Nvidia

Nvidia: Ridiculous times indeed (NASDAQ: NVDA)

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Investment thesis

NVIDIA (NASDAQ: NVDA) is expected to report results for FQ1’23 on May 25, 2022. However, investors are unlikely to rush to play the earnings game, given the macroeconomic pessimism. Also, since NVDA had been closely tied to the cryptocurrency miningwe can expect a drop in sales in the future, seeing how the whole market has lost more than $1,000,000 combined value in the last days.

However, we encourage NVDA investors to shrug off the noise as the stock remains a solid investment for the next decade. Still, please don’t buy the dip as we expect the stock to come back in the coming weeks as the market grapples with the macro-pessimism and crypto crash.

Why did NVDA fall out of favor?

NVDA Revenue, Net Profit and Gross Margin

NVDA Revenue, Net Profit and Gross Margin

S&P Capital IQ

Prior to the pandemic, NVDA had grown its revenue and net profit at a steady CAGR of 16.44% and 18.9%. It has obviously grown exponentially over the past two years given the massive demand for personal devices due to increased remote work/study/entertainment options during the COVID-19 pandemic. . As a result, NVDA grew its revenue at a CAGR of 57.05%, while its net profit grew even faster at a CAGR of 86.94%. The company has also steadily improved its gross margins, from 58.8% in fiscal 2017 to 64.9% in fiscal 2022.

NVDA 5Y stock price

NVDA 5Y stock price

Looking for Alpha

As a result, it’s clear that NVDA’s investors had benefited from its meteoric growth, given that the stock had risen 580% in the past two years, before the drastic moderation that came at the end of 2021.

NVDA 5Y EV/Revenue and P/E Valuations

NVDA 5Y EV/Revenue and P/E Valuations

S&P Capital IQ

However, we believe the market correction is expected, given that NVDA was trading at ridiculous valuations at its peak, with 3Y EV/Revenue of 28x and P/E of 72.98x. That’s way higher than Intel’s (INTC) valuation of 3Y EV/Revenue of 4.19x and P/E of 15.47x over the past three years, and even AMD’s (AMD) at 10 .59x and 65.39x, respectively. Looking back, it’s obvious that NVDA was very (perhaps over)priced, given its exposure to several market segments, such as AI technology, autonomous electric vehicles, cloud computing servers , cryptocurrency and metaverse, among others.

Nevertheless, we can also see a short-term impact, given that Meta (FB) investment slowdown in Reality Labs (metaverse), reduced GPU demand crypto mining, and automobile production outputs impacted China’s Zero Covid policy. As a result, given the uncertainties, we expect the pain to continue for a bit longer as the market consolidates over the next few quarters.

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

NVDA still invests in growth, even if we see short-term impacts

Cash/equivalent NVDA, FCF and FCF margins

NVDA Cash_ Equivalents, FCF and FCF Margins

S&P Capital IQ

Nonetheless, NVDA has been a strong generator of free cash flow (FCF), while posting its record FCF of $8.13 billion and FCF margins of 30.2% in fiscal 2022. The company has also ended the year with a decent cash and cash equivalents of $1.99 billion, which will prove helpful in expanding its R&D spending to an average of 21.5% of annual revenue over the last five years.

NVDA R&D Expenditure and % of Revenue

NVDA R&D Expenditure and % of Revenue

S&P Capital IQ

Assuming NVDA continues its reinvestments, we can expect the company to spend up to $7.4 billion in R&D expenditures in fiscal year 2023. As an investor myself, I believe the High-growth technology companies, such as NVDA, should strengthen their future capabilities and product innovations to maintain their edge in the highly competitive semiconductor industry. However, the risks are also inherent in the fact that many companies may slow down their Capex investments over the next few quarters given the impending recession and rising interest rates. Therefore, NVDA could also reduce its R&D expenditures in the short term, given the potential deceleration in revenue growth.

NVDA Forecast Revenue and Net Income

NVDA Forecast Revenue and Net Income

S&P Capital IQ

Over the next three years, NVDA is expected to record impressive growth in revenue and net profit at a CAGR of 18.99% and 27.19%, respectively. For fiscal year 2023, consensus estimates that the company will report revenue of $34.77 billion and net income of $14.39 billion, representing remarkable annual growth of 29.2% and 47.5 %, respectively.

Investors will closely watch NVDA’s performance in the first quarter of 2023, in which it guided revenues of $8.1 billion and gross margins of 65.2%. Assuming the company managed to break its own and consensus estimates of $8.09 billion, we can be sure of a near-term recovery. However, it’s also important to note that NVDA is expected to record a one-time write-off worth $1.36 billion for the quarter, due to the collapse of the ARM acquisition. In addition, given the quarter’s exposure to prolonged confinements in China, NVDA’s revenue may also be negatively impacted. As a result, we expect a mixed performance for the first quarter of 2023, which could lead to a further decline in the performance of its shares. We will see.

So, is NVDA Stock a buy?sell or keep?

NVDA is currently trading at a Revenue EV/NTM of 11.93x and a P/E NTM of 30x, below its 5-year average of 13.34x and 39.91x, respectively. The stock is also trading at $171.24 on May 19, 2022, down 50% from the 52-week high of $346.47. Given recent market pessimism, the stock is likely to break further below its 52-week low at $135.43 in the coming days, before rallying on a positive catalyst, namely its earnings call. FQ1’23 on May 25, 2022.

Even then, NVDA stock could potentially remain stagnant after earnings, like its AMD counterpart. The latter had announced bumper earnings for the first quarter of 2022, while also raising its guidance for fiscal 2022. In response, the stock rose 9% from $91.13 to $99.42 on May 3, 2022, before drifting sideways for the next two weeks to hit $96.67 on May 19, 2022. We can be sure that had such a bullish earnings call occurred during pandemic highs, AMD would have experienced more pronounced growth in valuation and share price, similar to the 25% growth after FQ3’21 earnings and the 15% growth after FQ2’21 earnings. Accordingly, interested tech investors should be aware that we are in the midst of maximum pain, greatly compounded by the cryptocurrency winterthe ongoing war in Ukraine and China’s Zero Covid policy.

Given the uncertainties and reasons listed above, we can also expect a more relaxed outlook for the second quarter of 2023 from NVDA management. While the stock may seem like an attractive buy given its current “undervaluation”, given its growth potential and promising pipeline, we urge caution for now. We expect a more attractive entry point going forward after more clarity from its FQ1’23 earnings call. Patient investors will be rewarded.

Therefore, we consider NVDA actions blocked for now.