Leading designer of graphics chips Nvidia (NASDAQ:NVDA) reported results ahead of analyst expectations in the Q1 FY2023 quarter, with revenue up 46.4% year on year to $8.28 billion. However, guidance for the next quarter was less impressive, coming in at $8.1 billion at the midpoint, being 4.05% below analyst estimates. Nvidia made a GAAP profit of $1.61 billion, down on its profit of $1.91 billion, in the same quarter last year.
Nvidia (NVDA) Q1 FY2023 Highlights:
- Revenue: $8.28 billion (2.4% beat)
- EPS (non-GAAP): $1.36 vs analyst estimates of $1.29 (5.03% beat)
- Revenue guidance for Q2 2023 is $8.1 billion at the midpoint, below analyst estimates of $8.44 billion
- Inventory Days Outstanding: 101, up from 90 previous quarter
- Gross Margin (GAAP): 65.5%, up from 64.1% 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 impressive, averaging 43.8% annually. And as you can see below, last year has been especially strong, with quarterly revenue growing from $5.66 billion to $8.28 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).
This was a great quarter for Nvidia with 46.4% revenue growth, beating analyst estimates by 2.4%. This marks 10 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 continue, and is guiding for revenue to grow 24.4% YoY next quarter, and Wall St analysts are estimating growth 22.5% 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 101, 9 days above the five year average, suggesting that that inventory has grown to higher levels 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 65.5% in Q1, up 1.4 percentage points year on year.
Gross margins have been trending up over the last year, averaging 65.2%. Nvidia's gross margins remain one of the highest in the semiconductor sector, driven strong pricing power from its differentiated chips.
Nvidia reported an operating margin of 47.7% in Q1, up 2.6 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 up over the last year, averaging 47.6%. 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
Analysts covering the company are expecting earnings per share to grow 20.4% 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 $1.34 billion in Q1, down 13.4% year on year.
Nvidia has generated $5.1 billion in free cash flow over the last twelve months. This is a solid result, which translates to 17.2% 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 108% 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 $404 billion, more than $20.3 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.
We were impressed by the exceptional revenue growth Nvidia delivered this quarter. And we were also excited to see that earnings outperformed Wall St’s expectations. On the other hand, it was unfortunate to see that the revenue guidance for the next quarter missed analysts' expectations and inventory levels increased. Overall, this quarter's results could have been better. The company currently trades at $153.6 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 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 is 29.0x. Looking at the semiconductors landscape today, Nvidia's qualities really stand out, and we really like it at this price.
The Wall St analysts covering the company had a one year price target of $338.5 per share right before these results, implying that they saw upside in buying Nvidia even in the short term.
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