Nvidia May Grow Even Faster Than Expected
Feb. 24, 2022
The Asian Investor
Summary
- Nvidia’s Q4’22 earnings card showed continual business strength in core segments.
- Nvidia is swimming in cash which could pave the way for a massive share buyback now that the ARM acquisition fell through.
- FY 2023 could be a year of revenue acceleration for the firm.
David Becker/Getty Images News
Shares of Nvidia ( NVDA) have experienced a couple of setbacks lately, but the semiconductor firm still delivered an impressive earnings sheet for Q4'22. The firm is experiencing accelerating momentum in its Data Center business, which is set to overtake Nvidia's Gaming segment, regarding total dollar contributions, for the first time in FY 2023. The current fiscal year could also be a successive year of top line acceleration as new RTX products come to market and the RTX 30 series upgrade cycle is going to support Nvidia's sales growth!
Q4'22 earnings sheet: as impressive as everNvidia ended its fiscal 2022 year with a strong fourth quarter that showed continual momentum in both the Gaming business, which is chiefly dealing with graphics cards, and the Data Center business. Total revenues for the quarter were $7.64B, showing a massive 53% increase compared to the same quarter in the year-earlier period.
Revenues in the Gaming segment were chiefly driven by volume and price growth related to Nvidia's GeForce RTX 30-Series GPUs, which continue to be super popular with gamers that want to upgrade their equipment to the latest graphics cards. Nvidia's results were also supported by gains made in the laptop segment where models equipped with the latest GeForce RTX 3070 Ti and 3080 Ti GPUs continue to sell extremely well. In the Data Center business, Nvidia benefited from record demand for high-performance computing and growing demand for artificial intelligence solutions.
Nvidia's gross margins also kept expanding...
Nvidia
Nvidia's revenue composition is set to change this yearIn FY 2023, Nvidia's current fiscal year, we can expect a shift in segment dominance. While the Gaming segment was the largest contributor of revenue dollars up to FY 2022, Data Centers are seeing real momentum due to an ongoing shift of workloads to the cloud, a long-term trend that accelerated because of COVID-19. Nvidia's Data Center business generated $3.26B in revenues in the fourth quarter, showing 71% year-over-year growth. At the same time, Nvidia's Gaming revenues advanced "only" 37% year-over-year to $3.42B, meaning Nvidia's Data Center business grew its segment top line almost twice as fast as the Gaming segment.
Due to strong demand for high-performance computing solutions, I believe Nvidia's Data Center business is set to overtake Nvidia's Gaming segment in FY 2023 regarding revenue contribution and become the dominant business within Nvidia's portfolio going forward. The Gaming business, however, will continue to grow, just not as fast as the business serving the hyper-scale and public cloud market.
In the Gaming segment, Nvidia just recently released the GeForce RTX 3050 GPU, which is aimed at price-conscious gamers that don't want to pay for Nvidia's high-priced graphics cards. The GeForce RTX 30 GPU series has been a huge success for Nvidia, and the company still benefits from a multi-year upgrade cycle related to GPUs. GPU prices for Nvidia's RTX 30 series also remained elevated in January, indicating strong potential for growth in Nvidia's Gaming segment. In January, market prices for the Nvidia GeForce 30 series remained way above the manufacturer's suggested retail price, at 1.77x MSRP.
3Dcenter.org
Record free cash flow and solid FCF margins
Nvidia achieved record free cash flow on record revenues in FY 2022 while maintaining very high free cash flow margins. Free cash flow in FY 2022 was $8.05B, showing massive 72.1% year-over-year growth due to Nvidia having the strongest product line-up in its existence. Free cash flow of $8.05B was achieved on $26.9B in revenues, which calculates to a free cash flow margin of 29.9%. Due to strength in pricing and new product launches (RTX series), Nvidia even increased its free cash flow margin 1.9 PP year-over-year.
