Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported Q1 FY2024 results beating Wall St's expectations, with revenue down 13.2% year on year to $7.19 billion. On top of that, guidance for next quarter's revenue was surprisingly good, being $11 billion at the midpoint, 54.6% above what analysts were expecting. Nvidia made a GAAP profit of $2.04 billion, improving on its profit of $1.62 billion, in the same quarter last year.
Nvidia (NVDA) Q1 FY2024 Highlights:
- Revenue: $7.19 billion vs analyst estimates of $6.52 billion (10.3% beat)
- EPS (non-GAAP): $1.09 vs analyst estimates of $0.92 (18.8% beat)
- Revenue guidance for Q2 2024 is $11 billion at the midpoint, above analyst estimates of $7.11 billion
- Free cash flow of $2.64 billion, up 52.2% from previous quarter
- Inventory Days Outstanding: 165, down from 212 previous quarter
- Gross Margin (GAAP): 64.6%, down from 65.5% 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.
Nvidia's revenue growth over the last three years has been very strong, averaging 35.2% annually. But as you can see below, last year quarterly revenue declined from $8.29 billion to $7.19 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).
Despite Nvidia revenues beating analyst estimates, this was still a slow quarter with a 13.2% revenue decline.
Nvidia's growth looks on the cusp of a rebound, as it is guiding to growth of 64.1% YoY next quarter, and analysts are estimating 24.9% growth over the next twelve months.
Product Demand & Outstanding Inventory
Days Inventory Outstanding (DIO) are an important metric for chipmakers, as it reflects the capital intensity of the business 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 inventory days came in at 165, 57 days above the five year average, suggesting that despite the recent decrease the inventory levels are still higher than what we used to see in the past.
Nvidia's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 64.6% in Q1, down 0.9 percentage points year on year.
Despite declining over the past year, Nvidia still retains reasonably high gross margins, averaging 56.3%, pointing to a still solid competitive offering, good cost controls, and a lack of significant pricing pressure.
Nvidia reported an operating margin of 42.4% in Q1, down 5.3 percentage points year on year. Operating margins are one of the best measures of profitability, telling us how much the company gets to keep after paying the costs of manufacturing the product, selling and marketing it and most importantly, keeping products relevant through research and development spending.
Operating margins have been trending down over the last year, averaging 31.2%. However, Nvidia's margins are still above average for semiconductor companies, driven by an efficient cost structure.
Earnings, Cash & Competitive Moat
Analysts covering the company are expecting earnings per share to grow 75.2% over the next twelve months, although estimates are likely to change post earnings.
Earnings are important, but we believe cash is king as you cannot pay bills with accounting profits. Nvidia's free cash flow came in at $2.64 billion in Q1, up 96.1% year on year.
Nvidia has generated $5.05 billion in free cash flow over the last twelve months. This is a solid result, which translates to 19.5% of revenue. That's above average for semiconductor companies, and should put Nvidia in a relatively strong position to invest in future growth.
Nvidia’s average return on invested capital (ROIC) over the last 5 years of 67.4% implies it has a strong competitive position and is able to invest in profitable growth over the long term.
Key Takeaways from Nvidia's Q1 Results
With a market capitalization of $759 billion, more than $15.3 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
The biggest highlight of Nvidia's quarter was revenue guidance for Q2, which was >50% ahead of expectations. We had to triple check that one! This led to operating profit guidance meaningfully ahead as well. We were impressed by the strong improvements in Nvidia’s inventory levels. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was less good to see the deterioration in operating margin. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 14.3% on the results and currently trades at $349.01 per share.
Is Now The Time?
When considering Nvidia, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are numerous reasons why we think Nvidia is one of the best semiconductor companies out there. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last three years. On top of that, its high return on invested capital suggests it is well run and in a strong position for profit growth, and its solid free cash flow generation gives it re-investment options.
The market is certainly expecting long term growth from Nvidia given its price to earnings ratio based on the next twelve months is 60.9x is much higher than other semiconductor companies. But looking at the semiconductors landscape today, Nvidia's qualities as one of the best businesses really stand out and we still like it at this price, despite the higher multiple.
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