Valuentum Exclusive Analysis for the Discerning Investor

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Image Source: Nvidia Corporation – GTC Spring 2021 Investor Day Presentation

By Callum Turcan

On May 26, Nvidia Corporation (NVDA) reported first quarter earnings for fiscal 2022 (period ended May 2, 2021) that beat both consensus top- and bottom-line estimates. Demand for Nvidia’s chips used in data center and gaming offerings remains robust. Looking ahead, Nvidia provided guidance for the fiscal second quarter during its latest earnings update that indicated its strong performance was expected to continue.

Earnings Update

Revenue from Nvidia’s ‘Gaming’ business operating segment was up 106% year-over-year and 11% sequentially last fiscal quarter as demand for laptops and desktops remained strong. The work-from-home trend became a big part of the weekly routine for many households in the wake of the coronavirus (‘COVID-19’) pandemic, though this trend likely has long legs and is supporting demand for laptops and desktops. Interest from gamers is also holding up nicely, as many households turned to video games to pass the time during the pandemic.

Management noted Nvidia’s Gaming unit also likely benefited from cryptocurrency mining demand during the company’s latest earnings call. Specifically, management noted that the firm’s Cryptocurrency Mining Processors (‘CMPs’), a new product line, generated $155 million in revenue in the fiscal first quarter, and these offerings are expected to generate $400 million in revenue in the second fiscal quarter. Sales of CMPs do not fully incorporate all the activity from cryptocurrency miners given the ability to use similar chip offerings from Nvidia to accomplish the same end goal. Note also that Nvidia launched its CMPs product line to maximize the availability of its GeForce graphics cards for gamers by optimizing its supply chain, and that Nvidia was modifying some of its GeForce offerings to make them less viable for cryptocurrency mining to encourage these customers to use its CMPs instead.

Pivoting now, revenue from Nvidia’s ‘Data Center’ business operating segment grew by 76% year-over-year and 8% sequentially last fiscal quarter. Demand for this segment’s offerings was supported by the proliferation of cloud computing as the backbone of modern IT operations. This dynamic is driving up interest for big data analytics and AI offerings as enterprises, governments, and other entities seek insights from the vast treasure troves of data they collect every day from their routine operations. Nvidia continues to innovate on these fronts. The firm recently launched its Nvidia Jarvis framework which provides “developers with state-of-the-art pre-trained deep learning models and software tools to create interactive conversational AI services that are easily adaptable for every industry and domain,” and we are excited by the potential upside here.

Nvidia completed its acquisition of Mellanox in late April 2020, which focuses on data centers and high-end computing needs. The deal helped Nvidia’s performance last fiscal quarter on an inorganic basis as it concerns year-over-year comparisons, but please note the lion’s share of its Data Center unit’s revenue growth was due to strong underlying organic demand for its offerings.

In April 2021, Nvidia announced its first central processing unit (‘CPU’) offering for data centers, the Nvidia Grace CPU, which is optimized to handle natural language processing, recommender systems, and AI computing operations. This offering is expected to become available in 2023, and we appreciate how Nvidia continues to push the envelope as it concerns semiconductor design innovation. Nvidia spent just under $1.2 billion on R&D expenses in the first quarter of fiscal 2022, up 57% year-over-year.

Firms worldwide are contending with a shortage of semiconductor components which has hit the automotive industry quite hard. Nvidia’s ‘Automotive’ business operating segment posted a 1% year-over-year decline in revenues last fiscal quarter, though on a sequential basis, sales at this unit were up 6%. Please note that while Nvidia designs chips, it does not produce them in commercial quantities as the firm outsources production to third parties that operate semiconductor foundries, firms such as Taiwan Semiconductor Mfg. Co. Ltd. (TSM) and Samsung Electronics Co (SSNLF). Revenue at Nvidia’s ‘Professional Visualization’ business operating segment was up 21% on both a year-over-year and sequential basis last fiscal quarter, aided by recent collaborations with key enterprises.

Financials Remain Strong

In the first quarter of fiscal 2022, Nvidia’s GAAP revenues advanced 84% year-over-year and its GAAP operating income more than doubled year-over-year as growth in its operating expenses was outpaced by its surging revenues. Nvidia generated $1.6 billion in free cash flow last fiscal quarter (which more than doubled year-over-year) while spending a modest $0.1 billion covering its dividend obligations. The firm did not repurchase a meaningful amount, or any, of its outstanding common stock in the fiscal first quarter as Nvidia is in the process of acquiring ARM Limited through a massive ~$40 billion cash-and-stock deal that we covered in detail here. During Nvidia’s latest earnings call, management noted that the firm “remain[s] on track to close the transaction within our original timeframe of early 2022.” We are keeping an eye on the acquisition.

At the end of Nvidia’s fiscal first quarter, it had a $5.7 billion net cash position (inclusive of short-term debt) though the cash component of its pending ARM Limited acquisition could see that flip to a net debt position if the deal gets completed. However, Nvidia may continue to build up cash on its balance sheet before the acquisition is finalized given its impressive free-cash-flow generating abilities and relatively modest dividend obligations. Material regulatory hurdles, with an eye towards anti-trust concerns, remain a key obstacle. It is far from certain that Nvidia’s pending ARM Limited deal will receive the necessary regulatory approvals.

Concluding Thoughts

Nvidia posted a solid earnings report. The company’s near-term guidance indicates Nvidia expects to continue growing at a brisk pace going forward, at least in the near term. Beyond expected growth in its new CMPs product lines, the firm expects demand for its gaming and data center offerings will remain robust (management mentioned that was expected to be the case during Nvidia’s latest earnings call). The company’s board of directors declared a four-to-one stock split on May 21, though this move still needs to be approved by shareholders during Nvidia’s 2021 Annual Meeting of Stockholders that will be held virtually on June 3. Should the measure get approved, the stock split would go into effect in July 2021.

Shares of NVDA are trading in the upper bound of our fair value estimate range as of this writing, indicating Nvidia is fairly valued, and we do not intend to add shares of Nvidia as an idea to our newsletter portfolios at this time. Our favorite semiconductor firm is Qualcomm Inc (QCOM), which is trading right near the bottom of the lower bound of our fair value estimate range as of this writing. We include QCOM as an idea in our Dividend Growth Newsletter portfolio.

Downloads

Nvidia Corp's 16-page Stock Report (pdf) >>

     Nvidia's Dividend Report (pdf) >>

Qualcomm's 16-page Stock Report (pdf) >>

     Qualcomm's Dividend Report (pdf) >>

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Callum Turcan does not own shares in any of the securities mentioned above. Apple Inc (AAPL), Cisco Systems Inc (CSCO), and Microsoft Corporation (MSFT) are all included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Alphabet Inc (GOOG) Class C shares, Facebook Inc (FB), Korn Ferry (KFY), PayPal Holdings Inc (PYPL) and Visa Inc (V) are all included in Valuentum’s simulated Best Ideas Newsletter portfolio. Oracle Corporation (ORCL) and Qualcomm Inc (QCOM) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.