Nvidia Stock: Solid Fundamentals and Reasonable Valuation (NASDAQ: NVDA)

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NVIDIA (NASDAQ: NVDA) delivered a good quarter for the first quarter of calendar year 2022, which is actually the first quarter of fiscal 2023 for the company. Sales, margins and earnings exceeded expectations for the period.

Forecasts for the next quarter were lower than Wall Street forecasts. However, this is due to a $500 million reduction due to no sales in Russia and blockages in China. Without this reduction, the revenue projections would have been higher than the estimates.

The company reports a slowdown in gaming – which also includes crypto mining demand. On the other hand, demand in the data center segment remains spectacularly strong, and it is Nvidia’s biggest business today.

Expectations have been reset due to macroeconomic headwinds, and Nvidia stock is fairly reasonably priced. The company has consistently exceeded expectations in the past and it could easily continue to do so in the future.

Macroeconomic risk and supply chain issues are still significant risk factors for Nvidia. Nevertheless, the fundamentals are stronger than ever and the long-term thesis remains intact.

fundamental strength

During the quarter, revenue grew 46% year over year to $8.3 billion. Gross profit margin increased 90 basis points to 67.1%, and adjusted earnings per share increased 49% year-over-year. As a sign of confidence, Nvidia has expanded the share buyback program to $15 billion through December 2023.

Nvidia numbers

Nvidia

The data center is now the most important segment of the business, and it’s running at full speed. This segment generated $3.8 billion in revenue, growing 15% sequentially and accelerating to 83% year-over-year growth.

Nvidia business sectors

Nvidia

According to management during the conference call:

Revenue from hyperscale and cloud computing customers more than doubled year over year, driven by strong demand for external and internal workloads. Customers remain constrained in their infrastructure needs and continue to increase capacity while trying to keep pace with demand.

Nvidia is at the heart of many of the most important future technology trends: gaming, the omniverse, artificial intelligence, cloud computing, data analytics and autonomous vehicles, to name but a few. some notable examples. The company has superior technologies and a large R&D budget to keep it ahead of the competition in this regard.

Nvidia is increasingly expanding into software, which should lead to not only revenue growth, but also higher margins. Because the industry has a superior economy, software companies are trading at higher valuations relative to hardware companies, so this expansion into software could have a positive impact on earnings visibility and possibly even on long-term valuation.

Nvidia enters the second half of the year with the biggest wave of new products in its history. Leaving macro uncertainty aside, Nvidia has plenty of operational momentum behind it.

In the words of Jensen Huang, Founder and CEO of Nvidia:

We’re gearing up for the biggest wave of new products in our history with new GPUs, CPUs, DPUs and robotics coming in the second half. Our new chips and systems will greatly advance AI, graphics, the Omniverse, self-driving cars and robotics, and the many industries impacted by these technologies.

It can be helpful to take a step back and look at the long-term trends in cash flow generation. The chart shows historical free cash flow data in combination with forward-looking analyst estimates to gauge the main trend. Wall Street forecasts free cash flow to grow from $8.1 billion in the year ending January 2022 to $23.6 billion in the year ending January 2027.

NVIDIA Free Cash Flow

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When considering growth projections, investors should always consider whether the company has the ability to meet or, ideally, exceed those expectations.

In the specific case of Nvidia, the company has far exceeded expectations in the past, and the company looks stronger than ever from a long-term perspective.

Nvidia earnings surprise

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Evaluation

Nvidia has always been an excellent company, and the most recent report confirms that the fundamental quality of the company remains intact, regardless of the natural volatility that accompanies macroeconomic jolts.

The main negative factor affecting the stock has always been valuation, as Nvidia has traditionally traded at aggressive multiples.

In the current environment, however, the valuation is actually quite reasonable, and it’s not hard to argue that Nvidia looks cheap if the company can exceed expectations in the coming years.

The chart below shows Nvidia’s quarterly revenue and average and median surprise to estimates. The company has exceeded estimates by around 8% over time.

Earning date EPS estimate Actual EPS Surprise Surprise %
FQ1 2023 (April 2022) 1.29 1.36 0.07 5.04%
FQ4 2022 (January 2021) 1.22 1.32 0.1 7.96%
FQ3 2022 (October 2021) 1.11 1.17 0.06 5.81%
FQ2 2022 (July 2021) 1.02 1.04 0.02 2.27%
FQ1 2022 (April 2021) 0.82 0.92 0.09 11.43%
FQ4 2021 (January 2020) 0.7 0.78 0.07 10.36%
FQ3 2021 (October 2020) 0.64 0.73 0.09 14.20%
FQ2 2021 (July 2020) 0.49 0.55 0.05 10.67%
FQ1 2021 (April 2020) 0.42 0.45 0.03 6.87%
FQ4 2020 (January 2019) 0.42 0.47 0.05 12.87%
FQ3 2020 (October 2019) 0.39 0.45 0.05 13.18%
FQ2 2020 (July 2019) 0.29 0.31 0.02 8.24%
FQ1 2020 (April 2019) 0.2 0.22 0.02 8.73%
FQ4 2019 (January 2018) 0.19 0.2 0.01 6.48%
FQ3 2019 (October 2018) 0.48 0.46 -0.02 -4.08%
FQ2 2019 (July 2018) 0.46 0.49 0.02 5.10%
medium surprise 7.82%
Median Surprise 8.10%

Wall Street analysts expect Nvidia to make earnings per share of $5.45 in the fiscal year ending January 2023 and $6.52 in the fiscal year ending January 2024 Based on different short-term earnings surprise assumptions, the stock is trading in a PE Ratio in the low 30s for the current year.

That’s not too cheap, but not excessive either for such a quality growth company that has historically traded at steep valuations relative to the rest of the market.

Average estimate 5% surprise 8% surprise
EP Jan 2023 34.3 32.7 31.8
EP Jan 2024 28.7 27.3 26.6

Not only is the stock reasonably priced based on current estimates, but Nvidia has proven its exceptional ability to consistently exceed expectations over the long term, and this is the primary reason the stock has created so much value. for shareholders over the years.

The chart shows the stock price in blue, the current year revenue forecast in red, the EBITDA estimate in green, and the earnings per share forecast in light blue.

Five years ago, the market expected Nvidia to make $8.25 billion in revenue this year, now it expects nearly $34.5 billion.

Earnings estimates rose from $0.78 to $5.6 per share during this period.

Nvidia sales and revenue

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Risk and reward in the future

Nvidia has direct exposure to cyclical areas like automotive, gaming, and all kinds of industrial applications. The semiconductor industry is also globally integrated and vulnerable to supply chain disruptions. For these reasons, the macroeconomic risk is substantial at Nvidia.

That aside, Nvidia is a unique company due to its prominent presence on many of the most important technology trends, providing exponential growth opportunities over the coming years. The business is largely profitable and enjoys strong cash flow generation.

Additionally, the management team is one of the best in the tech industry. Constant innovation combined with superior technology is what has allowed Nvidia to grow and win across multiple industries, and there’s no reason to believe that trend will change, with or without macroeconomic headwinds.

The stock isn’t too cheap, but its value is reasonable given the quality of the company and its proven ability to consistently exceed long-term expectations.

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