Nvidia NVDA shares have plummeted since the company released its second-quarter earnings report on August 28. Below is Morningstar’s take on Nvidia’s earnings and stock price.
Nvidia reported strong earnings and gave investors guidance for the October quarter that beat our prior forecast and FactSet consensus estimates.
In the near term, we still expect the company’s data center revenue to grow by several billion dollars per quarter as it further ramps up GPU production capacity, and we are encouraged that large cloud customers continue to plan increased AI investments.
Even as Nvidia’s next-generation Blackwell products arrive later this year, the company isn’t stopping purchases of its existing Hopper family of products. Blackwell is expected to generate more than $3 billion in revenue in the fiscal fourth quarter (ending January 2025).
Nvidia also expects data center revenue from national governments to exceed $10bn (£7.6bn) this year, up from its previous estimate of “high single-digit billions” issued last quarter. This revenue stream may be more stable in the long term as it is not dependent on governments’ ability to generate AI revenue.
We believe Nvidia’s stock was likely sold in response to the earnings report, as its growth guidance for the October quarter was not as impressive as in past quarters.
Key Morningstar Indicators for Nvidia
• Estimated fair value: $105.00
• Morningstar rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Very High
Nvidia’s fair value estimate
With a three-star rating, we believe Nvidia’s shares are fairly valued relative to our long-term fair value estimate of $105 per share (approximately $2.5 trillion in equity value), which implies a price-adjusted earnings multiple of 37x fiscal year 2025 (ending January 2025, effectively calendar year 2024) and a price-adjusted earnings multiple of 27x fiscal year 2026.
Our fair value estimate and Nvidia’s stock price will be driven, for better or worse, by the outlook for data center and AI GPUs. Nvidia’s DC business has already grown exponentially, from $3 billion in FY2020 to $15 billion in FY23 and then more than triple to $47.5 billion in FY24. DC revenue appears to be supply constrained, but as supply increases, we believe Nvidia will continue to grow revenue steadily in all four quarters of FY25. Based on Nvidia’s strong start to FY25, we expect DC revenue to grow 133% to $111 billion in FY25. Over the next three years, we forecast a compound annual growth rate of 23% as we expect a strong increase in data center capital spending among large enterprises and cloud computing customers. We believe it is natural for NVIDIA to face inventory correction and sluggish AI demand in the medium term. Excluding the sharp fluctuations we modeled over the past year, we expect DC to grow at an average annual rate of 10% thereafter, and we believe this is a reasonable long-term growth rate as AI matures.
Economic Moat Assessment
We believe NVIDIA has a wide defensive wall due to intangible assets around its graphics processing units and increased switching costs around its proprietary software, such as its Cuda platform for AI tools that allows developers to build AI models using the company’s GPUs.
Nvidia was an early leader and designer of GPUs, originally developed to offload graphics processing tasks for PCs and gaming consoles. The company has emerged as the clear market share leader in discrete GPUs (over 80% share according to Mercury Research). We believe this leadership is due to the intangible assets associated with GPU design, and the associated software, frameworks, and tools developers need to operate these GPUs. In our view, recent introductions such as ray tracing technology and the use of AI tensor cores in gaming applications are evidence that Nvidia has not lost its GPU leadership. A quick look at GPU pricing in gaming and DC shows that the company’s average selling price is often double that of its closest competitor, Advanced Micro Devices (AMD).
Read more about Nvidia’s economic moat.
Financial Strength
NVIDIA’s financial position is extremely strong. As of April 2024, the company has $31.4 billion in cash and investments, compared to $9.7 billion in short-term and long-term debt. Semiconductor companies tend to hold large cash balances to help them weather cycles in the chip industry. In downturns, this gives them the breathing room and flexibility to continue investing in research and development needed to stay competitive and technologically strong. NVIDIA’s dividends are largely insignificant compared to the company’s financial position and future prospects, with most of its distributions to shareholders coming in the form of share buybacks.
Learn more about Nvidia’s financial strength.
Risks and Uncertainties
Nvidia has a “very high” uncertainty rating from Morningstar. The company is the industry leader in GPUs used to train AI models, which account for most of the demand for chips used in AI inference workloads (the task of running models to make predictions or outputs).
Many technology leaders are competing with NVIDIA for its AI leadership position. We believe it is inevitable that large hyperscale vendors will seek to reduce their reliance on NVIDIA and diversify their semiconductor and software supplier base, including by developing their own solutions. Among the incumbent semiconductor vendors, AMD is rapidly expanding its GPU lineup to cater to these cloud leaders. Intel also now has AI accelerator products and will likely continue to focus on this opportunity.
Learn more about Nvidia’s risks and uncertainties.
NVDA bulls say
Nvidia’s GPUs offer industry-leading parallel processing, which was historically required for PC gaming applications but is now extending to cryptocurrency mining, AI and likely future applications.
Nvidia’s datacenter GPUs and Cuda software platform have established the company as a leading vendor for AI model training, a use case that is expected to grow exponentially over the next few years.
The company has first-mover advantage in the autonomous driving market, which could lead to widespread adoption of its Drive PX autonomous driving platform.
NVDA’s Bear Opinion
Nvidia is currently the leading AI chip vendor, but other powerful chipmakers and tech giants are focusing on developing their own chips.
Cuda is currently the leader in AI training software and tools, but the big cloud vendors are likely looking for more competition in this space and may move towards alternative open source tools as they emerge.
Nvidia’s gaming GPU business has often seen boom and bust cycles based on demand for PCs and, more recently, cryptocurrency mining.
This article was compiled by Renee Kaplan.
