Nvidia (NVDA.US) made its Q1'23 quarterly fiscal report on May 25, 2022 at close of business. NVDA's close ties to cryptocurrency mining could continue to put pressure on sales going forward, from a market (cryptocurrency) that has lost more than $1 trillion in value in recent days.
However, from a fundamental perspective, stocks remain a solid investment for the next decade. However, “buying the dip” is not recommended as the market continues to grapple with macroeconomic pessimism and the decline in cryptocurrencies.
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Why did NVDA fall out as the other techs?
Let's see directly some graphs to simplify:
NVDA revenue, net income and gross margin
S&P Capital IQ
Before the pandemic, NVDA had grown its revenue and net income at a constant CAGR (compound annual growth rate) of 16.44% and 18.9%. Obviously, it grew exponentially in the last two years, given the massive demand for personal computers due to the increase in remote work/study/entertainment options during the COVID-19 pandemic. And as a result, NVDA increased its revenue at a CAGR of 57.05%, while its net income grew even faster at a CAGR of 86.94%. The company also steadily improved its gross margins from 58.8% in fiscal 2017 to 64.9% in fiscal 2022.
NVDA 5Y Stock Price
source: xStation, logarithmic scale. Here it can be seen that during 2018, the fall was much more pronounced (-55%) than that recently accumulated in 2022 (approximately -52%).
As a result, it is clear that NVDA investors have benefited from its stellar growth, given that the stock had risen 580% in the last two years, before the drastic moderation that occurred at the end of 2021.
NVDA 5Y EV Ratings/Revenue and PER
S&P Capital IQ
However, it seems that the market correction is still awaited, NVDA was trading at extremely high valuations at its peak, with 3Y EV/Revenue of 28x and P/E of 72.98x. That's much higher than Intel's (INTC) valuation at 3Y EV/Revenue of 4.19x and PER of 15.47x over the past three years, and even AMD's (AMD) at 10.59x and 65.39x, respectively. In hindsight, it is clear that NVDA has been highly (perhaps over) valued, given its exposure to multiple market segments such as AI technology, autonomous electric vehicles, cloud computing servers, cryptocurrencies, and the metaverse. , among others.
Although we may also see a short-term impact, given the slowdown in Meta (FB) investments in Reality Labs (Metaverse), reduced demand for GPUs (graphics cards) from cryptocurrency mining, and the impact on production of automobiles of China's Zero Covid policy. As a result, given the uncertainties, the pain is expected to continue for at least a while, as the market consolidates in the coming quarters.
NVDA continues to invest in growth, although we see short-term impacts
NVDA Cash/Equivalents, FCF and FCF Margin
S&P Capital IQ
Notably, NVDA has been an excellent free cash flow (FCF) generator, while posting a record FCF of $8.13 billion and an FCF margin of 30.2% in fiscal 2022. The company also completed the year with a not inconsiderable amount of 1,990 million dollars in cash and equivalents, which will be useful for the expansion of its R&D expenses of 21.5% on average of its annual income in the last five years.
NVDA R&D expenses and percentage of revenue
S&P Capital IQ
Assuming NVDA continues with its reinvestments (which is very likely), we could expect the company to spend up to $7.4 billion on R&D by fiscal 2023. High-growth tech companies like NVDA need to develop their future capabilities and product innovations to maintain your edge in the highly competitive semiconductor industry. However, there are also inherent risks that many companies may slow down their Capex investments in the coming quarters given the looming recession and rising interest rates. Consequently, NVDA could also reduce its R&D spending in the short term, given the possible slowdown in revenue growth.
NVDA Projected Revenue and Net Income
S&P Capital IQ
Over the next three years, NVDA is expected to deliver impressive revenue growth and net profit at a CAGR of 18.99% and 27.19%, respectively. For fiscal year 2023, the consensus estimates that the company will report revenue of $34.77 billion and net profit of $14.39 billion, representing remarkable year-over-year growth of 29.2% and 47.5%, respectively.
Investors will be watching NVDA's performance in the first fiscal quarter of 2023, in which the company itself had set a revenue target of $8.1 billion and a gross margin of 65.2%. Assuming the company successfully beats its own and consensus estimates of $8.09bn (they are slightly under, thus NVDA is more positive about its results), we can be confident of a short-term recovery.
However, it is also important to note that NVDA is expected to record a $1.36 billion write-off for the quarter due to the failure of the ARM acquisition, by decision of the UK antitrust officer. Additionally, given the quarter's exposure to prolonged lockdowns in China, NVDA's revenue may also be negatively affected. As a result, the market expects mixed results in the first fiscal quarter of 2023, which could lead to a further decline in the value of its shares. We will see.
NVDA is currently trading at an EV/Revenue of 11.93x and a PER of 30x, lower than its 5-year average of 13.34x and 39.91x, respectively. The stock is also trading at $166.99 on May 23, 2022, down -51.8% from the 52-week high of $346.47. Given the recent bearishness in the market, there is a chance that the stock will pull back further below its 52-week low at $135.43 in the coming days, before bouncing back with a positive catalyst, which could be its FQ1' results. 23 on May 25, 2022, after the Wall Street close.
Given this analysis, the technical expectations are that the NVDA share may recover part of its price. The bullish divergence offered by the RSI indicator, and started at the break of the support at $208.88 on April 21, offers the perspective that the results will be a great catalyst for investors to reflect what the indicator tells us. is warning. Faced with an inverted head and shoulders formation.
Darío García, EFA