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Proprietary Data Insights Financial Pros’ Top Semiconductor Stock Searches in the Last Month
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Should You Own Nvidia (NVDA)? |
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The wait is finally over. Nvidia (NVDA) reported blockbuster earnings Wednesday evening, with revenue up 15% quarter over quarter and 122% against the same quarter last year. Yet, Wall Street demands perfection. So, a dip in margins due to a design delay on the company’s new Blackwell chip and slower growth (can that be a thing at +122% YoY?) sent the stock lower afterhours. It’s fair to say that expectations were high, as the stock was already up nearly 40% in the past few weeks. And YTD, shares are up almost 150%. Obviously, this caught everyone’s eye, making it the top stock search by financial pros and retail investors the day after the report. Bears point to slowing growth as an ominous sign for a stock that’s ballooned in value. Yet, bulls highlight the strong fundamentals. So, who’s right? Here’s what we think. Nvidia’s Business There is no way you’re reading this and don’t know who Nvidia is. Their chips power the biggest and baddest AI models for the world’s biggest companies, including Microsoft, Meta, Twitter (X)…pretty much everyone. To date, no one can match their performance. Demand for their chips is so high that these power-hungry processors are expected to drive up energy demand by 100% in 2024 alone. Nvidia segments its business into the following areas:
Nvidia’s latest quarterly report was the stuff of legends. Data center growth jumped 155% YoY. However, that’s a marked slowdown from the prior two quarters, which were 409% and 427% respectively. Bears act like this is confirmation of an overblown stock. In reality, it’s simply getting harder to grow against comparable sales from the prior year, which was pretty well known. The thing about Nvidia’s business is it’s more than just microprocessors. Its software platform is arguably the best and most advanced for AI model deployment, with Advanced Micro Devices (AMD) in second. That software and support is projected to expand to a $2 billion run rate by the end of this year. All this comes as the company focuses on the launch of its new (and higher-priced) Blackwell chip at the end of the year. Financials
Source: Stock Analysis Nvidia’s growth in the past few years has simply been phenomenal. What’s amazing is they achieved this without selling their high-end chips to China. Gross margins over 75% are incredible, with free cash flow margin near 50%. That means half of every dollar sold turns into straight cash. Speaking of cash, the company generates almost $50 billion from operations annually, a number that’s expected to double in the next few years. Yet, CAPEX is a paltry $1.9 billion. No wonder the board approved a $50 billion buyback, or 1.6% yield, and a token $0.01 per share dividend that pays about 0.03%. At the moment, Nvidia has $34.8 billion in cash and $9.8 billion in debt on the balance sheet. Valuation
Source: Seeking Alpha You could argue Nvidia is expensive at 73.4x trailing earnings and 76.2x cash flow. However, the forward numbers in those two categories at 47.9x on both show how quickly and the company is growing into their size. Plus, it’s actually reasonably priced when you compare it to AMD and won’t be much more expensive than Broadcom (AVGO) by next year. Growth
Source: Seeking Alpha The thing about Nvidia is no one can touch its growth. And yeah, growth may be slowing to 15% QoQ. But that still means sales double every year. So within two years, Nvidia would trade at a better price-to-cash flow ratio than most consumer staple companies with far less CAPEX. Profitability
Source: Seeking Alpha What makes Nvidia’s numbers so incredible is the company’s profitability. Gross margins are the highest of the group, with net income at over 50%. No other company achieves those kinds of numbers, let alone its peer group. Our Opinion 10/10 We don’t see any reason not to own Nvidia’s stock. Sure, it could let some air out and pull back. But with a new chip launch this year, increasing demand, and expansion opportunities internationally, this is the stock to own. |
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