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Nvidia Q4 Earnings: Solid Company, Risky Stock

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

While Nvidia’s (NVDA) executives might be celebrating this earnings season, many professional investors have many reasons to give pause. Central to this is the contention that the company’s outlook versus that of the stock is increasingly divorced.

The Good: Solid Earnings and a Shift in Consumer Mix

Key line items are examined with a “first-order” matrix to inspect their year-on-year change as well as a “second-order” matrix to winnow out sustained growth trends. The conclusions therein are singularly interesting:

Source: Company Financials, Leverage Shares analysis

After Fiscal Year (FY) 2022, there has been explosive change in the largely-orderly shifts in trends. In the present FY:

  • Revenue growth outpaces cost of revenue threefold while cost of operations increases a paltry 2%;

  • Gross Profit and Net Income have shaken off the slumps seen in the previous FY to exhibit a massive outperformance well exceeding that of revenue-related trends, while the Gross Margin shows a 30% improvement over the previous FY at 73.8%;

  • Inventories are only up 2% while a massive pileup in Accounts Receivable pushes current assets to 5-year highs;

  • Net Income Per Share (or diluted EPS) has shown the biggest outperformance over all other trends with a nearly 700% markup relative to the previous FY.

The second-order trends, however, indicate how singular this moment is from historical trends. Virtually no single line item shows a sustained growth trend in any way, shape or form.

The company’s products had long been favoured by the gamer and crypto miner. Over the past couple of years, however, the consumer mix has decidedly shifted towards the “corporate”:

  • The data center segment registered a 217% first-order change to $47.5 billion, with numerous enterprise solutions in language models, generative AI and medical applications.

  • Language models and generative AI are writ large on its next biggest segment – Gaming – which delivered $10.4 billion this year (15% first-order change), with the bulk attributable to increasing inroads with game developers.

  • The second-largest first-order change (21%) and the smallest revenue contributor ($1.1 billion) was the automotive segment, with increased adoption by Chinese carmakers Great Wall Motors and Li Auto lying square and center.

The company’s massive boost in earnings, however, doesn’t translate to a massive dividend bonus for long-term investors. With dividends staying at $0.04, the yield is at the 0.02% mark. The company spent $9.5 billion in stock repurchases over the year – nearly identical to the $10 billion spent in the previous FY.

The Mixed: Nvidia isn’t the Most Valued Chip Stock

The semiconductor industry has been a substantial recipient of investor attention over the past couple of years, with “AI” being a dominant theme therein. The performance of a pool of 120 semiconductor/chipmaking-related stocks (which includes the company) depict this in stark terms.

Source: CSI Markets, Inc

Up until Q4 2022, market participants were fairly measured in their outlook for this sector. Despite Q1 2023 being a relatively bad period for stock performance, investor vigour contributed to a doubling of the Price-to-Earnings (PE) Ratios over the previous quarter. Barring a slight adjustment upwards in the next two quarters, massive net income accruals in Q4 2023 pushed the sector’s PE aggregate to a twelvefold of its value a year prior.

The company’s position within this sector, however, is mixed. As of the day before the earnings release, NVIDIA ranked:

  • 10th in PE Ratio. California-based “fabless” chipmaker SiTime Corporation (SITM) ranked 1st.

  • 5th in Price to Sales (PS) Ratio. Canada-based chip-scale photonic solutions provider Poet Technologies (Canadian ticker: PTK) ranked 1st.

  • 5th in Price to Cashflow (PCF) Ratio. California-based semiconductor fabrication support specialist Ultra Clean Holdings, Inc (UCTT) ranked 1st.

The Bad (?): It’s Time to Rationalize

As the company’s consumer mix changed over 2023, so did the company’s PE Ratio.

Source: Leverage Shares analysis

As of the day before the earnings release, the PS Ratio was down 38% from a high of 45.5 while the PE Ratio was down 74% from a high of 222.

Traded volume was generally in the 45-65 million range except during options expiry/rollover and earnings release. When overlaid against the put-call interest ratio, the stock shows increasingly strong evenness in outlook. Through most of 2023, market participants were predominantly bearish on their outlook of stock valuation. In the current year, however, they have trended towards a ratio of 1.

Source: Leverage Shares analysis

As the PE Ratio rationalized, the Put-Call Ratio stabilized. Recent trends indicate that there is still a downward push on rationalizing the PE Ratio further.

