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NVIDIA (NASDAQ:NVDA) Delivers Impressive Q3, Provides Optimistic Guidance For Next Quarter


Full Report / November 17, 2021
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Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported Q3 FY2022 results topping analyst expectations, with revenue up 50.2% year on year to $7.1 billion. Guidance for next quarter's revenue was surprisingly good, being $7.4 billion at the midpoint, 8.13% above what analysts were expecting. NVIDIA made a GAAP profit of $2.46 billion, improving on its profit of $1.33 billion, in the same quarter last year.

NVIDIA (NVDA) Q3 FY2022 Highlights:

  • Revenue: $7.1 billion vs analyst estimates of $6.81 billion (4.25% beat)
  • EPS (non-GAAP): $1.17 vs analyst estimates of $1.11 (5.8% beat)
  • Revenue guidance for Q4 2022 is $7.4 billion at the midpoint, above analyst estimates of $6.84 billion
  • Free cash flow of $1.27 billion, down 48.5% from previous quarter
  • Inventory Days Outstanding: 82, down from 84 previous quarter
  • Gross Margin (GAAP): 65.1%, up from 62.6% 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 very strong, averaging 31% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $4.72 billion to $7.1 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

This was a fantastic quarter for NVIDIA with 50.2% revenue growth, beating analyst estimates. This marks 8 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.

However, NVIDIA believes the growth is set to even accelerate, and is guiding for revenue to grow 56.5% YoY next quarter, and Wall St analysts are estimating growth 17.7% 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 82, 9 days below 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 65.1% in Q3, up 2.6 percentage points year on year.

NVIDIA Gross Margin (GAAP)

Gross margins have been relatively stable over the last year, averaging 64.2%. NVIDIA's gross margins remain one of the highest in the semiconductor industry, driven by strong pricing power from its differentiated chips.

Profitability

NVIDIA reported an operating margin of 47.6% in Q3, up 5.5 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 up over the last year, averaging 45.4%. NVIDIA's margins remain one of the highest in the semiconductor industry, driven by its highly efficient operating model's economies of scale.

Earnings, Cash & Competitive Moat

Wall St analysts are expecting earnings per share to decline 29.7% 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 $1.27 billion in Q3, up 58.3% year on year.

NVIDIA Free Cash Flow

NVIDIA has generated $7.07 billion in free cash flow over the last twelve months, translating to 29.7% of revenues. This is a great result; NVIDIA's free cash flow conversion was very high compared to most semiconductor companies, in the last year. This high cash conversion, if maintained, puts it in a great position to invest in new products, while also remaining resilient during industry down cycles.

NVIDIA’s average return on invested capital (ROIC) over the last 5 years of 100% implies it has a strong competitive position and is able to invest in profitable growth over the long term.

Key Takeaways from NVIDIA's Q3 Results

With a market capitalization of $753 billion, more than $19.2 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 impressed by the exceptional revenue growth NVIDIA delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this was a great quarter and shareholders will likely feel excited about the results. The company is up 2.56% on the results and currently trades at $300.04 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 a number of reasons why we think NVIDIA is a great business. While we would expect growth rates to moderate from here, its revenue growth has been strong, over the last two 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 is 64.5x. Looking at the semiconductors landscape today, NVIDIA's qualities stand out, and we like the stock at this price.

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