NVIDIA, can’t be shaken!

Latest update time：2023-05-22

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This article provides a comprehensive evaluation of Nvidia (NASDAQ: NVDA). It is worth noting that we observe that its stock price has risen by more than 100% recently, covering the range and exceeding the estimated target price of $244.06.

In fiscal 2023, Nvidia's total revenue will only grow 0.2%, compared to previous analysis, which forecast Nvidia's total revenue to grow 4.5% in fiscal 2023, which is quite consistent with Nvidia's actual growth. As expected, data centers are its main growth driver. However, its actual growth was more than double expectations, rising 41.4% versus the forecast of 19.7%.

Although data center growth was stronger than expected, the gaming business grew higher than actual growth, which was -27.2%, as Nvidia's PC GPU revenue fell more than expected. Its smaller segment, Professional Visualization, also performed poorly compared to expectations. In contrast, growth in the auto industry was stronger than expected.

So, despite the softening PC GPU market, Nvidia still managed to generate similar revenue to the previous year as its data center segment remained a bright spot for growth.

The table above compiles forecasts for the company's data center segment. As shown, the actual growth of the cloud infrastructure market in 2022 was lower than our forecast, despite higher data volume growth due to lower cloud infrastructure revenue growth.

Additionally, estimates for cloud market capex, which consists of the top 4 players, Amazon, Microsoft, Google, and Alibaba, are lower than the 2022 forecast as market capex/market revenue declines are larger than expected.

However, Nvidia's data center revenue was still better than forecast, as its revenue share of data center capex increased to 8.4%, compared with 6.5% previously forecast based on its prior year's constant ratio. Therefore, this suggests that Nvidia is outperforming forecasts due to its share growth in the data center market.

Source: NVIDIA, Khaveen Investments

The number of new product launches in the data center field has declined slightly, from 17 in 2021 to 13 in 2022. Some new products released in 2022 include the IGX platform, GraceCPU Superchip and H100GPU.

In the third quarter, Nvidia launched its most advanced chip, the next-generation data center GPU (H100). According to Nvidia, "the H100 already has significantly higher revenue than the A100," which the company mentioned highlights its superior performance, explaining that it is "9 times faster than the A100 in training and 9x faster than [inference] (ph) 30x faster transformer-based large language models."

Overall, the decline in the number of product launches suggests that the company's growth in data center market share is not due to more product launches compared to the previous year, as its product launches declined in 2022.

Source: Company data, Khaveen Investments

The number of new partners in the data center space remains unchanged at four in 2021 and four in 2022. New partners in 2022 are Microsoft, Dell, Deloitte and Booz Allen. Additionally, the company recently announced additional partnerships this year with top CSPs including AWS, Microsoft, and Oracle. According to the company, "For the fourth consecutive quarter, CSP customers drove approximately 40% of data center revenue."

Overall, Nvidia has the same number of data center partnerships in 2022, so its above-forecast growth is not due to it acquiring more partnerships.

Improve competitiveness with data center competitors

According to the table above, the data center revenue of Nvidia's main competitors, including AMD, Intel, Broadcom and Marvell, are summarized, and their revenue share of total data center capital expenditures is calculated.

As can be seen from the table, Nvidia's share increased by nearly 2% in 2022. The company has been increasing share over the past 5 years. AMD also increased its share but remains a relatively small player compared to Nvidia.

Meanwhile, both Broadcom and Marvell have grown, as Broadcom's share has been declining until 2021, while Marvell's share has grown by just 0.2% and has been relatively stable over the past 4 years until 2022.

On the other hand, Intel's share continues to decline, with the largest decline in 2022 to 10.8%. The reason for the performance contrast between Nvidia and Intel is that Nvidia is focused on the faster-growing data center GPU market, while Intel is focused on CPUs. GPUs benefit from data center growth, as it was previously concluded that "GPUs are better suited than CPUs to handle many of the calculations required for artificial intelligence and machine learning in enterprise data centers and hyperscale networks," thus providing Nvidia with an opportunity to continue as a data center The market leader in GPUs with 88% share.

As shown, the breadth of Nvidia's data center offerings compared to its competitors is summarized. NVIDIA has the strongest product portfolio, including CPUs, GPUs, DPUs, network interconnects and software due to launch in 2024. Additionally, the company explained that it remains focused on expanding its software and services.

Additionally, the company announced a data center integration solution called NVIDIA DGXCloud, which it claims is "the fastest and easiest way to have your own DGXAI supercomputer." It highlighted that top CSPs such as Microsoft, Google and Oracle are already adopting its product and expects more CSPs to adopt it in the future. DXGCloud is an example of the strong product integration opportunities across its DC portfolio.

This article updates revenue forecasts for Nvidia, first updating the cloud market forecast, predicting it will grow 32% in 2023, based on a cloud infrastructure revenue growth/data volume growth factor of 1.06x, then increasing to 1.22x by 2026, Its five-year average growth rate is 37%.

