Justin Sullivan
Business overview and investment thesis
Nvidia Corporation (NASDAQ:NVDA) is a major player in the semiconductor industry and fabless chip designer. The company develops a range of products including graphics processing units, also known as GPUs, central processing units (CPUs), data processing units (DPUs) and network interface controllers (NICs). NVDA is really known for its GPUs, which could be considered the backbone of the company. With this product range, NVDA serves markets such as gaming, data centers, professional visualization, autonomous vehicles and OEMs.
In my previous article, I explained why NVDA is an established player in the semiconductor industry. The company’s robust financials coupled with its strong position in key markets such as the data center and gaming markets give it significant room for growth. Nonetheless, the uncertainty in the gaming market platform, export controls, and the volatility of the stock are risks too great to ignore.
Despite beating analysts’ expectations and the current AI craze, fourth-quarter financial results left the company with the same or even greater uncertainty. Revenue from the gaming market platform has slumped, recording about half the revenue reported in the same period last year. Additionally, data center revenue sustains the company’s revenue, but with a slowdown in the cloud computing market, the revenue growth of this market platform could slow. These uncertainties continue to cause me to rate this stock Hold. Let’s look at how the company performed in the fourth quarter.
Nvidia 4Q-23 results
Nvidia Quarterly Financial Highlights (Company’s 10-Q)
In the fourth quarter of FY 2023, NVDA saw revenue decline 21% to $6.1 billion. The decline in revenue was driven by the gaming market platform, which saw a 46% decline to $1.8 billion compared to $3.4 billion a year earlier. This decline was due to disruptions in game demand in China and lower overall sales. It should be noted that gaming revenue is up 16% quarter-on-quarter due to the company’s new GPUs (GeForce RTX). The Professional Visualization and OEM & Others market platforms also saw revenue decline by 65% and 56%, respectively. As we can see, this is a significant drop in sales. The overall revenue decline was partially offset by the company’s data center and automotive platforms, which posted increases of 11% and 135%, respectively.
Financial performance was further impacted by a 23% year-over-year increase in operating expenses, with R&D spending growing to $2 billion and accounting for 32% of revenue. Those increases pushed operating income down 40% to $1.8 billion, compared to $3 billion for the same period last year. As a result, NVDA reported net income of $1.4 billion with a profit margin that nearly halved to 23.4%.
Despite a slowdown in revenue and a significantly depressed bottom line, NVDA posted free cash flow of $1.7 billion for the period. Free cash flow was used to return $1.3 billion in value to shareholders through $1.2 billion of stock purchases and $98 million in dividends. The remainder of the cash was used to strengthen the company’s balance sheet, increasing cash and cash equivalents to $3.4 billion.
Results of the market platforms
Highlights of Nvidia Market Platforms (Company’s 10-Q)
From the table above, we can see that the Data Center platform is clearly holding back revenue for NVDA. Data center revenue rose 11% year-over-year, driven by U.S. cloud service providers. However, the company reported a slowdown in China, which is also reflected in the slowdown in cloud revenue from the country’s top cloud computing providers. Automotive revenue posted an impressive triple-digit increase, led by growth in sales of self-driving solutions and computing solutions for electric vehicle manufacturers. With the growing trend towards self-driving solutions and electric vehicles, we could see this market platform continue to drive sales in the coming quarters. Despite these revenue increases, three marketplace platforms saw significant revenue declines during the quarter. Gaming has already been discussed, related to Professional Visualization and OEM & Other, these market platforms also saw declines of 65% and 56% respectively. The decline in Professional Visualization was primarily impacted by lower revenue, while OEM & Other was impacted by Cryptocurrency Mining Processors, reflecting the impact of certain market trends, most notably the collapse of the cryptocurrency market in previous quarters.
The central theses
Gaming Deceleration Continues: The gaming platform has slowed significantly in previous quarters, accounting for 30% of total revenue, according to its latest earnings report. This is a notable difference from a year ago when it made up almost half of NVDA revenue. The announced partnership with Microsoft and Activision Blizzard could boost revenue, but the gaming market as a whole will need a rebound before NVDA can match its previous results.
Data Center Revenue Growth May Slow Down: The data center continues to be the stronghold of NVDA total revenue. It’s no secret, however, that the cloud computing market has slowed in the last quarter, with major cloud computing vendors everywhere seeing a slowdown in the growth rate. For more information on this topic, see my article on the leading cloud computing providers. In addition, Chinese cloud computing providers have reported flat or slight increases in sales. As such, these cloud computing providers may be looking to cut costs, which could impact NVDA’s revenue. I will be watching this closely over the next few quarterly results from NVDA as well as the various cloud computing vendors.
Inventory Issues: Similar to many semiconductor companies, NVDA has experienced an inventory glut throughout the year. For reference, NVDA had inventory levels of $2.6 billion at the end of FY2022, fast forward 12 months and inventory levels are now at $5.2 billion. The question now is, will NVDA be able to offload this inventory at full price, or will it need to offer deep discounts to return to more efficient inventory levels? I’m weighting my answer towards heavy discounts.
bottom line
As mentioned at the beginning of the article, despite beating analysts’ expectations and the current AI craze, fourth-quarter financial results left the company with the same or even greater uncertainties. Sales have slumped across three of its five market platforms, inventories have doubled in 12 months, and the cloud computing market could see a slowdown in the coming months. All of these uncertainties continue to cause me to rate this stock as Hold. It’s true that the upside potential is significant, but with the stock trading at a price-to-earnings ratio of over 50, I’d recommend investors wait for a more attractive entry point or until the uncertainties have subsided.
