Nvidia (NVDA)

Leading designer of graphics chips Nvidia (NASDAQ:NVDA) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 69.2% year on year to $44.06 billion. On the other hand, next quarter’s revenue guidance of $45 billion was less impressive, coming in 1.6% below analysts’ estimates. Its non-GAAP profit of $0.81 per share was 8% above analysts’ consensus estimates.

Company Overview

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.

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.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Nvidia’s sales grew at an incredible 66% compounded annual growth rate over the last five years. Its growth surpassed the average semiconductor company and shows its offerings resonate with customers, a great starting point for our analysis. 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).

Long-term growth is the most important, but short-term results matter for semiconductors because the rapid pace of technological innovation (Moore's Law) could make yesterday's hit product obsolete today. Nvidia’s annualized revenue growth of 140% over the last two years is above its five-year trend, suggesting its demand was strong and recently accelerated.

This quarter, Nvidia reported magnificent year-on-year revenue growth of 69.2%, and its $44.06 billion of revenue beat Wall Street’s estimates by 1.8%. Despite the beat, this was its third consecutive quarter of decelerating growth, indicating that the current upcycle is potentially losing some steam. Company management is currently guiding for a 49.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 43% over the next 12 months, a deceleration versus the last two years. Still, this projection is eye-popping given its scale and suggests the market sees success for its products and services.

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.

This quarter, Nvidia’s DIO came in at 59, which is 47 days below its five-year average. At the moment, these numbers show no indication of an excessive inventory buildup.

Gross profit margin is a key metric to track because it shows how much money a semiconductor company gets to keep after paying for its raw materials, manufacturing, and other input costs.

Nvidia’s gross margin is one of the best in the semiconductor sector, and its differentiated products give it strong pricing power. As you can see below, it averaged an elite 71.9% gross margin over the last two years. Said differently, roughly $71.92 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Nvidia produced a 60.5% gross profit margin in Q1, down 17.8 percentage points year on year. Nvidia’s full-year margin has also been trending down over the past 12 months, decreasing by 5.2 percentage points. If this move continues, it could suggest a more competitive environment with pressure to lower prices and higher input costs (such as raw materials and manufacturing expenses).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Nvidia has been a well-oiled machine over the last two years. It demonstrated elite profitability for a semiconductor business, boasting an average operating margin of 58.7%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Nvidia’s operating margin rose by 29.4 percentage points over the last five years, as its sales growth gave it immense operating leverage.

This quarter, Nvidia generated an operating profit margin of 49.1%, down 15.8 percentage points year on year. Since Nvidia’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, R&D, and administrative overhead expenses.

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Nvidia’s EPS grew at an astounding 80.2% compounded annual growth rate over the last five years, higher than its 66% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

Diving into Nvidia’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, Nvidia’s operating margin declined this quarter but expanded by 29.4 percentage points over the last five years. Its share count also shrank by 1.1%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

In Q1, Nvidia reported EPS at $0.81, up from $0.61 in the same quarter last year. This print beat analysts’ estimates by 8%. Over the next 12 months, Wall Street expects Nvidia’s full-year EPS of $3.19 to grow 47.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Nvidia has shown terrific cash profitability, and if sustainable, puts it in an advantageous position to invest in new products, return capital to investors, and consolidate the market during industry downturns. The company’s free cash flow margin was among the best in the semiconductor sector, averaging an eye-popping 48.8% over the last two years.

Taking a step back, we can see that Nvidia’s margin expanded by 19.8 percentage points over the last five years. This is encouraging because it gives the company more optionality.

Nvidia’s free cash flow clocked in at $26.14 billion in Q1, equivalent to a 59.3% margin. This result was good as its margin was 1.8 percentage points higher than in the same quarter last year, building on its favorable historical trend.

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

Nvidia’s five-year average ROIC was 37.1%, placing it among the best semiconductor companies. This illustrates its management team’s ability to invest in highly profitable ventures and produce tangible results for shareholders.

Big corporations like Nvidia are attractive to many investors in times of instability thanks to their fortress balance sheets that buffer pockets of soft demand.

Nvidia has an eye-popping $53.69 billion of cash on its balance sheet (that's no typo) compared to $8.46 billion of debt. This $45.23 billion net cash position is 1.3% of its market cap and shockingly larger than the value of most public companies, giving it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by Nvidia’s strong improvement in inventory levels. We were also excited its revenue, operating income, and EPS outperformed Wall Street’s estimates. It wasn't a perfect quarter, though. The company's Datacenter revenue missed by a slight amount, and its revenue guidance for next quarter missed. Overall, we think this was a decent quarter with some key metrics above expectations. The stock traded up 2.8% to $138.56 immediately after reporting.

Updated: June 16, 2025 at 10:17 PM EDT

When considering an investment in Nvidia, investors should account for its valuation and business qualities as well as what’s happened in the latest quarter.

There is a lot to like about Nvidia. First of all, the company’s revenue growth was exceptional over the last five years. On top of that, its admirable gross margins indicate robust pricing power, and its powerful free cash flow generation enables it to stay ahead of the competition through consistent reinvestment of profits.

Nvidia’s P/E ratio based on the next 12 months is 30.7x. Looking across the spectrum of semiconductor businesses, Nvidia’s fundamentals clearly illustrate it’s a special business. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $172.11 on the company (compared to the current share price of $143.66), implying they see 19.8% upside in buying Nvidia in the short term.