Nvidia (NASDAQ:NVDA) Reports Q2 In Line With Expectations But Quarterly Guidance Underwhelms

Full Report / September 22, 2022
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Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported results in line with analyst expectations in Q2 FY2023 quarter, with revenue up 3.02% year on year to $6.7 billion. However, guidance for the next quarter was less impressive, coming in at $5.9 billion at the midpoint, being 14.7% below analyst estimates. Nvidia made a GAAP profit of $656 million, down on its profit of $2.37 billion, in the same quarter last year.

Nvidia (NVDA) Q2 FY2023 Highlights:

  • Revenue: $6.7 billion vs analyst estimates of $6.7 billion (small beat)
  • EPS (non-GAAP): $0.51 vs analyst expectations of $0.52 (1.49% miss)
  • Revenue guidance for Q3 2023 is $5.9 billion at the midpoint, below analyst estimates of $6.91 billion
  • Free cash flow of $824 million, down 38.8% from previous quarter
  • Inventory Days Outstanding: 93, down from 101 previous quarter
  • Gross Margin (GAAP): 43.4%, down from 64.7% 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. 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 impressive, averaging 45.5% annually. But as you can see below, last year has not been especially strong, with quarterly revenue growing from $6.5 billion to $6.7 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

While Nvidia beat analysts' revenue estimates, this was a very slow quarter with just 3.02% revenue growth. This marks 11 straight quarters of revenue growth, which means the current upcycle has had a good run, as a typical upcycle tends to be 8-10 quarters.

Nvidia's revenue growth is expected to go negative next quarter, with the company guiding to decline of 16.9% YoY next quarter, but analyst consensus sees growth of 3.24% 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.

Nvidia Inventory Days Outstanding

This quarter, Nvidia’s inventory days came in at 93, one day above the five year average, showing no indication of an excessive inventory buildup at the moment.

Pricing Power

Nvidia's gross profit margin, how much the company gets to keep after paying the costs of manufacturing its products, came in at 43.4% in Q2, down 21.3 percentage points year on year.

Nvidia Gross Margin (GAAP)

Despite declining over the past year, Nvidia still retains strong gross margins, averaging 59.9%, pointing to a still potent competitive offering, pricing power, and solid inventory management.


Nvidia reported an operating margin of 19.7% in Q2, down 27.4 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.

Nvidia Adjusted Operating Margin

Operating margins have been trending down over the last year, averaging 40.8%. However, Nvidia's margins remain one of the highest in the industry, driven by its strong gross margins and economies of scale generated from its highly efficient operating model.

Earnings, Cash & Competitive Moat

Analysts covering the company are expecting earnings per share to grow 23.3% 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 $824 million in Q2, down 66.7% year on year.

Nvidia Free Cash Flow

Nvidia produced free cash flow of $3.44 billion in the last year, which is 11.5% of revenue. It's good to see positive free cash flow, and that puts the company in a position to reinvest, but we wouldn't mind seeing cashflow yield improve a little.

Nvidia’s average return on invested capital (ROIC) over the last 5 years of 95% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from Nvidia's Q2 Results

With a market capitalization of $430 billion, more than $17 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.

We were very impressed by the strong improvements in Nvidia’s inventory levels. That feature of these results really stood out as a positive. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and operating margin deteriorated. Overall, this quarter's results were not the best we've seen from Nvidia. The company currently trades at $130 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. We think Nvidia is a good business. We would expect growth rates to moderate from here, but its revenue growth has been exceptional, over the last three years. On top of that, its impressive operating margins are indicative of an highly efficient business model, and its high return on invested capital suggests it is well run and in a strong position for profit growth.

Nvidia's price to earnings ratio based on the next twelve months of 38.9x indicates that the market is certainly optimistic about its growth prospects. There is definitely a lot of things to like about Nvidia and looking at the semiconductors landscape right now, it seems that it doesn't trade at an unreasonable price point.

The Wall St analysts covering the company had a one year price target of $224.8 per share right before these results, implying that they saw upside in buying Nvidia even in the short term.

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