Nvidia: The King Marches On (Rating Upgrade)

Seekingalpha2023-11-27

Nvidia's earnings report for Q3 2023 showed stellar performance, with revenue growth and a significant increase in gross profit.Operating expenses remained stable, and earnings increased significantly...

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href=https://seekingalpha.com/article/4654018-nvidia-king-marches-on><strong>Seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Nvidia's earnings report for Q3 2023 showed stellar performance, with revenue growth and a significant increase in gross profit.Operating expenses remained stable, and earnings increased significantly...</p>\n\n<a href=\"https://seekingalpha.com/article/4654018-nvidia-king-marches-on\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"LU0943347566.SGD","symbol_name":"安联收益及增长平衡基金AM H2-SGD","start_time":0,"source_url":"https://seekingalpha.com/article/4654018-nvidia-king-marches-on","article_id":"2385347629","we_media_id":null,"thumbnails":[],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2385347629","pubTimestamp":1701069459,"columns":[],"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Nvidia's earnings 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this year with a Hold rating in an article comparing Nvidia to AMD in the race for AI dominance. Then, I downgraded my rating following the Q1 2024 earnings release, where I made the case that Nvidia's price performance was the product of irrational exuberance (how wrong I was!). Most recently, I previewed Nvidia's Q2 earnings, suggesting readers should focus on the CoWoS-driven AI chip shortage, Nvidia's H200, and Nvidia's customer allocations. In that earnings release, Nvidia had robust discussions of both the chip shortage (this is the reason they have such high pre-paid, non-cancellable contracts with foundries) and the GH200. Nvidia did not comment on customer allocations. In this article, I'm going to briefly review the recent earnings release, discuss key accounting procedures detailed in Nvidia's bear case, and finally provide the reasoning for my rating upgrade to Buy. Lastly, I give readers my recommended approach to investing in Nvidia, namely that of dollar-cost averaging indefinitely.Earnings ReviewNVIDIA Corporation's (NASDAQ: NVDA) November 21st, 2023 earnings report was nothing short of stellar. Revenue grew by $12.19B YoY with the three months ending October 29, 2023, representing nearly half of the 2023 YTD revenue figure. Meanwhile, the cost of sales less than doubled YoY, increasing from $2.7B to $4.7B. This efficiency in sales led to a more than $10B increase in gross profit YoY, coming in at $13.4B representing a gross margin of ~74%.Operating expenses increased minimally YoY for Q3, while YTD operating expenses decreased as last year Nvidia paid $1.3B to terminate the acquisition of Arm Holdings plc (ARM). For the three months ending October 29th, 2023, Nvidia posted an operating margin of 57%, quite a bit higher than the YTD operating margin of ~49%. All of this filters down to earnings of $9.2B this quarter, compared to the $0.68B at this time last year.On the balance sheet, Nvidia reported growth of $13B in assets as of October 29th, 2023 compared to January 29, 2023. A significant portion of this growth is attributed to accounts receivable growth of $4.5B over this period. Other meaningful contributors were growth in cash (+$2.2B) and marketable securities (~+$3B). On the liabilities side, current liabilities grew about $2.5B while total liabilities grew only $1.8B, aided by a decrease in long-term debt of $1.3B. Notably, retained earnings grew over $10B from January 29th to October 29th, 2023.Amidst the spectacular year Nvidia has enjoyed, some Seeking Alpha analysts believe Nvidia is artificially inflating revenue among other warning signs.Let's take a look at the accounting procedures in question.Accounting ConsiderationsRevenue RecognitionIn their most recent 10-K filing, Nvidia said \"We derive our revenue from product sales, including hardware and systems, license and development arrangements, software licensing, and cloud services.\"Product sales revenue is recognized \"upon transfer of control of products to customers in an amount that reflects the consideration we expect to receive in exchange for those products\" Meanwhile, license and development arrangements are recognized \"as a single performance obligation over the period in which the development services are performed\". This means that Nvidia recognizes the full revenue impact of license and development arrangements upfront, while the services required by Nvidia may not be fully met yet. This is broken down further in note 1 of \"Notes to the Consolidated Financial Statements\" in the 10-K, breaking out software licensing and cloud services.Software licensing revenue, which is either a subscription or perpetual license, is recognized upfront. Cloud services revenue, which is either subscription or 'subscription plus usage', is also recognized upfront. These upfront revenue recognitions have likely contributed in large part to Nvidia's meteoric revenue growth in fiscal 2024. What we don't know is the revenue split between 'product revenue' and 'license and development revenue' for H100 sales. I have reached