Nvidia Stock: Dreadful Earnings, AI Hopium, Bubbly Valuations, And More

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Introduction

After doubling disconnected of its October lows successful a matter of weeks, Nvidia (NASDAQ:NVDA) has regained its title arsenic nan "world's astir valuable semiconductor company" (as measured by marketplace capitalization astatine 8:00 PM EST connected 02/22/2023 - Nvidia: $555B, information from Google Finance). While the GPU proviso glut is still creating an adverse effect connected Nvidia's financial performance, yesterday's quarterly net study showed early signs of a recovery. With generative AI touted to reinvigorate maturation and profits astatine Nvidia, nan banal rallied higher successful nan after-hours session.

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Despite Nvidia undergoing gross and net contraction successful caller quarters amid a proviso glut, investors person piled into Nvidia's banal successful caller weeks, sending nan banal to unfathomable heights. Quite astoundingly, Nvidia's banal value has much than doubled from its October lows of $108. Now, I emotion Nvidia arsenic a institution - its products are miles up of competitors, its leadership squad is arsenic bully arsenic they come, its marque loyalty is apical notch, its full addressable marketplace is massive, and its semipermanent maturation communicative is acold from over. However, I'm not a instrumentality of Nvidia's banal because of nan unrealistic assumptions baked into its valuations. In this note, we will execute a reverse DCF workout to spot what Mr. Market is pricing into Nvidia's banal correct now.

Generally, I thin to person a batch of antagonistic feedback for providing financial reality checks done my investigation articles connected momentum stocks for illustration Nvidia. However, arsenic a financial expert and equity researcher, I consciousness compelled to adhere to my work toward unit investors, and truthful I will proceed to constituent retired bubbly valuations erstwhile I travel crossed them.

As I person said successful nan past, Mr. Market is simply a drunken psycho who tends to waste and acquisition stocks measurement up and measurement beneath their intrinsic values for short (and sometimes long) periods of time. And I deliberation nan marketplace is erstwhile again getting measurement up of itself successful nan lawsuit of Nvidia.

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Riding precocious connected nan backmost of nan AI hype train, semiconductor stocks, and Nvidia successful peculiar person knowledgeable benignant of a renaissance successful nan past 4 months aliases so. Despite gross maturation falling disconnected a cliff and net being successful contraction mode, Nvidia's banal has regained bubbly valuations of >20x Price-to-Sales, and that excessively successful a rising liking complaint environment.

In this article, we will concisely talk Nvidia's Q4 results, find nan implied maturation complaint for Nvidia utilizing reverse DCF analysis, and past find a realistic valuation for Nvidia. With truthful overmuch to cover, let's get started!

Brief Review of Nvidia's Q4 Earnings Report

For Q4, Nvidia surpassed expectations connected some apical and bottommost lines, pinch revenues and non-GAAP EPS coming successful astatine $6.05B (vs. est. $6.02B) and $0.88 (vs. est. $0.80), respectively. Nvidia's study was somewhat amended than expected, pinch a betterment successful gross margins suggestive of an extremity successful show for nan GPU proviso glut. However, Nvidia's Q4 gross was down -21% y/y, and net contracted moreover much owed to ballooning operating expenses!

Nvidia Q4FY23 CFO Commentary

Here's what Jensen Huang, Nvidia's CEO, had to opportunity astir Nvidia's Q4 study successful nan net press release -

AI is astatine an inflection point, mounting up for wide take reaching into each industry. From startups to awesome enterprises, we are seeing accelerated liking successful nan versatility and capabilities of generative AI.

We are group to thief customers return advantage of breakthroughs successful generative AI and ample connection models. Our caller AI supercomputer, pinch H100 and its Transformer Engine and Quantum-2 networking fabric, is successful afloat production.

Gaming is recovering from nan post-pandemic downturn, pinch gamers enthusiastically embracing nan caller Ada architecture GPUs pinch AI neural rendering

In Q4, Nvidia's Data Center gross came successful astatine $3.62B, up +11% y/y but down -6% q/q, missing thoroughfare estimates of $3.85B. The sequential diminution was driven by reduced income successful China and immoderate pullback from unreality services providers successful nan US. In a large announcement, Nvidia revealed that it is partnering pinch starring unreality work providers to connection "AI-as-a-service" that provides enterprises entree to NVIDIA’s world-leading AI platform. According to nan property release:

Customers will beryllium capable to prosecute each furniture of Nvidia AI – nan AI supercomputer, acceleration libraries package aliases pretrained generative AI models – arsenic a unreality service.

