NVIDIA Corporation (NVDA) is a leading manufacturer of high-end graphics processing units (GPUs). The company’s segments include Graphics and Compute & Networking. The Graphics segment includes GeForce GPUs for gaming and PCs. The Compute & Networking segment includes Data Center platforms and systems for artificial intelligence (AI), high-performance computing (HPC), and accelerated computing; Mellanox networking and interconnect solutions; automotive AI Cockpit, autonomous driving development agreements, and autonomous vehicle solutions; and cryptocurrency mining processors (CMP). In terms of revenue in 2QFY2023, Data Center accounted for 56.8%, Gaming 30.5%, Professional Visualisation 7.4% and Automotive 3.3%.
Investment Overview
Long-term, structural demand for AI applications becoming more critical. Nvidia commands a dominant market share in the GPU market and is the leader in accelerator technology and artificial intelligence. GPUs designed and built by Nvidia for (the increasingly more important) data centers are cutting edge and market leading and preferred to support high-powered computing and in the areas of artificial intelligence, analytics, machine learning and scientific computing. Nvidia’s relentless pursuit towards high-powered computing is key to its growth; its latest unveiled H200 AI-chips is a testament of its continuous strive towards technological advancements to cements its market leading position.
Drivers in place to support elevated growth, going forward. Nvidia, the market leader for AI-chips, has and continues to break new heights with each passing quarter. First, the second-consecutive quarter of strong top- and bottom-line growth in Q3FY24 debunked any concerns of AI as simply a hype, but instead seen as a core earnings driver. Second, the incremental revenue guidance of US$4bn (Q2FY24: US$5bn) underscores the demand for robust AI-chips globally. Last, Nvidia should see incremental benefits from the positive flywheel effect owing to (1) increased adoption of generative AI across industries, and (2) expectation for AI to provide a strong second leg to the ongoing, industry-wide recovery.
Strong fundamentals to support next phase of growth. Nvidia's market leading position is exhibited through its ability to maintain above-peers’ margins for its offerings. Its net cash position as well as diverse sources of revenue and earnings (i.e., across business segments, customers, geographical markets) are seen as further positives for the stock.
Increased competition from other chipmakers eyeing the AI/ML space. We believe Nvidia has the competence/capability to maintain its market leading position in the AI-chips market that is increasingly crowded – with peers like AMD and Intel rolling their AI-chips in the coming year.
Geopolitical risks. Management noted that China contributes c.20% to its top-line revenue, which may be at risk on the expanded US export controls. Yet, there is optimism that Nvidia – working with the US government – can develop regulation-compliant products for the Chinese markets. Slowdown in AI growth momentum.
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