Nvidia (NVDA +2.57%) took the gold medal for the number of times "AI" (artificial intelligence) was mentioned on its latest earnings call. And for good reason. In a new era where operational efficiency is the focus of the business world, Nvidia has built itself into far-and-away the top platform for building AI systems to unlock new computing technology use cases for companies and new cost-saving opportunities.
The emergence of the AI economy is a long-term thesis for owning Nvidia right now, but the more notable news on the last earnings update was that the company would be returning to growth again. It doesn't completely justify the more than 60% run-up in the stock price so far in 2023, nor the more than doubling in share price from lows last reached in mid-October 2022.
Stock prices are volatile, and investors should fully expect a pullback in Nvidia from these levels. Nevertheless, the bear market (i.e., when a stock falls at least 20% from all-time highs and investor confidence in the company is low) is over for Nvidia.
NASDAQ: NVDA
Key Data Points
A return to growth driven by AI
Nvidia had a brutal couple of quarters in the past fiscal year (fiscal 2023, the 12-month period ended in January 2023), led by a steep decline in its gaming segment -- graphics processing units (GPUs) for high-end PC video games -- but also in the crypto market, which uses these same GPUs to "mine" digital currencies like Ethereum.
Professional visualization's decline also was hastened by a sharp falloff in early pandemic demand for high-end PCs. As a result, even as the data center segment continued to advance, gaming and professional visualization dragged Nvidia's overall quarterly sequential progress into negative territory in a grandiose fashion.
|
Quarterly Revenue and Nvidia Business Segment |
Q4 2022 |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
|---|---|---|---|---|---|
|
Data Centers |
$3.3 billion |
$3.8 billion |
$3.8 billion |
$3.8 billion |
$3.6 billion |
|
Gaming |
$3.4 billion |
$3.6 billion |
$2.0 billion |
$1.6 billion |
$1.8 billion |
|
Professional Viz |
$643 million |
$622 million |
$496 million |
$200 million |
$226 million |
|
Auto |
$125 million |
$138 million |
$220 million |
$251 million |
$294 million |
|
Total |
$7.6 billion |
$8.3 billion |
$6.7 billion |
$5.9 billion |
$6.1 billion |
|
Total QoQ % Change |
8% |
8% |
(19%) |
(12%) |
2% |
Data source: Nvidia. QoQ = quarter over quarter. Chart by author.
As the supply of consumer chips began to build and demand began to weaken last year, Nvidia quickly decided to work with its PC manufacturing and retail partners to aggressively burn off this excess inventory. It appears this decision is beginning to pay off.
Nvidia finally posted an overall sequential increase in sales again to close out its fiscal year 2023. Sequential growth will return in the first quarter of fiscal 2024 (the three months ending in April 2023). Management expects revenue to be $6.5 billion. That's still well below all-time highs; nevertheless, it's an expected 7% quarter-over-quarter increase at the midpoint of guidance.
What's driving growth higher?
On the earnings call, Nvidia CFO Collette Kress said sequential growth will "be driven by each of our four major market platforms, led by strong growth in data center and gaming." That's right: Data center, gaming, professional visualization, and auto sales are all expected to rise over and above the level reported in Q4 fiscal 2023.
Data center, now far and away the largest Nvidia segment, is getting a big boost from AI. When asked by an analyst later on the call, Kress added that Nvidia expects "a great year, with our year-over-year growth in data center probably accelerating past Q1." As organizations realize AI's power to speed up their cost-saving initiatives, there is a scramble to add more Nvidia GPUs to data centers.
Is Nvidia stock still a buy?
Nvidia's profit margins will also rebound this year. Due to the aforementioned inventory correction, gross margin on product sold went from 65% in fiscal 2022 to just 57% in fiscal 2023. The resulting net income was more than cut in half in fiscal 2023, down 55% year over year to just $4.4 billion. However, by Q4 (the just-reported quarter ended in January 2023), gross margin had already rallied back to 63%, and net income more than doubled from the prior quarter to $1.4 billion (or 23% of revenue).
In other words, as Nvidia's revenue recovers in the next year, profits will return, too, rebounding from minimal net income at times last year.
This effect is creating a wonky-looking valuation on Nvidia stock. Shares currently trade for 100 times trailing-12-month earnings-per-share and 100 times trailing 12-month free cash flow. However, the stock trades for a more reasonable 43 times earnings-per-share on a one-year-forward expected basis.
Reasonable valuation is relative, though. Even when eyeing a strong rally in financial results in the next year, Nvidia is a premium-priced stock. That is going to create some very volatile stock price action in the months ahead. Nevertheless, Nvidia has earned that premium price tag. I don't think this stock will be cheap anytime soon. If you decide to buy now, do so with the intent of owning Nvidia for the very long term.
At any rate, after a brutal calendar year 2022, Nvidia's positive initial guidance for the road ahead indicates the bear market is now over for this leader in the AI economy.
