reports Bullish Q1, Guides For Strong Sales Next Quarter


Full Report / May 22, 2024

Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported results ahead of analysts' expectations in Q1 CY2024, with revenue up 262% year on year to $26.04 billion. On top of that, next quarter's revenue guidance ($28 billion at the midpoint) was surprisingly good and 4.3% above what analysts were expecting. It made a non-GAAP profit of $6.12 per share, improving from its profit of $1.09 per share in the same quarter last year.

Nvidia (NVDA) Q1 CY2024 Highlights:

  • Revenue: $26.04 billion vs analyst estimates of $24.59 billion (5.9% beat)
  • EPS (non-GAAP): $6.12 vs analyst estimates of $5.58 (9.7% beat)
  • Revenue Guidance for Q2 CY2024 is $28 billion at the midpoint, above analyst estimates of $26.84 billion
  • Gross Margin (GAAP): 78.4%, up from 64.6% in the same quarter last year
  • Inventory Days Outstanding: 95, up from 90 in the previous quarter
  • Free Cash Flow of $14.94 billion, up 32.8% from the previous quarter
  • Market Capitalization: $2.35 trillion

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. Read More The semiconductor industry is broadly divided into analog and digital semiconductors. Digital chips are what most people think of as the brains of almost every electronic device. Their primary purpose is to either store (memory chips) or process (CPUs/GPUs) data. Digital chips derive their processing power from the number of transistors that can be packed on an individual chip. In chip design, nanometers or “nm” refers to the length of a transistor gate – the smaller the gate the more processing power that can be packed into a given space. In 1965, Intel’s founder Gordon Moore famously predicted a doubling of transistors on a chip every two years. The concept, known as Moore’s Law, was based on his belief that the technology used to create semiconductors would improve continuously, allowing chips to become ever smaller and ever more powerful.

Sales Growth

Nvidia's revenue growth over the last three years has been incredible, averaging 83.7% annually. As you can see below, this quarter was especially strong, with revenue growing from $7.19 billion in the same quarter last year to $26.04 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 Total Revenue

Nvidia had a fantastic quarter as its 262% year-on-year revenue growth beat analysts' estimates by 5.9%. This marks 4 straight quarters of growth, implying that Nvidia is in the middle of its cycle, as a typical upcycle generally lasts 8-10 quarters.

Nvidia's management team believes its revenue growth will continue, guiding to 107% year-on-year growth next quarter. Analysts expect the company to grow its revenue by 56.6% 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.

Nvidia Inventory Days Outstanding

This quarter, Nvidia's DIO came in at 95, which is 9 days below its five-year average. These numbers show that despite the recent increase, there's 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 78.4% in Q1, up 13.7 percentage points year on year.

Nvidia Gross Margin (GAAP)

Gross margins have been trending up over the last year, averaging 75.3%. These are some of the best margins in the semiconductor sector, driven by strong pricing power from its differentiated, value-add products.

Profitability

Nvidia reported an operating margin of 69.3% in Q1, up 26.9 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 Adjusted Operating Margin

Nvidia's operating margins have been trending up over the last year, averaging 65.4%. 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 60% 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 $14.94 billion in Q1, up 461% year on year.

Nvidia Free Cash Flow

As you can see above, Nvidia produced $39.3 billion in free cash flow over the last 12 months, an eye-popping 49.3% 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.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money the business raised (debt and equity).

Nvidia's five-year average ROIC was 51.3%, placing it among the best semiconductor companies. Just as you’d like your investment dollars to generate returns, Nvidia's invested capital has produced excellent profits.

Nvidia Return On Invested Capital

The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, Nvidia's ROIC significantly decreased over the last few years. The company has historically shown the ability to generate good returns, but they have not been as strong recently.

Key Takeaways from Nvidia's Q1 Results

We were impressed by Nvidia's healthy gross margin improvement this quarter, indicating elevated pricing power. We were also excited its revenue and EPS outperformed Wall Street's estimates, driven by better-than-expected results in its data center and automotive segments; the result in its automotive segment (17% year-on-year revenue growth) was especially impressive given the industry is in a cyclical downturn and many other semiconductor companies have posted year-on-year declines for that end market. Lastly, we note its inventory levels increased, likely due to the company stocking up on products in anticipation of strong demand.

During the announcement of the results, Nvidia issued a 10-1 stock split that will commence on Friday, June 7, 2024. Looking ahead, Nvidia's revenue for the next quarter beat expectations again.

Overall, we think this was a great quarter that shareholders will appreciate. The stock is up 4.6% after reporting and currently trades at $992.56 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. While we'd expect growth rates to moderate from here, its superb revenue growth over the last three years implys it's winning market share. Additionally, its powerful free cash generation enables it to sustainably invest in growth initiatives while maintaining an ample cash cushion, and its impressive gross margins indicate robust pricing power.

Nvidia's price-to-earnings ratio based on the next 12 months is 35.4x. 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 $1,039 per share right before these results (compared to the current share price of $992.56), implying they saw upside in buying Nvidia in the short term.

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