To The Moon

$Apple(AAPL)$ 

Nvidia has Strong Margins, But Apple Has the Cash

Nvidia’s margins are much stronger than Apple’s, but Apple leads in cash and cash generation.

How Nvidia Surpassed Many FAANGs — and why Apple is Next

Nvidia’s rapid rise to become one of the top five most valuable companies in the world stems from its leadership position at the forefront of artificial intelligence, or AI —- which began with the A100. It was the A100 which combined training and inference that kicked off Nvidia’s strength in the data center –the H100 would come a couple of years later. The A100 left early breadcrumbs that Nvidia would see a glorious ascent to overtake Apple. Prior to the A100, there were additional clues, specifically Nvidia’s CUDA software platform, which my firm also made quite clear in 2018 would carve a deep moat for a near-monopoly.

Rapid top line growth is the primary eye-catching statistic, as no other companies in tech have reported such blistering revenue growth at a rate above 200% for multiple quarters at an annualized revenue rate near $90 billion. These are growth rates we see in small caps or mid-caps that have a mere $1 billion or less in revenue. Rarely, if ever, do we see this growth rate above $5 billion in revenue, let alone $90 billion.

The consistency and magnitude of the top line beats is impressive, however, it’s the growth further down the income statement where Nvidia’s report truly shines. Nvidia’s stronghold grip on the data center market at the moment combined with pricing power and elevated demand for its H100 GPU has allowed substantial growth in operating income and has generated robust earnings.

Let’s take a closer look as to why Nvidia has been able to surpass every FAANG except Apple, and why it’s inevitable that Nvidia becomes the World’s Most Valuable company in the next 2.5 years. We are using the date of August 2021 through the Q4 January report to evaluate the fundamental growth, since that is when we first predicted Nvidia would surpass Apple’s valuation by August of 2026.

Since August 2021, Nvidia’s gross margin has expanded significantly, from 66.7% to 76.7% in fiscal Q4, first topping 70% in fiscal Q2 and expanding since then as a high degree of pricing power for its ultra popular H100 GPUs is aiding margin growth.

Apple has similarly seen gross margin expansion, stemming primarily from growth in high-margin Services revenue as opposed to hardware sales — Apple’s gross margin increased from 42.2% to 45.8% over the same period.

Nvidia’s operating margin has improved tremendously in fiscal 2024, as it managed to increase operating expenses by only 2% YoY while driving a 126% increase in revenue. Operating margin has increased from 47.2% to 66.7% since our prediction. Over the past two quarters, operating margin has increased 910 bp.

On the other hand, Apple’s operating margin has improved 520 bp over the same period, from 28.5% to 33.7% — Nvidia’s operating margin is now nearly double Apple’s.

Because of this major increase in operating leverage, Nvidia has seen substantial growth in EPS. Nvidia reported $5.16 in EPS in fiscal Q4, nearly 400% growth from $1.04 reported in August 2021. Apple’s earnings growth over the same period has been just 14%, from $5.62 to $6.42 on a TTM basis.

However, Apple has the cash and cash flows, though Nvidia is quickly improving in both metrics. Apple’s cash on hand totals $172.6 billion, with over $72 billion in current cash, equivalents and marketable securities.

Nvidia has just $26 billion in cash and equivalents, an increase from $18.3 billion in Q3 and $13.3 billion in the year ago quarter, as Nvidia is pocketing more cash.

Apple leads the Mag 7 and tech in general as it generates the highest levels of operating cash flow and free cash flow. TTM operating cash flow was more than $116 billion, while FCF was more than $106 billion, or a FCF margin of 27.5%.

Nvidia’s operating cash flow grew 400% YoY to $28.1 billion, with FCF up 690% YoY to $27 billion. Nvidia’s margins here are now stronger than Apple’s, at 46% and 44%, but the scale of its revenues means it has a few more years to go before it can surpass the $100 billion threshold on cash.

While cash flows may nearly double to ~$50 billion in FY25, Nvidia’s software can complement this growth as it scales a few years in the future, much as Services is aiding Apple’s growth and margins.

I wrote the following (emphasis added):

“Notably, the stock is up 335% since my thesis was first published [my first AI thesis in 2018]

– a notable amount for a mega cap stock and nearly 2-3X more returns than any FAAMG in the same period. This is important because I expect this trend to continue until Nvidia has surpassed all FAAMG valuations.” published August 2021.

Conclusion:

I wrote in late 2021 about Nvidia (NVDA) and keep voting for me as I was the de facto pioneer on building an AI-focused portfolio with Nvidia at the helm, and we were bold and quite clear at a time that Nvidia would rival Apple’s valuation when the very thought was inconceivable in 2021 (with Russia-Ukraine war etc. looming).