out to Nvidia investor relations for insight into this question, as it will give clarity to the extreme margin expansion and revenue growth we've seen in 2023. If H100's are a majority product revenue, then these accounting procedures are mostly inane. However, if Nvidia earns most of its money through licensing, the risk of significant future impairment losses becomes more relevant.The real risk this illustrates is one of demand falling off a cliff at some point in the future, causing Nvidia to write off sizable impairment losses because of contract terminations. This is unlikely. According to SemiAnalysis:Microsoft is currently conducting the largest infrastructure buildout that humanity has ever seen. While that may seem like hyperbole, look at the annual spending on mega projects such as nationwide rail networks, dams, or even space programs such as the Apollo moon landings, and they all pale in comparison to the >$50 billion annual spend on datacenters Microsoft has penned in for 2024 and beyond. This infrastructure buildout is aimed squarely at accelerating the path to AGI and bringing the intelligence of generative AI to every facet of life from productivity applications to leisure.This is just one of three major CSPs, the incentive for the other two (Google and Amazon.com, Inc. (AMZN)) is to continue ramping up data center spending. I provide a much more detailed discussion of the data center ecosystem in my recent article Super Micro Computer: A Clear Winner In The Server Market. The concentration in the cloud industry has led to an extreme concentration of revenue for Nvidia, though. Let's dive into this.Concentration of RevenueNvidia reported that two unnamed customers represented over 10% of revenue, as shown below. Those sales funneled mostly to two End Customers, one of which represented 15% of revenue from this quarter.Nvidia November 21, 2023 10-QAlthough unnamed in the 10-Q filing, I am speculating that these two End Customers are Alphabet Inc. (GOOG, GOOGL) and Microsoft Corporation (MSFT). This is because Nvidia reported the following in the \"Highlights\" section of the Q3 2024 Press Release:Made advances with global cloud service providers:Google Cloud Platform made generally available new A3 instances powered by NVIDIA H100 Tensor Core GPUs and NVIDIA AI Enterprise software in Google Cloud Marketplace.Microsoft Azure will be offering customers access to NVIDIA Omniverse™ Cloud Services for accelerating automotive digitalization, as well as new instances featuring NVL H100 Tensor Core GPUs and H100 with confidential computing, with H200 GPUs coming next year.Further, we already know that Microsoft-backed OpenAI, creator of ChatGPT, uses only Nvidia hardware as of right now.Although Nvidia's revenue profile will remain extremely concentrated in the near future, this is not an imminent threat. The likelihood of a significant slowdown in data center spending is low, and this is a key determinant of the Nvidia bear case. As long as the tech industry continues its rapid adoption of AI, Nvidia's product and licensing revenue profiles are safe.In addition to a slowdown in data center spending, in-house projects are threatening Nvidia's dominance. There are already signs of the CUDA monopoly breaking while Microsoft has announced in-house silicon, Apple is many generations deep into their own in-house designs, Google offers its TPUs on the Google Cloud Platform, and Amazon touts Trainium and Inferentia chips. But Nvidia is not resting on its laurels, with the next generation Blackwell architecture already announced and Nvidia's already dominant position in nascent AI opportunities like healthcare and autonomous driving.InvestabilityI do not believe Nvidia investors should sell. Nvidia's current non-GAAP FWD P/E is a touch over 40 with a PEG of 1.22, this suggests that despite the incredible performance in 2023, Nvidia actually still offers a somewhat reasonable valuation. Meanwhile, Nvidia's Quant ratings are A and A+ for growth and profitability, respectively. Additionally, Nvidia has a strong history of \"beat and raise\":Earnings Surprise History (Seeking Alpha)Of course, investing at a forward P/E of 40 is not devoid of risk, and the risk of future impairment losses could cause significant price erosion. Despite this risk, I believe Nvidia offers a fair risk/reward at current levels.Nvidia is an exceptional business with superb management. I strongly believe that Nvidia will be earning far more in five years than they are currently earning, aided by a deep monopoly in data center architecture amidst one of the most prolific infrastructure buildouts in human history. Nvidia is the centerpiece of this buildout, so investors need to pay a premium for the growth. I am rating Nvidia a Buy at its current level, with a recommended investment approach of dollar-cost averaging. In my personal portfolio, I have weekly investments in Nvidia, which I plan to continue indefinitely. Valuing a company with Nvidia's growth prospects is an exercise in futility, so a DCA approach limits short-term downside while allowing investors to take part in the most prolific growth story of the 2020s.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":1,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2385347629"}