What is NVIDIA's investment value?

Thanks to the wave of AI transformation, the company's profits have continued to double. This quarter, the company achieved revenues of $26 billion, a YoY increase of 262%, with diluted EPS at $5.98, up 629% YoY, and adjusted diluted EPS at $6.12, up 461% YoY.

Following the financial report, the company announced a stock split of 1-for-10, which is expected to lower the investment threshold and increase stock liquidity.

(1) Where is the company's continuous growth momentum, and can it continue to support high-speed growth?

(2) What is the investment value of the company?

Chart: NVIDIA revenue composition

Data center business is the main source of income and profit for NVIDIA, accounting for $22.6 billion of the $26 billion in revenue this quarter, a YoY increase of 427%, mainly due to strong and sustained demand for generative AI training and inference, especially robust demand for Hopper chips.

(1) From the perspective of downstream customers, NVIDIA's customers mainly come from cloud service providers, consumer internet companies, and automotive clients, basically covering global tech giants, including Amazon, Google, Microsoft, Meta, Tesla, etc. According to first-quarter financial reports, these tech giants have all increased capital expenditures to strengthen AI infrastructure construction, showing a huge demand for AI chips.

(2) From the perspective of upstream customers, TSMC mentioned after releasing sales data in April that current AI demand remains very strong. The world's largest chipmaker confirming strong AI demand undoubtedly gives the market a strong boost.

(1) The world is transitioning from general computing to accelerated computing. In addition to Hopper chips, the demand for enterprise customized AI services, sovereign national supercomputing platforms (based on Grace Hopper superchips), and NVIDIA AI Enterprise software stack services is very strong, which is expected to continuously contribute to the data center business.

(2) At the same time, network revenue was separately announced for the first time this quarter at $3.2 billion, up 242% YoY, thanks to the strong growth of the InfiniBand end-to-end solutions. Network revenue is expected to become one of the new growth points for data center business income. According to company management, the Spectrum-X Ethernet network solution is currently in mass production with several customers and is expected to become a product line worth several billion dollars within a year.

(1) The company's hardware technology iteration capability is astonishing, and continuously launching stronger AI chips leaves competitors far behind. The company announced that the Blackwell chip will start shipping in Q2, increase production in the third quarter, and be deployed in customer data centers in the fourth quarter, which is expected to bring in substantial revenue. Moreover, the Blackwell chip is backward compatible with the existing Hopper architecture, so there is no need to worry that its launch will cause customers to stop buying Hopper chips.

Additionally, company management has revealed that they will accelerate the pace of chip architecture updates, from a two-year update cycle to one-year updates. Such efficient product iteration and updates keep NVIDIA at the forefront in the AI chip field.

(2) At the same time, the software ecosystem, including CUDA, enhances product adaptability, increases customer stickiness, and raises the cost for customers to change chips and systems, becoming the company's main competitive advantage.

Chart: Data Center Business Revenue (Million USD)

This quarter, the company's gaming business revenue was $2.65 billion, up 18% YoY, but down 8% QoQ, mainly due to seasonal sales declines. The market acceptance of GeForce RTX Supers GPU is high, and the demand and channel inventory of the entire product line remain at healthy levels.

The future growth of the gaming business lies in AI PCs. The company has already equipped GeForce RTX GPUs with CUDA Tensor Cores to lay the foundation for subsequent AI PCs. Currently, the install base of GeForce RTX GPUs has exceeded 100 million, demonstrating NVIDIA's extensive user base and strong market penetration in gaming and AI. NVIDIA has a complete technology stack that can be deployed and run generative AI inference efficiently on GeForce RTX PCs.

Recently, NVIDIA and Microsoft announced AI performance optimizations for Windows to help triple the running speed of LLMs on NVIDIA GeForce RTX AI PCs. Future growth in the gaming business will focus on the development of AI PCs.

Chart:  Gaming Business Revenue (Million USD)

(1) Professional visualization business revenue was $427 million, up 45% YoY, with generative artificial intelligence and the digitization of the entire industry expected to drive the next wave of professional visualization growth.

(2) Automotive business revenue was $329 million, up 11% YoY, mainly driven by growth in autonomous driving, such as Xiaomi's first electric vehicle SU7 equipped with NVIDIA DRIVE Orin autonomous driving platform. The new generation autonomous driving platform NVIDIA DRIVE Thor will use the new NVIDIA Blackwell architecture and is expected to start mass production next year.

