Stock of the week - Nvidia (23.05.2024)

• Nvidia showed its results for 1Q25. 
• The company again beat expectations. 
• Revenues of the most important Data Center segment rose 427% y/y. 
• Nvidia raises forecasts for Q2. 
• Announcement of a stock split.
• A look at valuation. 

Nvidia beat market forecasts for another quarter in a row. Before the publication of the 1Q25 report (the company's fiscal year does not coincide with the calendar year), the main question the market was asking was not "whether it would beat" estimates but "by how much." With such heavily inflated expectations, there was strong pressure on the company's stock price; however, Nvidia's report, as well as CEO Jensen Huang's comments, reassured investors that there was further strong growth potential for the company. 

Impressive 1Q25 results 

Nvidia achieved revenue of $26 billion (+262% y/y) in Q1. Improved performances in every business segment were the risen for such an increase in sales. The largest growth was, of course, in the Data Center segment, which has been the focus of investors' attention in recent quarters. Revenues were equal $22.56 billion, an increase of 427% y/y. This is the highest revenue growth rate for this segment in the company's history.

Nvidia also reported an improvement in revenue in the Gaming segment to $2.87 billion (+56% y/y ), in the Professional Visualization segment revenue rose to $463 million (+105% y/y), and in OEM & Other to $90 million (+7% y/y). The only segment that lost y/y is the Automotive segment, where revenues fell to $281 million (-4% y/y). However, it should be remembered, as shown in the chart below, that in the case of Nvidia, the assessment of its performance depends primarily on the Data Center segment, which sales value in 1Q25 alone was equivalent to 83% of Nvidia's total revenues for 2023. So we can see that as long as the company maintains a strong performance in this segment, the rest of the data does not have as much impact on its market valuation. 

Source: Bloomberg Finance L.P., XTB Research

While the segmental revenue growth rates are very impressive, in evaluating future data it is worth remembering that 1Q24 was the last quarter in which Nvidia did not record a jump in earnings related to the AI boom. Thus, although the company will most likely continue to grow its sales, the times of dynamics above 200% are behind us due to the high base effect. 

Also it is wroth mentioning that the company continued to improve its margin. Its operating income reached $18.06 billion, which translates into an operating margin of 69.3%, a drastic improvement in profitability compared to the previous year (when the operating margin was only 42%). The improved profitability underlines an effective cost management policy. Operating expenses increased year-on-year by only 13%, which, with such high revenue growth, is an impressive achievement. 

All this translates into an increase in net income to $15.24 billion (+462% y/y), and diluted earnings per share were $6.12 in 1Q25 (vs. $1.09 a year earlier and $5.16 in the previous quarter). 

1Q25 financial results:

• Revenue $26.04 billion vs. $7.19 billion y/y, estimate $24.69 billion
  • Data center revenue $22.6 billion vs. $4.28 billion y/y, estimate $21.13 billion
  • Gaming revenue $2.6 billion, +16% y/y, estimate $2.62 billion
  • Professional Visualization revenue $427 million, +45% y/y, estimate $479.1 million
  • Automotive revenue $329 million, +11% y/y, estimate $292.4 million
• Adjusted gross margin 78.9% vs. 66.8% y/y, estimate 77%
• R&D expenses $2.72 billion, +45% y/y, estimate $2.73 billion
• Adjusted operating expenses $2.50 billion, +43% y/y, estimate $2.51 billion
• Adjusted operating income $18.06 billion vs. $3.05 billion y/y, estimate $16.46 billion
• Adjusted EPS $6.12 vs. $1.09 y/y, estimate $5.65
• Free cash flow $14.94 billion vs. $2.64 billion y/y, estimate $12.29 billion

2Q outlook

The company expects revenue to continue to grow in Q2, this time to $28 billion (+/- 2%). Such forecasts still seems slightly below the company's full potential. Still, it is higher than the consensus forecast (projected revenue: $26.8 billion). In the coming days, we can expect an upward revision of expectations for the company's future results.

