01 What does Nvidia do?

Nvidia Corporation (Ticker: NVDA)$NVIDIA(NVDA.US)$ is an American technology company established in 1993. They specialize in designing and selling display chips and graphics processing units (GPUs). Their products have wide-ranging applications in various industries, including computer gaming, data centers, high-performance computing, professional graphics design, autonomous driving, vehicle connectivity, artificial intelligence, and edge computing.

Nvidia went public on the NASDAQ stock market on January 22, 1999. As of May 26, 2023, the company's stock market value reached an impressive US$961.97 billion, with a remarkable increase of 96,947.17% since its initial public offering.

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02 Nvidia Fundamentals

● Industry Overview

Nvidia operates in the cyclical semiconductor chip industry. When chip demand is high, companies in this industry can make high profits. However, when chip demand decreases, profits can drop significantly, affecting the company's stock price.

Now, the semiconductor industry shows promise, particularly with the surge of generative AI driven by ChatGPT, fueling chip demand. McKinsey's report forecasts the global semiconductor market will reach trillions of dollars in 2030, highlighting its immense potential.

Nvidia primarily focuses on chip design and operates in the upstream segment of the industry. The company is a prominent competitor of AMD and Intel and is widely recognized as a leading player in the sector.

Source: McKinsey

● Business Model

Nvidia has a mature business model. The company focuses on designing and selling GPU chips to end customers, which has proven to be profitable.

In fiscal year 2023, the company achieved a revenue of US$26.97 billion and a net income of US$4.368 billion, resulting in a solid profit margin of 16.19%.

However, the profit margin has been volatile over the past five years, ranging from a high of 36.23% in FY2022 to a low of 16.19% in FY2023. This fluctuation can be primarily attributed to the cyclical nature of the semiconductor industry weighing on inventory management.

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● Competitive Advantage

Nvidia sets itself apart from intense competition by leveraging its technological advantage in the GPU field, artificial intelligence, and high-performance computing.

As a top GPU manufacturer, Nvidia's GPU architecture excels in graphics rendering and parallel computing, making it a preferred choice across various industries.

According to a report by JPR, Nvidia dominates the discrete GPU market with an impressive market share of 85% in Q4 2022, leaving AMD and Intel with only 9% and 6% each.

Source: JPR

● Key Financial Indicators

Nvidia, a growth-oriented company, attracts investors' attention through its revenue growth.

The company generates revenue from five markets: gaming, data center, automotive and professional visualization, and OEM businesses. Gaming and data centers contribute most of Nvidia's revenue, so they are crucial areas for investors to monitor. Two important financial indicators are the gross margin and research and development (R&D) expenses, reflecting the company's product competitiveness and innovation commitment.

1. Data center revenue: Nvidia's data center business is experiencing significant growth, driven by the increasing demand for AI and data processing. In the fiscal year 2023, the company's data center revenue reached US$15 billion, a remarkable 41% growth compared to the previous year. Whether this segment can sustain rapid growth in the future is one of the areas of critical concern for investors.

2. Gaming revenue: In the fiscal year 2023, Nvidia's gaming business revenue was $9.1 billion, a substantial decrease of 27% compared to the previous year. This drop was mainly caused by distributors holding excessive inventory. The recovery of the gaming business depends on how quickly the inventory is cleared, so investors should pay attention to destocking efforts in the industry.

3. Gross Margin: Nvidia's gross margin for the fiscal year 2023 was 56.93%, significantly lower than the previous year's 64.93%. This decline was due to inventory write-downs resulting from the cyclicality of the semiconductor industry.

4. R&D Investment: Nvidia consistently invests a substantial amount in R&D to drive technological innovation and product development. In fiscal year 2023, the company spent US$7.339 billion on R&D, representing a 39% year-over-year increase.

03 Recent earnings

On May 24, 2023, after the market closed, Nvidia released its financial results for the first quarter of fiscal year 2024. The next day, the stock price soared by 24.37%. As of May 26, the market value of Nvidia reached US$961.966 billion.

Here are the highlights of FY2024Q1 performance:

● Revenue: US$7.192 billion (YoY -13%), surpassing the expected US$6.52 billion.

● Non-GAAP EPS: US$1.09 (YoY -20%), exceeding the expected US$0.92.

At first glance, you may wonder why Nvidia's stock price surged despite its declining revenue and EPS compared to the previous year. The reasons can be boiled down to two primary  factors:

1. The revenue and EPS decline reported by Nvidia in its latest financial report was not as significant as analysts had predicted, propping up positive sentiment.

2. Additionally, the company's unexpectedly positive guidance for the upcoming FY24Q2 played a major role in the significant increase in its stock price. The guidance provided an optimistic outlook, projecting a US$11 billion in revenue, a YoY growth of 64%, surpassing the market's expectation of US$7.17 billion. This strong guidance is attributed to the soaring demand for AI data servers.

When analyzing financial reports, it is essential to consider not only the current business data but also the company's guidance and analysts' expectations for future performance.

04 Risks and Changes

High expectations: Nvidia's future performance is highly anticipated by the market. Failing to meet these expectations in upcoming financial reports may result in significant fluctuations in the company's stock price.

High valuation: Nvidia's stock price has reached record highs, and its valuation metrics, such as the price-to-earnings ratio (PE) and price-to-sales ratio (PS), are currently at their highest levels in the past two years.

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Additional disclosures: This content is also not a research report and is not intended to serve as the basis for any investment decision. The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Furthermore, there is no guarantee that any statements, opinions or forecasts provided herein will prove to be correct.