In addition, this article updates the cloud market capex consisting of AWS, Microsoft, Google, and Alibaba, based on an updated market capex/market revenue coefficient of 0.7x in 2023, based on its 10-year average of 11% annual decline, total growth is 22%.

Nvidia's share of top cloud capital spending continues to increase in 2022, according to an updated Nvidia revenue forecast model for its DC unit. It is forecast to continue growing based on the three-year average growth of 1.7%. Nvidia's latest DC segment growth rate of 41% was obtained, which is more in line with its 2022 growth rate. Therefore, the growth forecast is revised upward, assuming the company continues to improve its competitiveness and gain share in the data center market, leading to a higher average growth rate of 40%, which is more in line with its performance in 2022.

All in all, Nvidia's data center growth beat forecasts as it becomes more competitive in the data center market and captures a higher share of the overall market, driven by the company's strong competitive data center portfolio and GPU performance Advantage. Nvidia continues to gain share through the breadth and performance advantages of its product portfolio as it secures more partnerships and continues to expand its product portfolio, forecasting that its data center segment will grow 41% in 2023.

Games and other departments

In addition to the data center segment, this article also looks at Nvidia's gaming segment, which is very important as it accounts for 33% of revenue. Additionally, this article examines its professional visualization and automotive divisions.

In fiscal 2023, Nvidia's gaming segment underperformed forecasts, falling 27.2% below forecasts based on prorated quarterly revenue.

However, the company provided positive guidance for its gaming unit in the first quarter of fiscal 2023.

Graphics processor market share

Source: JPR, Khaveen Investments

According to the GPU market share chart, Nvidia has consolidated its lead in the GPU market in 2022 with an average share of 82%. However, in Q4 2022, Nvidia lost share while Intel gained share after its launch. AMD's share remains stable. Compared with 2021, Nvidia's average market share in 2022 is 81.3%, roughly the same as the previous year. Therefore, the company's solid dominance in the GPU market has been maintained and is not the reason for its poor performance in 2022.

Shipments and pricing

The company's GPU segment is further examined by aggregating market share, unit shipments, and average pricing to determine the factors contributing to its decline. According to the table, the company's shipments dropped significantly to -48% in 2022, which is in line with the overall market shipment growth rate of -48.33%.

However, its average pricing was positive and provided some cushion against revenue declines as it increased 40%. Therefore, the decline in its GPU revenue in 2022 is mainly due to the sluggish GPU market, which contracted significantly. The larger-than-expected decline compared to forecasts was due to worse-than-expected performance in the second half of 2022. According to JPR data, the GPU market fell 40.1% in the second half compared to the first half in terms of shipments. This is because PC market sales will continue to decline in the second half of 2022.

PassMark, company data, Khaveen Investments

Following the launch of its RTX40 series, the analysis of the company's GPU products against competitors such as AMD and Intel has been updated based on previous analysis. According to the company, "Gamers have responded enthusiastically to the new RTX 4090, 4080, and 4070Ti desktop GPUs, with many retail stores and online stores selling out quickly."

According to the table, the average performance growth rate of Nvidia's latest generation of GPUs is as high as 54%, while its average price is 43% higher. Its value as measured by pricing performance increased as pricing growth slowed to 8%. Overall, the company maintains its position with a superior performance advantage over AMD and Intel.

However, AMD and Intel's latest generations offer slightly higher performance per unit pricing compared to Nvidia. In other words, AMD's pricing performance has dropped by an average of 17% with each generation, while Nvidia's has increased by 15%. So this highlights another advantage of Nvidia by increasing its value.

In addition, its automotive revenue increased 60%, reflecting sales growth of autonomous driving solutions, computing solutions for electric vehicle manufacturers, and sales strength of artificial intelligence cockpit solutions. Growth also included growth in automotive development arrangements.

In 2022, NVIDIA launched its next-generation NVIDIA DRIVEThorADAS chip. The company claims it achieves up to 2,000 teraflops of performance and unifies smart features - including autonomous and assisted driving, parking, driver and occupant monitoring, digital instrument cluster, in-vehicle infotainment (IVI) and rear-seat entertainment.

Nvidia emphasized the advantages of "multi-domain computing" because the chip is a centralized computing system that can handle multiple ADAS functions simultaneously, rather than traditionally relying on multiple ECUs. Therefore, it is believed that the integration capabilities of the new chips provide greater efficiency for ADAS manufacturers and allow Nvidia to benefit from the AV market estimated to be 31.3% in our analysis of Mobileye.

All in all, while the GPU market continues to face headwinds that see the company's gaming segment decline in 2022, the segment is expected to recover to positive growth of 11.6% on the back of rising prices. That's important because gaming accounts for 33% of revenue.

financial analysis

Additionally, the company's operating profit was significantly lower than expected. Therefore, this article conducted a financial analysis to determine Nvidia's operating expenses and whether they have increased, which contributes to its lower profit margins.