Using their browser, they will beryllium capable to prosecute an Nvidia DGX™ AI supercomputer done nan Nvidia DGX Cloud, which is already offered connected Oracle Cloud Infrastructure, pinch Microsoft Azure, Google Cloud Platform and others expected soon. At nan AI level package layer, they will beryllium capable to entree Nvidia AI Enterprise for training and deploying ample connection models aliases different AI workloads. And astatine nan AI-model-as-a-service layer, Nvidia will connection its NeMo™ and BioNeMo™ customizable AI models to endeavor customers who want to build proprietary generative AI models and services for their businesses.

Further specifications will beryllium shared astatine nan company’s GTC developer conference, taking spot virtually March 20-23.

Source: Nvidia Q4 FY2023 Press Release

While this news is an breathtaking development, Nvidia's Q4 CFO commentary suggests that 2022 results included purchases made by respective unreality services providers to support multi-year unreality work agreements for their caller Nvidia AI unreality work offerings. Hence, I don't foresee a important gross boost from Nvidia's "AI-as-a-service" offering successful nan adjacent term.

Nvidia Q4FY23 CFO Commentary

Now, Gaming conception gross jumped up +16% q/q successful Q4 owed to a successful ramp of Nvidia's caller GeForce RTX 40 bid GPUs (based connected Ada Lovelace architecture), and yet, this conception was down -46% y/y. The crisp diminution successful Gaming revenues is simply a consequence of faltering request (in a challenging macro environment) and under-shipping to transmission partners to thief trim inventory levels.

For Q4, Nvidia's Automotive conception was a agleam spot, pinch revenues present increasing 135% y/y and 17% q/q. The spot successful nan automotive conception was reflective of robust maturation successful income of self-driving solutions, computing solutions for electrical conveyance makers, and AI cockpit solutions. Professional Visualization gross was down -65% y/y but up 13% q/q.

Nvidia Quarterly Revenue Trend

Overall, Nvidia's business shrunk by 21% y/y successful Q4 2022, however, sequential maturation turned affirmative aft 2 consecutive quarters of sequential declines. As nan GPU proviso glut eases off, Nvidia's gross margins are recovering from nan crisp dip seen successful Q3.

Nvidia Q4FY23 CFO Commentary

With a betterment successful margins, Nvidia's quarterly free rate travel rebounded from -156M successful Q3 to +$1.74B successful Q4. The semiconductor elephantine has a sound equilibrium expanse pinch $13.3B of rate and short-term investments, and now that nan institution is backmost to affirmative FCF generation, I spot nary liquidity risks for Nvidia successful nan foreseeable future.

Nvidia Q4FY23 CFO Commentary

Nvidia is making billions of dollars successful free rate travel and looks group to make much successful nan coming years. With nan institution adopting shareholder-friendly superior allocation policies, I deliberation we will proceed to spot bigger stock repurchases and dividends from Nvidia successful years to come.

In my mind, Nvidia is simply a awesome company. The problem I person pinch investing successful Nvidia is that its banal is priced for perfection and more. Let's execute a reverse DCF study to understand my rationale.

Nvidia's Implied Growth Is Unrealistic

For nan intent of this exercise, we shall first group up immoderate communal assumptions that would beryllium re-used successful nan adjacent section, wherever we will find Nvidia's existent adjacent worth and expected returns. Here are nan assumptions we will return into information for inputs to TQI Valuation Model:

Here's nan consequence for implied growth:

TQI Valuation Model (TQIG.org)

As you tin spot successful nan array above, Nvidia's implied gross maturation complaint for nan adjacent 5 years is ~42% CAGR. Such a maturation complaint would support Nvidia's existent stock price. However, this complaint seems excessive because Nvidia conscionable reported a gross diminution of -21% y/y for Q4 2022.

