I have always been a fan. I have not always been long, but I am long now, and have been long more often than not. My current long position in Nvidia (NVDA) (as of 07:30 am ET) is up 59%. Hard to justify the 48 times forward looking earnings valuation? Always is. Especially when my other semiconductor favorite, Advanced Micro Devices (AMD) trades at 'just" 25 times.
Nvidia, led by the now legendary CEO Jensen Huang, has always been on the edge. Not just high-tech, but the cutting edge of whatever is hot within high-technology while it is hot. Nvidia has been your leader in gaming, then machine learning, then gaming again, and then cryptocurrency mining. We move on still, to the data center, and ultimately to artificial intelligence.
While I am certainly biased, therefore at least partially discrediting my opinion regarding Nvidia... Aside from being a bull market darling, the name has earned more than most running with an elevated valuation, at least a portion of that "good faith."
Where am I going with this? To the future. During last night's conference call, the acronym "AI" for artificial intelligence was mentioned by Nvidia personnel and sell-side analysts an incredible 90 times. That number could be off by one or two, but it's close. I counted by hand at zero dark-thirty this morning.
The CEO
I analyze a lot of corporate earnings, conference calls, outlooks, cash flows, and balance sheets. I don't always quote the CEO. Sometimes I do. Jensen Huang was on his "A" game or his "AI" game last night. Check out these beauties. They're as much the reason for the overnight run as anything performance related. It may be a pain in the tail, but read them all. Then re-read them.
"The accumulation of technology breakthroughs has brought AI to an inflection point. Generative AI's versatility and capability has triggered a sense of urgency at enterprises around the world to develop and deploy AI strategies. Yet, the AI supercomputer. model algorithms, data processing and training techniques remain an insurmountable obstacle for most."
" First of all, taking a step back, Nvidia AI is essentially the operating system of AI systems today. It starts from data processing to learning, training, to validation, to inference. And so this body of software is completely accelerated. It runs in every cloud. It runs on-prem. And it supports every framework, every model that we know of, and it's accelerated everywhere."
"Over the course of the next 10 years, I hope through new chips, new interconnects, new systems, new operating systems, new distributed computing algorithms and new AI algorithms and working with developers coming up with new models, I believe we're going to accelerate AI by another million x (that's one million times)."
"Nvidia is not just a chip company because the problem we're trying to solve is just too complex. You have to think across the entire stack all the way from the chip, all the way into the data center across the network through the software. And in the mind of one single company, we can think across that entire stack."
The Quarter Reported
On Wednesday evening (Did they make us wait, or what?), Nvidia released the firm's financial results for their fourth quarter, which ended January 29th. For that period, the firm posted an adjusted EPS of $0.88 (GAAP: $0.57) on revenue of $6.051B. These results modestly beat Wall Street's expectations for both the top and bottom lines.
This is despite the fact that revenue tumbled 20.8% year over year, while adjusted net income dropped 35% to $2.174B (GAAP net income dropped 53% to $1.414B). Adjustments were made for stock based compensation expense, acquisition related costs and tax related purposes.
Looking within, adjusted gross margin of 66.1%, was down from 67%, but did beat the consensus view. Adjusted operating expenses increased 23% to $1.775B, which knocked adjusted operating income down 40% to $2.224B. However, adjusted operating expenses were down and operating income higher when looked at sequentially (quarter over quarter).
Segment Performance
- Data Center generated revenue of $3.616B (+10.8%), falling short of expectations.
- Gaming generated revenue of $1.831B (-46.3%), beating expectations.
- Automotive and Embedded generated record revenue of $294M (+135.2%), beating expectations.
- Professional Visualization generated revenue of $226M (-64.9%), beating expectations.
Guidance
For the current quarter, Nvidia sees revenue generation of $6.5B, give or take 2%. This is well above the $6.34B that Wall Street had in mind. The firm sees GAAP and adjusted gross margin at 64.1% and 66.5% respectively, plus or minus 50 basis points.
In addition the firm expects operating expenses to run at an adjusted $1.78B, and an effective tax rate of 13% (+/- 1%).
Fundamentals
For the quarter, Nvidia drove GAAP operating cash flow of $2.249B (-25.8%), falling short of expectations. Out of this came $509M in purchases of property and equipment, which was less than expected, to leave free cash flow of $1.736B. While this is still a beastly number, it actually fell short of expectations and was down 36.6% from the year ago comp. Out of this free cash flow, the firm returned $1.15B to shareholders in the form of share repurchases and dividends paid. Nvidia currently leaves $7.23B in its current repurchase authorization that expires at year's end.
Turning to the balance sheet, Nvidia ended the quarter with a cash position of $13.296B and inventories of $5.159B. Cash was down 37% from a year ago, while inventories were up 98%. This put current assets at $23.073B (-20%). Current liabilities add up to $6.563B, which includes $1.25B in short-term debt. That puts the firm's current ratio at 3.51 and the firm's quick ratio at 2.73. Still, despite a tough year, these ratios go way beyond merely being very healthy.
Total assets amount to $41.182B, which includes $6,048B in "goodwill" and other intangibles. At less than 15% of total assets, I have no problem with this. Total liabilities less equity comes to $19.081B. This includes $9.703B in long-term debt. The firm has enough cash on hand to wipe out both its short-term and long-term debt-loads and get change. This balance sheet has been and remains in pristine condition.
Wall Street
There's a lot of opinion on this name. After only accepting sell-side analysts rated at four stars or better by TipRanks, I am still left with 23 individuals who have opined on NVDA since last night. After allowing for changes, there are 18 "Buy" or buy-equivalent ratings and five "Hold" or hold-equivalent ratings. The average target price for NVDA across these 23 analysts is $259.83, with a high of $320 (Hans Mosesmann of Rosenblatt Securities) and a low of $190 (Richard Shannon of Craig-Hallum).
Once omitting these two as potential outliers, the average target price across the other 21 climbs to $260.29. Because we have so many targets to work with and because you may find this interesting... The average target across the 18 "Buys" is $270.89, while the average target across the five "Holds" is an even $220.
My Thoughts
Can you tell that I am impressed? You know it's not the fourth quarter beats that were modest in nature. You know it's not the guidance, which is solid, but not all that detailed. The data center is still growing. Gaming is recovering. Automotive is getting kind of hot. It's none of that. It's artificial intelligence. It's in AI, where it appears that the corporate world is headed and where it appears that Nvidia is their leader.
The addressable market seems infinite. Nvidia is once again at the center of shifting change. At the... inflection point.
It's been a while since I've broken out my Pitchfork model for NVDA. The stock found support at its 21 day EMA (exponential moving average) earlier this week, and will very likely make another attempt at retaking the Pitchfork's central trendline on Thursday.
I had a revised target price of $216 coming in, so I am bound by the code of discipline to sell a small portion of my long position this morning. That said, I will be taking my target price for the balance of my position up to $270, in order to get it out of the way, as that is roughly where the upper trendline of the Pitchfork intersects with the present.
This will be a temporary target until a pattern with an overt pivot becomes more visible. That will also provide for me another chance to write for you as we engage with the environment provided together.