Source NVIDIA, Khaveen Investments

According to expense analysis, the company's R&D expenses have shown a downward trend since 2018 and have stabilized at more than 20%, making it the company's largest operating expense.

As can be seen from the table, the company's operating expenses show higher-than-expected growth in its R&D. However, SG&A expenses were in line with forecasts. According to Nvidia's annual report.

The increase in R&D expenses in fiscal 2023 is primarily due to increased compensation, employee growth, engineering development costs and data center infrastructure” - Nvidia Annual Report.

To determine the exact factors responsible for its R&D growth, this article has compiled the growth percentage for each component in the table above.

Its R&D-related stock-based compensation increased 46% in fiscal 2023 and accounted for 26% of its total R&D expenses, making it one of the major contributors to expense growth in fiscal 2023. However, increases in the company's stock compensation are not unusual, as the company's total stock compensation has grown at a 5-year average rate of 47%.

The company's headcount has grown 16.5% over the past year, which is actually down from the 18.4% headcount growth in the previous year. Therefore, this suggests that it is not a major factor. While the company is expected to continue adding headcount to support its growth, its headcount growth is not a significant factor in its R&D growth.

On the patent front, the company's total number of patent publications increased significantly by 63% over the past year, reaching its highest level ever, reflecting the company's commitment to product development to expand its product portfolio.

Therefore, this may indicate its higher engineering development costs, which may lead to higher R&D expenses, which is one of the main factors for its significant increase in R&D expenses in fiscal 2023.

However, the company's engineering development costs are not expected to increase significantly this year, as the company's annualized number of patent disclosures from Global Data through March were 8% lower than last year's total.

In addition, the company's capital expenditures increased 100% to $1.8 billion from $900 million in the previous year, which may indicate the expansion of its data center infrastructure and lead to higher operating costs for the company. Therefore, this may also be a major factor in the increase in R&D expenses in fiscal 2023.

Going forward, the company's data center infrastructure costs are not expected to increase materially, as the company's capital expenditures are expected to decrease to $1.2 billion in fiscal 2024 based on the midpoint of management guidance and assume $1.5 billion annually after fiscal 2024. Dollar.

Overall, the main factors contributing to Nvidia's strong growth in R&D expenses were its compensation, engineering development costs, and data center infrastructure.

However, the company's strong R&D growth in FY2023 will not continue in FY2024 as its stock-based compensation is below its 5-year average and its patent disclosure count is expected to decline in FY2023 on an annualized basis. , it expects its capital expenditures this year to be lower than in fiscal 2023. This article updates the model to predict a company's R&D expenses based on R&D revenue growth percentage/revenue growth factors.

By dividing the average R&D percentage of revenue growth by the revenue growth during the period, the average R&D revenue growth percentage/revenue growth factor excluding periods of negative growth and flat growth is obtained, which is -0.29x. Based on the revenue forecast, the forecast percentage of revenue accounted for by R&D in 2023 is 24.9%, which will drop to 17.6% by 2027.

Additionally, the forecast for the company's SG&A revenue percentage is updated to decline based on an average decline of -0.2% over the past 10 years, so its SG&A revenue percentage is forecast to be 9.05% in fiscal 2024 and fall to 8.96% in fiscal 2028.

NVIDIA, Khaveen Investments

This article predicts that its net profit margin will continue to grow by 2028, from 33.8% in fiscal 2028 to 44.94%. The updated margins are more conservative compared to our previous analysis, as they are lower than previous forecasts, as more aggressive margin growth assumptions were previously assumed for the company by lowering R&D expenses as a percentage of revenue.

in conclusion

NVIDIA Corporation's Data Center segment exceeded initial analyst forecasts with its competitiveness and growing market share, driven by its strong data center portfolio and superior GPU performance. Based on these factors, Nvidia is expected to continue to expand its share, with its data center segment expected to grow by 41% in 2023.

Although the gaming and professional visualization segments are facing challenges in the GPU market, better prospects for active recovery in gaming and professional visualization are expected in FY2024. Furthermore, the automotive segment shows potential for rapid growth, driven by high growth rates in the ADAS market and improvements in next-generation chip efficiency.

This article's free cash flow ("FCF") margin model predicts rising to 42% by fiscal 2028, supported by gross margin growth and lower operating expenses, as R&D expenses are expected to increase after abnormal growth in fiscal 2023. decreasing gradually. After reassessing Nvidia Corporation's prospects, this article raises the target price to $271.60.

*Disclaimer: This article is original by the author. The content of the article is the personal opinion of the author. The reprinting by Semiconductor Industry Watch is only to convey a different point of view. It does not mean that Semiconductor Industry Watch agrees or supports the view. If you have any objections, please contact Semiconductor Industry Watch.

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