($m)
| FY2018
| FY2019
| FY2020
| FY2021
| FY2022
| Gaming
| $5,513
| $6,246
| $5,518
| $7,759
| $12,462
| Data Centers
| $1,932
| $2,932
| $2,983
| $6,696
| $10,613
| Visualization
| $934
| $1,130
| $1,212
| $1,053
| $2,111
| Automotive
| $558
| $641
| $700
| $536
| $566
| OEM
| $777
| $767
| $505
| $631
| $1,162
| Revenues
| $9,714
| $11,716
| $10,918
| $16,675
| $26,914
| | | | | | | Cash Flow from Operating Activities
| $3,502
| $3,743
| $4,761
| $5,822
| $9,108
| Investments in Property & Equipment
| -$593
| -$600
| -$489
| -$1,145
| -$1,059
| Free Cash Flow
| $2,909
| $3,143
| $4,272
| $4,677
| $8,049
| Free Cash Flow Margin
(Source: Author)
Guidance for FY 2023Nvidia does not deliver guidance for the full fiscal year, but the firm does predict revenues and gross margins for the next quarter, which allows investors to judge how optimistic the firm is about its business expansion in the short term.
For the first quarter, Nvidia expects $8.10 billion, plus or minus 2 percent, in revenues and a non-GAAP gross margin of 67.0 percent, plus or minus 50 basis points. The guidance shows that the firm expects to grow its top line 6% quarter-over-quarter, which translates to approximately $500M on top of record Q4'22 revenues. The momentum in Nvidia's revenue growth is not stalling, and if Nvidia keeps growing at this rate for the rest of the year, Nvidia could even see another year of revenue acceleration in FY 2023.
Expect a share buybackNow that Nvidia has abandoned the acquisition of U.K.-based chipmaker ARM, due to regulatory hurdles, the company is going to have to use its considerable cash resources somehow. Robust commercial performance in Gaming and Data Centers resulted in record free cash flow for the company, which swelled the firm's cash coffers in FY 2022. Nvidia ended the last fiscal year with an unrivaled cash balance of $21.2B in cash, showing an increase of 84% over last year. I believe Nvidia could announce a share buyback worth billions of dollars in FY 2023 to make up for the failed ARM acquisition and for the additional growth that the ARM acquisition would have brought and that the firm is now missing out on.
 Nvidia
Nvidia may grow even faster than expectedI question consensus estimates for Nvidia's top line growth in FY 2023. The consensus is for $34.58B in revenues in FY 2023 and $40.17B in FY 2024, implying growth rates of 29% and 16%. These are unrealistic numbers considering that Nvidia grew revenues at 61% in the last year and guidance for Q1'23 already indicates that revenue momentum is continuing. Due to the release of new products, including a slew of more than 160 new GeForce RTX and Studio laptops that are set for release this year, Nvidia could grow significantly faster this year and next year.
For this reason, I believe consensus revenue estimates are significantly below Nvidia's actual sales potential. Given how strongly Nvidia ended FY 2022, I believe Nvidia will achieve at least $37B in revenues in FY 2023 and $45B in FY 2024, the majority of it coming from the Data Center business.
Based off of Nvidia's P-S ratio, Nvidia's prospects in the Gaming and Data Center segments have been significantly discounted since November. The P-S ratio has dropped from more than 22 X to 15 X... despite Nvidia delivering record revenues, free cash flow and cash resources. Estimates have been rising, but still, underrate Nvidia's growth potential.
 Data by YCharts
Risks with NvidiaThe biggest risk for Nvidia, and for the company's valuation, is a material slowdown in revenue and free cash flow growth that would force the market to reevaluate Nvidia's commercial prospects in the Gaming and the Data Center business. Since demand for Nvidia's products has never been better than now, a growth slowdown is not an imminent threat. Longer term, however, Nvidia won't be able to sustain 60% annual revenue growth rates which implies that the sales multiplier factor could correct.
Final thoughtsI believe Nvidia will grow much faster than expected. Stronger-than-expected revenue and free cash flow growth, driven by new product launches and continual pricing strength for graphics cards, could drive a revaluation of Nvidia in FY 2023. Revenue estimates are too low, and Nvidia may grow significantly faster than revenue predictions indicate.
| 29.9%
| 26.8%
| 39.1%
| 28.0%
| 29.9%
|
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