Nvidia: Bulls In Danger Despite AI Boom (NASDAQ:NVDA)

Over the past few months, Nvidia Corporation (NASDAQ:NVDA), a leader in developing high-performance graphics processing units and technologies for cloud service providers, has continued to delight investors with positive news that will affect its financial position for a long time.

The main driver of business growth over the past two quarters has been the data center segment, whose revenue exceeded $10 billion in the second quarter of fiscal 2024, an increase of 171.3% year-over-year. The main reason for this jump in sales was the sharp growth in demand for Nvidia GPUs, which are increasingly used in various fields and tasks, including machine learning, medical diagnostics, developing next-generation drugs, real-time driving of autonomous vehicles, and more.

Despite several positive events that have occurred since the beginning of 2023, which symbolized the advent of the era of artificial intelligence, Americans are gradually beginning to lose interest in this topic and are shifting their attention to COVID-19. Moreover, Intel (INTC), Advanced Micro Devices, Inc. (AMD), and Alphabet/Google (GOOG) continue to actively work on developing AI chips and are preparing for their mass production, which should ultimately lead to a decrease in Nvidia’s share in this fast-growing market. As a result, the company’s share price has fallen more than 17% from its August peak, signaling growing concerns among financial market participants about Nvidia’s ability to continue delivering strong revenue growth in the coming years.

But even though Nvidia’s share price has reached a strong support zone, we believe the downward trend will continue despite the increase in its share repurchase program to $27.95 billion.

Impact of recent events on Nvidia’s financial position

Nvidia’s revenue was approximately $13.51 billion in fiscal Q2 FY24, beating our expectations by $2.26 billion but, more importantly, exceeding analysts’ consensus expectations by $2.42 billion. One of the primary contributors behind the company’s remarkable revenue growth was its data center division, which achieved a total revenue of $10.32 billion, marking a substantial 141% increase compared to the previous quarter. This surge in revenue can be attributed mainly to the increasing demand for the NVIDIA HGX platform from Internet companies and cloud service providers.

According to Seeking Alpha, Nvidia’s revenue for the fiscal third quarter of fiscal year 2024 (closing at the end of October) is expected to be $15.93-$17.08 billion, 44.9% more than analysts’ expectations for the second quarter of 2023. At the same time, according to our model, the company’s total revenue will be slightly higher than the upper limit of this range and will amount to $16.2 billion, which is within the guidance.

The first contributor to Nvidia’s revenue growth will be the gaming sector, whose sales will continue to grow thanks to the higher performance of their graphics cards relative to competitors and the introduction of generative artificial intelligence technologies that can significantly improve the interaction of gamers with non-player characters (NPCs).

NVIDIA GeForce RTX 40 Series GPUs feature ray-tracing technology, giving gamers a deeper and more immersive experience in the virtual worlds of popular video games such as Watch Dogs: Legion, Far Cry 6, Cyberpunk 2077, and Battlefield 5.

At the same time, the company does not stop at the progress achieved. Nvidia is expanding its share of the fast-growing global cloud gaming market by offering gamers without the financial capacity to purchase powerful personal computers and laptops to play thousands of games in up to 4K resolution through GeForce Now.

The second contributor to Nvidia’s revenue growth will be the data center segment, which has been demonstrating stunning growth rates since the beginning of 2023 thanks to the active implementation of the company’s products in areas such as artificial intelligence, high-performance computing, genomic data analysis, autonomous vehicle management and more.

During the earnings call, Nvidia management pleased investors with the significant progress made since introducing its AI chips, such as the H100, A100, and A800, to the market.

DGX Cloud’s strategy is to achieve several things: number one, to enable a really close partnership between us and the world’s CSPs. We recognize that many of our — we work with some 30,000 companies around the world. 15,000 of them are startups. Thousands of them are generative AI companies and the fastest-growing segment, of course, is generative AI.

So, on September 8, Nvidia announced a partnership agreement with the largest Indian conglomerates, Reliance Industries and Tata Group, to create an artificial intelligence computing infrastructure. We believe this is just the first stage of the company’s product expansion into India, whose economy continues to thrive despite economic challenges in neighboring countries. As a result, this allows India to continue to attract multi-billion dollar investments and become one of the world’s key technology and innovation hubs.

It is planned that the large-scale infrastructure and platforms being created for implementing projects in artificial intelligence will work in tandem with DGX Cloud and DGX GH200. These Nvidia products have the potential to enable companies to address resource-intensive challenges more effectively and pave the way for the development of advanced chatbots, ultimately contributing to the economic growth of India and other nations. The DGX GH200 is an AI supercomputer that delivers impressive performance and will provide significant competition to global supercomputer manufacturers.

Besides India, tech giants such as Meta Platforms, Alphabet, and Microsoft are showing interest in Nvidia’s product, which will undoubtedly help maintain high growth rates in its net income in the short term.

DGX GH200 systems are expected to be available by the end of the year, Google Cloud, Meta and Microsoft among the first to gain access.

However, the continued impact of high inflation, rising global public debt, and high hydrocarbon prices negatively impact economic recovery in many countries. At the FOMC meeting, which took place on September 19-20, participants discussed various financial topics, including the discussion of new measures to reduce inflation. According to a document released following a two-day meeting, some Fed officials are considering another interest rate increase before the end of 2023 and expect a slower pace of rate cuts in subsequent years.

Consequently, this is the first key factor that necessitated a revision of our discounted cash flow (“DCF”) model until 2030. We expect Nvidia’s revenue to be $140.1 billion by 2030, which is $12.74 billion below analysts’ consensus estimates.

The second reason necessitating a downward revision of our projected revenue and net income for Nvidia until 2030 is the intensified competition with Amazon (AMZN), Microsoft (MSFT), AMD (AMD), and Intel (INTC), which have been developing and are gearing up for large-scale manufacturing of AI chips. As a result, we expect Nvidia’s EPS to reach $19.4 by 2025, which is $0.69 below analysts’ consensus estimates.

Given the company’s current share price, its Non-GAAP P/E [FWD] would be 21.4x, which is one of the factors indicating a slight overvaluation of the company by financial market participants relative to other technology corporations.

Conclusion

Over the past few months, Nvidia Corporation, a leader in developing high-performance graphics processing units and technologies for cloud service providers, has continued to delight investors with positive news that will affect its financial position for a long time.

Thanks to remarkable revenue growth from its gaming and data center segments, the company was able to significantly beat analyst expectations in the second quarter of fiscal 2024. We anticipate that Nvidia’s product sales growth will persist in the short term, driven by faster adoption of AI chips in various areas such as high-performance computing, genomic data analysis, autonomous vehicle control, and more.

On September 8, Nvidia announced a partnership agreement with the largest Indian conglomerates, Reliance Industries and Tata Group, to create an artificial intelligence computing infrastructure. We believe this is the first stage of the company’s product expansion into India, whose economy continues to thrive despite economic challenges in neighboring countries. Moreover, it will also help reduce potential negative consequences in the event of new U.S. restrictions on supplying AI chips to China.

We expect that the ongoing impact of high inflation, rising global public debt, and high energy prices will not only slow down the economic recovery of China, the U.S., and the European Union but will negatively impact the S&P 500. Additionally, given the imminent intensification of competition in the global artificial intelligence market and based on technical analysis, we are lowering our previous level at which the risk/reward profile would be attractive. This price level at which we plan to buy the company’s shares is $357-$359.

We continue our analytics coverage of Nvidia Corporation with a “hold” rating for the next 12 months.