The gross margin reached a historic high, and EPS continued to double. This quarter, the company's GAAP gross margin continued to rise to 78.4%, and the non-GAAP gross margin was as high as 78.9%, a significant increase, mainly due to high-margin Hopper GPU chips, lower inventory costs, and a decrease in upstream component product costs. EPS doubled, with diluted EPS at $5.98, up 629% YoY, and adjusted diluted EPS at $6.12, up 461% YoY.

Chart: Profit Margin Situation

The operating expense ratio declined, indicating excellent cost control. This quarter, operating expenses increased by 39% YoY, and adjusted operating expenses grew by 43% YoY, mainly driven by compensation and benefits, reflecting the growth in employees and remuneration. However, the overall operating expense ratio slid to 13.4%, reflecting the company's excellent cost control capabilities and the further dilution of costs under scale effects.

Chart: Total Operating Expenses (Million USD)

Free cash flow saw strong growth, with the full-year free cash flow expected to exceed $60 billion. With the rapid growth of the company's net profit, the free cash flow for this quarter was $14.936 billion, up 461% YoY, and it is expected that the FY25 will have more than $60 billion in free cash flow. As of FY24, the company's cash and cash equivalents were $31.4 billion, higher than the same period last year's $15.3 billion and the previous quarter's $26 billion.

Chart:  Free Cash Flow (Million USD)

Shareholder returns still have room for improvement. This quarter, the company returned $7.8 billion to shareholders, including $7.7 billion in stock buybacks and $98 million in dividends. The current remaining buyback scale is $14.8 billion, and the company announced an increase in quarterly cash dividends from $0.04 per share to $0.10 per share, a 150% increase. The shareholder return rate for FY25 is expected to be 1%, a relatively low level. Considering that the free cash flow for FY25 is expected to break $60 billion, there is still room for improvement in shareholder returns.

Overall, NVIDIA continues to benefit from the growth in AI demand, seeing record growth in business scale and profitability. With its hardware technology advantage and CUDA ecosystem advantage, NVIDIA is expected to maintain an absolute leading market position amid fierce competition.

The company's performance is expected to maintain high growth, mainly driven by the growth of data center business revenue. The reasons include the key factors mentioned above:

(1) Strong AI demand is confirmed by both upstream and downstream data.

(2) Data center business revenue is increasingly diversified. In addition to hardware chip sales revenue, sovereign AI, custom enterprise AI services, AI Enterprise software stack services, and network solution revenue are expected to become new growth points. Future software service revenue is expected to become a long lifecycle source of income for the company.

(3) The company has strong software and hardware competitive barriers. Hardware technology and product acceleration iteration, speeding up chip architecture updates from a two-year cycle to a yearly update, With the new Blackwell chip set to ship in Q2, NVIDIA continues to maintain a leading edge in the AI chip field. At the same time, software ecosystems like CUDA increase product adaptability and customer stickiness, raising the cost for customers to switch chips and systems, becoming the company's primary competitive advantage.

According to the company's guidance, the mid-point estimate for FY25 Q2 revenue is $28 billion, exceeding market expectations. The mid-point estimates for GAAP and non-GAAP gross margin are 74.8% and 75.5%, respectively, with the full-year gross margin expected to be around 70%. Additionally, full-year operating expenses are anticipated to increase by about 40%.

Taking into account that starting from the second quarter of FY24, the company's EPS growth rate began to double, it is expected that after the second quarter of FY25, the EPS growth rate will gradually slow down. Overall, under the strong demand for AI and excellent cost control, the company's EPS growth rate for the full FY25 is expected to achieve around 100%.

The shareholder return rate for FY25 is expected to be 1%, which is relatively low. Considering that the free cash flow for FY25 is expected to exceed $60 billion, there is still room for improvement in shareholder returns. Assuming that all the cash flow is distributed, the shareholder return rate for FY25 could reach 2.56%, which is still not high.

Therefore, NVIDIA's stock price momentum mainly depends on the high-speed growth of its performance. Whether the growth rate can be maintained will significantly affect NVIDIA's stock price. If NVIDIA's growth rate slows down, it could negatively impact valuation.

We expect the EPS for FY25 to double, and based on the stock price that broke $1000 after the financial report, the current PE valuation is around 35-40x, which is relatively reasonable and can still support the current stock price.

AI is a long-term development trend, and NVIDIA, as the "shovel seller" in the AI industry, has undeniable long-term investment value. What investors need to focus on now is whether there are more cutting-edge technologies and broader demands emerging in the AI field that can drive growth in the AI industry, thus allowing NVIDIA to continue benefiting. Be wary of risks such as slowing demand, increasing competition, and technology substitution.