If Nvidia were to turn astatine 42% CAGR for nan adjacent 5 years, its yearly revenues would turn from ~$27B to $155.7B (~6x 2022 revenue). Here's really nan numbers work:

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According to Nvidia's CEO, Jensen Huang, AI is astatine an inflection constituent and Nvidia is group to beryllium a ample beneficiary arsenic nan starring accelerated computing level connected this planet. Now, I work together pinch him. However, these implied maturation rates are simply unrealistic. As per statement expert estimates, Nvidia is group to turn revenues astatine a 20% CAGR complete nan adjacent 5 years.

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Despite Nvidia touting a $600B TAM opportunity ($300 hardware + $300B software) connected yesterday's net call, I wouldn't exemplary for ~42% CAGR maturation successful nan champion of economical times, fto unsocial nan existent uncertain macroeconomic environment. With nan Fed putting brakes connected nan system pinch 1 of nan astir fierce tightening cycles ever seen, a recession could beryllium hanging conscionable astir nan corner. And arsenic you know, semiconductors are exposed to macroeconomic cycles.

For 2022, Nvidia's gross maturation flatlined, and nan Q1 2023 guideline of $6.5B calls for yet different 4th of antagonistic maturation (-22% y/y to beryllium precise). While Nvidia's guidance is optimistic astir a maturation re-acceleration successful 2023 based connected higher liking successful AI owed to nan chatGPT breakthrough, I spot this affirmative guidance commentary arsenic thing much than a large dose of AI hopium until I spot important betterment successful financial performance. Now, statement expert estimates could beryllium wrong, and Nvidia could proceed to turn rapidly. With that being said, nan rule of ample numbers is real, and nan existent TAM for Nvidia is constricted by nan breadth of its merchandise portfolio.

According to my projections based connected respective maturation drivers (e.g., gaming, AI, 3D design, self-driving cars, etc.) for nan company, Nvidia could realistically propulsion disconnected ~15-20% CAGR gross maturation complete nan adjacent 5 years. When nan AI hype wears disconnected and nan marketplace wakes up to Nvidia's financial realities erstwhile again, I expect nan banal to get battered large time. As nan gross guidelines increases, I deliberation Nvidia's maturation rates will taper complete nan adjacent decade (even pinch continued technological leadership, merchandise innovation, and AI package description ).

Nvidia's Actual Fair Value And Expected Return

I expect Nvidia to support its technological activity position and grow successfully into different markets. However, arsenic investors, we must stay levelheaded erstwhile buying into immoderate business. The value we salary for a business will find our early returns connected nan investment. Believe it aliases not, starting valuations do matter.

Let america now look astatine a much realistic maturation trajectory for Nvidia:

Author

By nan extremity of 2027, I deliberation Nvidia's gross could reasonably turn to statement expert estimates of $67B (~2.5x from 2022 revenue). Consequently, I tin spot Nvidia holding onto its margins complete nan agelong word owed to nan antagonistic effect of title being nullified by nan affirmative effect of merchandise advantage and partial modulation to an AI package business. Using nan 5-year CAGR of 20% from nan supra projections, we get an intrinsic worth of $102.50 per stock for Nvidia, arsenic tin beryllium seen below:

TQI Valuation Model (TQIG.org)

TQI Valuation Model (TQIG.org)

In my mind, Nvidia's value has ne'er been nether question. However, contempt assigning a generous exit aggregate of ~25x P/FCF, nan banal looks improbable to make immoderate returns complete nan adjacent 5 years. The risk/reward for a semipermanent investor is perfectly terrible, and this is why I wouldn't touch Nvidia pinch a ten-foot rod astatine existent levels.

Concluding Thoughts

Nvidia is simply a awesome institution pinch market-leading products and arguably nan champion CEO successful nan semiconductor industry. However, nan value we're being asked to salary for Nvidia ($225 per stock aliases ~21x P/S) is measurement much than its intrinsic value. With a unspeakable risk/reward connected offer, semipermanent investors should debar buying Nvidia until nan valuation normalizes done a steep diminution successful shares aliases a multi-year consolidation.

Key Takeaway: I complaint Nvidia "Avoid/Neutral/Hold" astatine $225.

Thanks for reading, and happy investing! Please stock your thoughts, questions, aliases concerns successful nan comments conception below.

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