Nvidia: Ridiculous Times Indeed (NASDAQ:NVDA)


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Investment thesis

Nvidia (NASDAQ: NVDA) is expected to report earnings for FQ1’23 on May 25, 2022. However, investors should not rush to gamble on the earnings game, given the macro pessimism. Also, considering how NVDA has been closely linked o cryptocurrency miningwe can expect a reduction in sales ahead, seeing as the whole market has lost $ 1T of combined value in recent days.

However, we encourage NVDA investors to ignore noise as stocks remain a solid investment for the next decade. However, do not buy the decline, as we expect stocks to retreat in the coming weeks, as the market struggles with macro pessimism and cryptocurrency crash.

Why did NVDA fall into disgrace?

NVDA revenue, net income and gross margin

NVDA revenue, net income and gross margin

S&P Capital IQ

Prior to the pandemic, NVDA had increased its net income and revenue by a constant CAGR of 16.44% and 18.9%. Obviously, it has grown exponentially over the past two years, given the massive demand for personal devices due to the increase in remote work, study, and entertainment options during the COVID-19 pandemic. As a result, NVDA increased its revenue by a whopping CAGR by 57.05%, while its net revenue increased even faster with a CAGR of 86.94%. The company also steadily improved its gross margins from 58.8% in 2017 to 64.9% in 2022.

The stock price of NVDA 5Y

The stock price of NVDA 5Y

Looking for Alpha

As a result, it is clear that NVDA investors have benefited from its stellar growth, as shares have risen 580% in the last two years, ahead of the drastic moderation that occurred in late 2021.

NVDA 5Y EV / Revenue Ratings and P / E

NVDA 5Y EV / Revenue Ratings and P / E

S&P Capital IQ

However, we believe that the correction of the market is expected, given that NVDA was trading with ridiculous valuations at its peak, with an EV / Revenue 3Y of 28x and a P / E of 72.98x. This is much higher than Intel’s (INTC) rating of 3Y EV / 4.19x Revenue and 15.47x P / E in the last three years, and even AMD (AMD) at 10.59x and 65.39x, respectively. In retrospect, it is clear that NVDA has been highly (perhaps over) valued, given its exposure to multiple market segments, such as artificial intelligence technology, autonomous electric vehicles, cloud computing servers, cryptocurrency, and metaverse, among others.

However, we can also see a short-term impact, given the slowdown in Meta (FB) investments in Reality Labs (metaverse), the reduction in GPU demand for cryptographic mining, and the impact on Covid Zero Policy car production. of China. As a result, given the uncertainties, we expect the pain to continue for a longer period of time as the market consolidates in the coming quarters.

In the meantime, we encourage you to read our previous article on NVDA, which will help you better understand your market opportunities in the AI ​​technology, automotive, and data center industries.

NVDA continues to invest in growth, although we see short-term impacts

Cash / NVDA, FCF and FCF Margin equivalents

NVDA Cash_ Equivalents, FCF and FCF Margins

S&P Capital IQ

However, NVDA was an excellent free cash flow (FCF) generator, while reporting its FCF record of $ 8.13 million and FCF margins of 30.2% in 2022. The company also ended the year with a decent $ 1.99 million in cash and cash equivalents, which will prove useful for its expanding R&D spending averaging 21.5% of its annual revenue over the past five years.

NVDA R & D expenses and% of revenue

NVDA R & D expenses and% of revenue

S&P Capital IQ

Assuming NVDA continues its reinvestments, we can expect the company to spend up to $ 7.4 million on R&D spending for FY2023. As an investor, I believe that high-growth technology companies, such as NVDA, should develop their future capabilities and product innovations to maintain their advantage in the highly competitive semiconductor industry. However, there are also inherent risks that many companies may curb their Capex investments in the coming quarters, given the impending recession and rising interest rates. As a result, NVDA may also reduce its R&D spending in the short term, given the potential slowdown in revenue growth.

NVDA’s projected net income and revenue

NVDA's projected net income and revenue

S&P Capital IQ

Over the next three years, NVDA is expected to report impressive revenue and net revenue growth at a CAGR of 18.99% and 27.19%, respectively. For FY2023, the consensus estimates that the company will report revenue of $ 34.77 million and net income of $ 14.39 million, a significant year-on-year growth of 29.2% and 47.5%. respectively.

Investors will be closely watching the performance of NVDA’s FQ1’23, which was geared toward $ 8.1 million in revenue and gross margin of 65.2%. Assuming the company has successfully broken its $ 8.09 million consensus and consensus estimates, we can be confident of a short-term recovery. However, it is also important to note that NVDA is expected to record a single amortization of $ 1.36 million during the quarter due to the collapse of the ARM acquisition. In addition, given the quarter’s exposure to prolonged blockades in China, NVDA’s revenue may also be adversely affected. As a result, we expect a mixed return of FQ1’23, which may lead to a further decline in the performance of its shares. We’ll see.

So, it’s a NVDA stock purchaseSell ​​or Retain?

NVDA is currently trading at 11.93x EV / NTM revenue and 30x N / P P / E, below its 5Y average of 13.34x and 39.91x, respectively. Shares also traded at $ 171.24 on May 19, 2022, up 50% from a 52-week high of $ 346.47. Given the recent pessimism of the market, it is likely that the stock may fall further below its 52-week low of $ 135.43 in the coming days, before recovering with a positive catalyst, ie its call for profit FQ1’23 on May 25, 2022.

Even then, NVDA shares could remain stagnant after the gains, similar to its partner, AMD. The latter reported stellar gains in FQ1’22, while increasing its focus for fiscal year 2022. In response, shares rose 9% from $ 91.13 to $ 99.42 on May 3, 2022, before from deviating laterally over the next two weeks to $ 96.67 on May 19, 2022. We can be sure that there was such an optimistic call for gains during the highs. of the pandemic, AMD would have experienced a sharper growth in the valuation and share price, similar to the growth of 25% after the gains of FQ3’21 and 15% after the gains of FQ2’21. As a result, interested technology investors should be aware that we are in the midst of maximum pain, significantly exacerbated by the winter of cryptocurrencies, the ongoing Ukrainian war, and China’s Zero Covid Policy.

Given the uncertainties and reasons listed above, we can also expect a softer orientation for NVDA’s FQ2’23 direction. While stocks may seem like an attractive buy in their current “undervaluation,” given their growth potential and promising pipeline, we would encourage caution for now. We expect a more attractive entry point forward, after more clarity of its FQ1’23 earnings call. Patient investments will be rewarded.

Therefore, we classify NVDA actions as a hold for the time being.



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