To The Moon

Nvidia Inc's ( $NVIDIA Corp(NVDA)$) earnings release for the first quarter of the year (referred in its reporting convention as Q1 of FY 2025) held few surprises. As the previous article detailing the company's FY 2024 results described, the company had quite effectively swapped out its crypto miner and gamer niche in favour of "corporate" clients by continually burnishing its product offerings. By virtue of having a strong corporate clientele, the company was expected to have strong results and the company didn't disappoint. 

Within the various line items and revenue segments, however, lie some causes for concern as well as the degree by which the company's performance is overlapped by its stock performance.

Trend Drilldown 

The company's revenues are well set to establish all-new highs in 2024 relative to previous full years.

If Q1's trends continue, it can be expected that FY 2025 will end with revenues nearly 35-45% higher than its previous year, which in itself was a stalwart year. Both cost of revenues and operating expenses continue to trend downwards as its customer base is increasingly populated in volume and prominence by a corporate clientele. Interestingly, research expenses trending downwards indicate that product releases is likely to be less "revolutionary" and more inclined towards incremental improvements in performance. The share of net income - which has a strong correlation with earnings per share - also shows steady improvement. 

On the other hand, the company's evolution has shaken up the diversified pillars of its financial success. While 2021 had two leading revenue segments  - "Data Center" and "Gaming" - running neck and neck in revenue contribution, the company is now almost completely dependent on its "Data Center" clientele. While a corporate clientele ensures a steady demand for the company's products, it also imposes limits: if the products are deemed overpriced relative to requirements, said clientele would show no reluctance to move on to another more accommodating supplier. Also important are the clients' usage cycle: once costs have been sunk into a set of products, there will likely be a tight set of requirements before substantial investments are made into upgrades. This means that after a certain volume of sales, there will inevitably be a slowdown in sales growth. 

As it stands, a slowdown isn't evident but this evolution has implications on the stock's forward outlook. 

PE Ratio Trends

As it stands, the company was quite well-received prior to 2023. But the stalwart year of 2023 was also the period in recent history when the company's stock reached dizzying heights in Price to Earnings (PE) Ratio valuations after which the stock's trajectory rationalized.

2023 set out to be the year when it was increasingly evident that the company had secured a foothold in an extremely resilient consumer segment and ended with the aforementioned limits being realized by a growing cross-section of market participants, including instituitional "buy-and-hold" players. 

So far, in the Year Till Date (YTD), the stock has been traversing the 60-75 range but there is resilient resistance that brings this ratio down to the 50-60 range. This doesn't necessarily mean a massive drop in price performance: since the company's net income passthrough efficiency is running high, the company's earnings are rising. However, the stock likely won't run as wild as it used to in 2023. 

Other Considerations and Conclusion

The earnings press release highlights the company's strong commitment to its "Data Center" clients: the recently-unveiled Blackwell platform as well as the Quantum and Spectrum X800 series switches delivers to clients trillion-parameter computing capability that will essentially pave the way for AI-driven supercomputing. This also augments the company's positioning in supercomputing that its "Grace Hopper Superchips" had heralded. Furthermore, the company's diminutive-yet-impactful "Automotive" segment with deepening relationships with Chinese carmakers BYD ($BYD Co., Ltd.(BYDDY)$), XPeng ($XPeng Inc.(XPEV)$) and GAC as well as American autonomous vehicle solutions startup Nuro (which itself has a strategic tie-up with BYD). 

Over the past year, China's net contribution to the company's revenues have shown some signs of weakness:

This might be attributable to the fact that the U.S. government continues to be increasingly concerned (on a largely bipartisan basis) over the export of AI-relevant technology to China. Nvidia's high-powered products lay square within the government's targets twice: both when restrictions were introduced and subsequently amended. Yet, at the same time, the company's likely banking on deepening relationships with Chinese companies to boost revenues. 

"AI-relevant technology" is a complicated matter: even if the company were to successively produce restrictions-compliant products for the Chinese market, it is entirely possible to replicate "restricted" levels of computing proficient via some configurations that effectively "chain" these "allowed" products in a series. This is a perpetual risk factor for the company in terms of global reach. 

The company's growing edge in supercomputing is another potential headache: supercomputers had long featured in the list of export restrictions and severe regulatory oversight both during and after the Cold War. This essentially leaves the company's growth prospects promised via its excellent products at the hands of the U.S. government's deliberations, which will inevitably prove to be onerous and taxing even on the company's top executives. 

All in all, the company's excellence both in product design and operational efficiency is undeniable but it's stepping progressively deeper into murky geopolitical territory. It wouldn't be entirely unreasonable if consensus market opinion drives down the stock's PE Ratio by about 25-35% from its present 70+ levels. 

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For broader articles that deep-dives into business and culture in Asia, visit asianomics.substack.com. Recent articles feature a comparison between Indian and Chinese market trends that formed the core of my commentary to Bloomberg, commentary on EV markets that were featured in CNN and Investing.com, and a summary of all of my talking points that featured in media outlets regarding Nvidia’s earnings and the ongoing US sanctions regime regarding tech exports to China.