NVIDIA | First Massive Wave of Demand in Generative AI

Generative AI and large language/transformer models are driving accelerating demand for Nvidia’s accelerated compute/networking platforms and software solutions.

1. Strong F1Q24 (Apr-Qtr) results driven by double-digit% Q/Q growth across Gaming, Pro-Vis, and Data Center. NVIDIA reported F1Q24 revenue of $7.19B (up 19% Q/Q) , above consensus ($6.51B) on better-than-expected revenues across Gaming, Pro-Vis, and DataCenter. EPS of $1.09 was above consensus.

2. Gaming revenues grew 22% Q/Q on strong demand for its RTX 40 series.

3. Data Center revenues grew 18% Q/Q on strong demand pull for its A100/H00 products to support generative AI and large language models.

4. In Networking, demand was strong for its high performance networking products to support AI workloads. Pro Vis (up 31% Q/Q) reaccelerated on strong workstation demand and the team believes its worked through excess customer inventories.

5. Auto (up 1% Q/Q) was up slightly but impacted by lower demand from China EV OEMs.

We believe NVIDIA continues to execute across all segments. While 1H is typically seasonally weaker than 2H, we expect solid demand in PC gaming to be a strong revenue driver for the company, offsetting PC OEM, which is in secular decline. We expect the data center segment to grow strongly as hyperscale customers continue to embrace GPU-accelerated deep learning for processing large data sets. We are encouraged by strength in the automotive and enterprise segments as well, although strong adoption of autonomous driving in the market remains to be seen. We anticipate significant upside in the shares, driving our Overweight rating.

Our PT of $500 assumes that NVIDIA trades at 30-35x applied to $17 of earnings power in CY25, discounted back to CY24 assuming a 12% discount rate. Our outlook of $17 of earnings power assumes the team will be drive its earnings power by 30% + per year over the next two years on strong datacenter growth (30-40% CAGR), monetizing an incremental ~$11B of auto revenue pipeline and an incremental $1-2B of software, licensing, and subscription revenues over the next 3-4 years. With our view of significant upside potential in shares, we are Overweight NVDA.

1) Macro uncertainties could weigh on PC gaming demand trends，given NVDA’s ~53% exposure to the PC gaming segment.

2) NVIDIA’s GPUs gain lower than expected deployment into data center applications.

3) Significant decrease in the adoption of deep learning by hyperscale customers or increase in competition.