NVIDIA Financial Report Review: Strong Performance Driven by AI Demand in Data Center Computing and Networking Products Sales

On November 21st after market close, NVIDIA announced its Q3 FY24 financial report which exceeded expectations. On November 22nd, JPM released a financial report review stating that NVIDIA's performance was strong, driven by the demand for artificial intelligence in data center computing and networking products sales.

Stock Rating: Overweight

Closing Price on Report Release Date: $499.44 (11/23/2023)

JPM Target Price Updated to: $650.00

Recent Closing Price: $481.40 (11/29/2023)

NVIDIA's October financial data performed far beyond expectations, with the company's team predicting a 10% growth in January Qtr, higher than market expectations, partly due to strong customer spending in the field of AI/accelerated computing. Despite the impact of US export controls, its data center products still have strong demand. The company's data center department grew more than 41% in October Qtr, and the networking business grew at an annualized revenue rate of over $10 billion. The team is optimistic about the future demand environment and estimates that it can achieve quarterly growth of 10-15% in the data center business in January Qtr. In addition, DGX cloud services and AI enterprise software are also growing strongly. JPM has raised its future estimated value for NVDA and reaffirmed its OW rating.

NVIDIA's F3Q24 (Oct-Qtr) financial report was strong, mainly driven by the continued strong demand for data center products in AI and supported by growth in all other areas. NVIDIA reported F3Q24 revenue of $18.12 billion (up 34% QoQ), well above market expectation ($16.09 billion), primarily due to the continued strong demand for its data center solutions. In fact, the annualized revenue rate of its networking business has exceeded $10 billion. Data center revenue increased by 41% YoY due to the strong demand for H100 products driving DataCenter Compute (up 38% QoQ) and high-performance networking products (up 52% QoQ). Gaming revenue increased by 15% QoQ due to seasonal strength and strong demand for its RTX 40 series. Pro Vis (up 10% QoQ) continues to recover and channel inventory normalization is underway. The automotive sector grew 3% QoQ. Gross margin reached 75.0%, well above market expectations. Earnings per share were $4.02, also exceeding market expectations.

Due to the strong demand for generative AI and the continuous growth of its new Hopper architecture, the data center business continued to perform well, and therefore NVIDIA's F4Q24 (Jan-Qtr) guidance far exceeded market expectations. Revenue guidance for January is $20 billion (up 10% QoQ, up 231% YoY), well above market expectations ($17.89 billion). At the midpoint of F4Q24, the team expects that data centers will lead the quarterly growth, while gaming business is expected to decline QoQ during the seasonally weak period. Gross margin is expected to increase to 75.5%. OpEx guidance is $2.2 billion. Earnings per share are expected to be $4.33, well above market expectations of $3.76.

Driven by strong customer expenditure on AI/accelerated computing items and software/services, data center revenue continues to accelerate in CY24. Due to the strong growth of H100 products (Data center computing up 38% QoQ) and high-performance networking products (up 52% QoQ), data center revenue increased by 41% YoY in October Qtr. The team expects to maintain strong growth in January Qtr (estimated growth of 10-15% QoQ). The team is optimistic about the demand environment for generative AI applications (such as Adobe Firefly, ChatGPT, Microsoft 365 Copilot/Coassist, ServiceNow, Zoom) in CY25. The team expects supply to increase quarter by quarter next year, believing this will help push steady data center revenue growth in CY24. The new Grace Hopper (CPU/GPU) is now in mass production, representing a revenue opportunity worth tens of billions of dollars, according to the team. In addition, the team found that its DGX cloud services and AI enterprise software are receiving strong market feedback and plans to achieve an annualized revenue rate of $1 billion this year.

JPM raised its future estimates and increased NVIDIA's target price from $600 to $650. The institution believes that NVDA stock has the potential to earn $24.5 per share in CY25, then discounted at a rate of 12% back to CY24, assuming its P/E trades in a range of 30-35 times. The team expects, over the next few years, to drive its earnings growth by over 30% annually by continuing strong data center business growth (30-40% CAGR) and realize additional automotive revenue stream of approximately $14 billion and additional $2-3 billion in software, licensing, and subscription revenue within the next 3-4 years. Given its significant upside potential, the institution maintains its "Overweight" rating on NVDA.

JPM believes that NVIDIA is making progress in all areas. While the first half of the year is usually weaker seasonally, JPM expects strong demand for PC gaming to be a strong driver of the company's revenue, offsetting declining PC OEMs that are in a structural decline. As large-scale customers continue to adopt GPU-accelerated deep learning for processing large datasets, JPM expects data center business to maintain strong growth, and is also encouraged by growth in the automotive and enterprise sectors, although the penetration of autonomous driving technology in the market is still to be observed. JPM expects significant upside potential in the stock and therefore gives it an "Overweight" rating.