Nvidia, The Future is Price IN Are We Expect Slower Return in FY2025?

$NVIDIA Corp(NVDA)$ recently released its earnings report, and while the stock dipped by approximately 1% in after-hours trading, the company’s market capitalization now stands at $3.59 trillion.

Company Overview

For the past 12 months, Nvidia has generated $121 billion in revenue, with $63 billion in net income and $56 billion in free cash flow. This places Nvidia’s stock at a valuation of 29 times revenue, 57 times earnings, and 63 times free cash flow.

Earning Overview

Despite the slight drop in stock price, Nvidia’s earnings report is undeniably strong. In Q3, revenue rose by 17% compared to the previous quarter, reaching $35 billion—surpassing expectations and marking an acceleration in growth. Net income jumped to $19.3 billion, with a 55% margin.

Fundamental Analysis

Nvidia’s Q3 2024 earnings report revealed strong financial results and robust performance, despite some concerns about future growth projections and margin pressures. Below is a detailed fundamental analysis of Nvidia’s Q3 performance:

Financial Performance

Revenue: Nvidia posted $35 billion in revenue for Q3 2024, marking a 17% increase from the previous quarter and exceeding expectations. This reflects an acceleration in sequential growth and a strong demand for its products, particularly from AI-driven industries.

Net Income: The company achieved $19.3 billion in net income, with a healthy 55% profit margin. This strong profitability highlights Nvidia’s dominant position in the semiconductor market, especially as it continues to benefit from the AI boom.

Free Cash Flow: Nvidia generated $56 billion in free cash flow over the past 12 months, showcasing its ability to generate substantial cash from operations. This positions Nvidia well for reinvestment and shareholder returns.

Valuation Metrics

Nvidia is currently trading at the following multiples:

Price-to-Revenue (P/S): 31x

Price-to-Earnings (P/E): 57x

Price-to-Book (P/B): 54.x

Price-to-Free Cash Flow (P/FCF): 63x

These elevated multiples reflect investor optimism driven by Nvidia's dominance in the AI and gaming sectors, but also suggest that the stock is valued highly relative to earnings and cash flow, implying some potential risk if growth slows.

Gross Margin and Production Costs

Gross Margin: Nvidia’s gross margin is projected to drop to the low 70s in Q4 2024 due to higher production costs, especially with the rollout of the Blackwell product. This reduction in margin is partly attributed to rising production costs, likely driven by suppliers like TSMC, which may be taking a larger share of profits due to increasing demand for semiconductor production capacity.

Cost of Production: The increased production costs indicate that Nvidia may be facing greater pricing pressure from its suppliers, though the company still retains strong pricing power due to its market-leading products.

Outlook

Q4 Guidance: Nvidia has guided for sequential revenue growth of about 7% in Q4 2024. While this growth is still positive, it is lower than the rapid acceleration in previous quarters, which might signal a slowdown in the near term.

Margin Compression: With gross margins expected to dip due to the rollout of Blackwell, investors will be watching closely to see if Nvidia can manage production costs effectively and sustain its profitability.

Competitive Position and Market Dominance

Nvidia continues to hold a dominant position in the GPU and AI infrastructure markets. Its market leadership in AI chips, coupled with strong partnerships with major cloud providers like Amazon and Google, gives it a significant competitive edge over rivals such as AMD and Intel.

The company’s leadership in gaming and AI hardware makes it a central player in two high-growth markets, offering diversified revenue streams.

During the company’s conference call, Nvidia’s management highlighted an overwhelming demand for its latest Blackwell product, as large corporations continue to build their AI infrastructure, develop new AI technologies, and significantly increase revenue. This trend is supported by recent results from Google Cloud and Amazon AWS.

Investment Thesis

Future Growth Catalysts

AI’s Long-Term Potential: The AI market is still in its early stages, and Nvidia is well-positioned to capitalize on this transformative trend. As generative AI, machine learning, and AI-powered applications become more pervasive, Nvidia’s technology will remain integral to these advancements.

Automotive and Autonomous Vehicles: Nvidia is expanding its reach into the automotive sector with its Drive platform, which provides AI solutions for self-driving cars and advanced driver-assistance systems (ADAS). As autonomous vehicle technology evolves, Nvidia’s position in this space could unlock substantial growth.

Product Innovation: Nvidia’s ongoing investment in R&D ensures that it remains at the cutting edge of technology. The upcoming releases of next-gen products, such as the Blackwell GPUs and advancements in AI-specific chips, will further solidify its market leadership.

Risk Factors and Adjustments

While Nvidia’s long-term prospects look promising, the company is currently priced at a premium, reflecting investor expectations for high growth. Any downward revision of growth expectations, especially in the short term, could lead to a correction in the stock price.

Production Costs and Margin Compression: Rising production costs, particularly in semiconductor manufacturing (with suppliers like TSMC), could put pressure on Nvidia’s margins in the short term. Additionally, increasing competition from AMD and Intel in the AI and GPU markets could affect pricing power.

Cyclicality of the Semiconductor Market: The semiconductor industry can be cyclical, and Nvidia could face periods of slower growth or reduced demand if the macroeconomic environment weakens or if the semiconductor market experiences a downturn.

Technical Analysis

As of November 2024, analysts have provided a range of price targets for Nvidia (NVDA), reflecting the company's strong performance but also some concerns about potential challenges ahead. The average 12-month price target is around $167, with estimates ranging from a low of $87 to a high of $220.the average price target implies a modest upside, but Nvidia's future performance will largely depend on managing production challenges and continuing to capitalize on the booming AI and semiconductor markets.

Conclusion

However, the outlook for the upcoming quarter may raise some concerns. Management has projected sequential growth of around 7%, which is slower than in previous quarters. Additionally, gross margins are expected to decrease to the low 70s due to the rollout of Blackwell, driven by higher production costs. This margin contraction could suggest that companies like TSMC are capturing a larger share of the profits.

Nvidia’s Q3 2024 performance highlights the company’s strong growth and profitability, driven by a booming AI market. The company’s valuation is high, but its market leadership in GPUs and AI infrastructure presents significant long-term growth potential. However, margin compression and slower sequential growth in Q4 could pose risks, and investors should monitor these developments closely. Overall, Nvidia remains well-positioned to benefit from the ongoing AI revolution but faces some near-term challenges in production costs and growth rate moderation.