The company predominantly operates as a designer while the bulk of the manufacturing/assembly of disparate components is carried out by Taiwan-based TSMC. Given that there is no single correct “architecture” and design is highly dependent on application, the company’s “high water mark” currently achieved via successful corporate outreach and collaborations comes with the caveat that its counterparts will constantly look towards optimizing cost and performance based on need.

Another factor is the problem with the “Magnificent Seven”, which has become a refuge for hype-driven investors. Economist David Rosenberg contends1 that the Magnificent Seven’s frequent comparison with the dot-com stocks at the turn of the century is incorrect since the former are actually profitable. Instead, they should be compared with the American “Nifty Fifty” of the 1960s and 1970s (not to be confused with the Indian index) which were also mostly profitable. While the “Nifty Fifty” eventually tumbled over 60% between 1973 and 1975, most of the companies therein remained profitable all the way till the present. Much like the “Nifty Fifty” of yore, the Magnificent Seven is the dominant driver of today’s market.

Source: The Capital Group

Much like the “Nifty Fifty”, a rationalization is due.

In Conclusion

As a company, the company’s high earnings will likely stabilize on a forward-looking basis: corporate adhesion tends to be stable albeit and subject to significant interplay with requirement scoping and cost. A diverse set of corporate-centric hardware solutions can also be expected in the year to come.

As a stock, however, historically high ratio premia cannot be expected. Goldman Sachs reported2 that nearly every one of the 722 hedge funds surveyed with a total equity exposure of $2.6 trillion have been paring down their exposure to these stocks. A further 40-50% correction of the PE Ratio from the present level to the mid-twenties to early-thirties is likely on the cards while stock repurchases are likely to continue.


Footnotes:

  1. “Forget dot-com comparisons: The Magnificent 7 look like the Nifty 50 bubble that burst in the 1970s and sent the group tumbling 60%, famed economist says”, Markets Insider, 21 February 2024
  2. “Hedge Funds Cut Magnificent Seven in Last Quarter, Goldman Says”, Bloomberg, 21 February, 2024

Your capital is at risk if you invest. You could lose all your investment. Please see the full risk warning here.

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Violeta Todorova

Senior Research

Violeta è entrata a far parte di Leverage Shares nel settembre 2022. È responsabile dello svolgimento di analisi tecniche e ricerche macroeconomiche ed azionarie, fornendo pregiate informazioni per aiutare a definire le strategie di investimento per i clienti.

Prima di cominciare con LS, Violeta ha lavorato presso diverse società di investimento di alto profilo in Australia, come Tollhurst e Morgans Financial, dove ha trascorso gli ultimi 12 anni della sua carriera.

Violeta è un tecnico di mercato certificato dall’Australian Technical Analysts Association e ha conseguito un diploma post-laurea in finanza applicata e investimenti presso Kaplan Professional (FINSIA), Australia, dove è stata docente per diversi anni.

Julian Manoilov

Marketing Lead

Julian è entrato a far parte di Leverage Shares nel 2018 come parte della prima espansione della società in Europa orientale. È responsabile della progettazione di strategie di marketing e della promozione della notorietà del marchio.

Oktay Kavrak

Head of Communications and Strategy

Oktay è entrato a far parte di Leverage Shares alla fine del 2019. È responsabile della crescita aziendale, mantenendo relazioni chiave e sviluppando attività di vendita nei mercati di lingua inglese.

È entrato in LS da UniCredit, dove è stato responsabile delle relazioni aziendali per le multinazionali. La sua precedente esperienza è in finanza aziendale e amministrazione di fondi in società come IBM Bulgaria e DeGiro / FundShare.

Oktay ha conseguito una laurea in Finanza e contabilità ed un certificato post-laurea in Imprenditoria presso il Babson College. Ha ottenuto anche la certificazione CFA.

Sandeep Rao

Research
Sandeep è entrato a far parte di Leverage Shares nel settembre 2020. È responsabile della ricerca sulle linee di prodotto esistenti e nuove, su asset class e strategie, con particolare riguardo all’analisi degli eventi attuali ed i loro sviluppi. Sandeep ha una lunga esperienza nei mercati finanziari. Iniziata in un hedge fund di Chicago come ingegnere finanziario, la sua carriera è proseguita in numerose società ed organizzazioni, nel corso di 8 anni – da Barclays (Capital’s Prime Services Division) al più recente Index Research Team di Nasdaq. Sandeep detiene un M.S. in Finanza ed un MBA all’Illinois Institute of Technology di Chicago.