The company also anticipates the first steps toward normalizing its gross margin. In Q2, it expects it to be 75.5%. This further implies a result of higher than the average for the last 7 quarters, while it is 3.4 p.p. lower than this quarter's margin. 

The company estimates operating expenses at around $2.8 billion, which will represent a 12% q/q growth rate. Still, the gap between Nvidia's margins and its competitors remains significant. 

Outlook for 2Q25:

• Revenues: $28 billion (+/- 2%) 
• Gross margin: 75.5%; for the full year: around 75% 
• Operating expenses: $2.8 billion; full-year growth: in the range of 40-45% 
• Result on other operations (excluding gains and losses on unrelated investments): $300 million
• Tax rate: 17% (+/- 1%)

Dividend growth and stock split

The company announced a 150% increase of the dividend. This is primarily due to the planned 10-1 stock split, after which the dividend per share will be $0.01. Hence, we consider such a rapid increase in the dividend as a one-time event and do not expect similar changes of such high dynamics in the future. 

Stock splits can also help strengthen the demand side, adding (little) potential for further growth. Share splits have historically proved positive for company listings, although they do not fundamentally change the situation of companies, but only increase their popularity among individual investors. The stock split will be conducted on June 7, 2024, and the first session with new share prices will begin on June 10 (Monday). 

A look at valuation

Let's take a look at Nvidia's valuation using 2 frequently used valuation methods - DCF and multiples valuation. We want to emphasize that these valuations are for presentation purposes only and should not be seen as recommendations or target prices. The price values were given for the stock before the split. 

DCF

Let's start with the most popular valuation method, which is the discounted cash flow (DCF) method. This method is based on a series of strict assumptions, of which even a small change in any of them can have a significant impact on the final price. In the case of Nvidia, due to the nature of its business benefiting strongly in recent quarters from the boom associated with the growing popularity of AI, valuation by this method is particularly prone to deviation. Due to strong earnings volatility, we decided to conduct a detailed valuation over a five-year period, assuming average revenue growth of 50% and an operating margin of 60% over that time, which is lower than the company's forecast for the coming year. We assumed a weighted cost of capital based on the average value for the last 5 years of 13%. In terms of residual value, we made an assumption of 10% revenue growth (to try to capture the potential of AI market), and we took the WACC over the residual period at the same level as for the detailed forecast, i.e. at 13%. 

Such assumptions result in a valuation of Nvidia shares at $1034.74, which implies about 9% upside potential from the last closing price (before the results). 

Due to the sensitivity of the DCF valuation to individual assumptions, below is a matrix of valuation changes depending on assumption fluctuations. 

Source: Bloomberg Finance L.P., XTB Research

Source: Bloomberg Finance L.P., XTB Research

Multiples

Next, let's look at how Nvidia compares to other companies. The comparison group consists of 7 companies operating in a similar sector as Nvidia. It is worth noting that this type of valuation is subject to potential deviations due to the different sizes of the companies' operations. This is particularly evident in the case of Nvidia, which, given the current market environment, is the clear leader in its sector. The ratios we have adopted are: P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA. Due to the large gap between Nvidia and the rest of the market, we decided to value through capitalization-adjusted ratio values. As a result of the comparative valuation, the value of Nvidia shares was set at $635.99, which is 33% lower than Wednesday's closing price.

Source: Bloomberg Finance L.P., XTB Research
 

Price chart 

Nvidia's price goes up more than 8% after the report. Thus, the company sets a new ATH. The company is already up 115% since the beginning of the year. After such forecasts and results, the market does not see any supply pressure that could threaten the company, pulling its stock price lower. What's more, the company broke through the psychological barrier of $1,000 today, which, from the perspective of price analysis, can also mean the consolidation of a positive trend. The company has been in an uptrend since breaking out of the levels of early January 2024.

Source: xStation