Nvidia a hit – but it comes with risk

Top analysts, including FNB Wealth and Investments’s Wayne McCurrie and Sasfin Securities’ David Shapiro, says Nvidia presents a good buying opportunity at current levels.

Nvidia design and manufactures computer chips, graphics processors, and multimedia software and operates under two broad segments:

• The graphics segment includes processors for gaming, graphics, virtual processing units, virtual computing, infotainment systems, and omniverse software.

• The compute and network segment includes datacentre platforms and systems which are used in AI, high-performance, and accelerated computing solutions.

Nvidia’s share price has come under extreme pressure since December 2021, when the Federal Reserve started increasing its focus on inflation and interest rate hikes.

The company’s share price plummeted by 60.3% from its high price of R333.76 in 2021.

McCurrie said the decline in Nvidia’s share price means it now presents a true long-term value opportunity.

Shapiro agreed, saying Nvidia is a superb business operating in the right industry and offers good value at current levels.

Another strong proponent for Nvidia is Cathie Wood, whose ARK funds have significantly increased their position in the company.

A look at Nvidia’s finances

Nvidia’s experienced strong revenue growth in recent years. Its two largest revenue contributors – gaming and datacentres – have increased revenue at an average annual growth rate of 50.8% since 2017.

However, in Q2 2023, Nvidia delivered disappointing results. Its revenue of $6.70 billion was significantly lower than its Q1 2023 prediction of $8.10 billion.

It represents 3% year-over-year growth and is 19.11% lower than the previous quarter, as shown in the quarterly revenue graph below.

The significant decrease in revenue was due to the company’s gaming operations, which have contracted by 33% year-on-year and 44% quarter-on-quarter.

The gaming market was Nvidia’s largest contributor to revenue, and the contraction cannot be overlooked.

Nvidia explained that the decrease in growth was due to a global slowdown in demand. The company hopes to regain its fallback with better inventory management and new launches.

The company has experienced strong growth in the automotive market, but it is a very small contributor to revenue, and it would take years before it can meaningfully contribute to revenue.

The larger data centre market had very strong annual growth at 61%, but it was flat quarter-on-quarter.

The below chart shows how Nvidia’s annual revenue composition has changed since 2017.

The last word

Gene Munster, the managing partner at Loup Ventures, has mixed feelings toward Nvidia because of its slowdown in revenue.

He said the magnitude with which the business has hit the wall is remarkable, calling it one of the biggest slowdowns he has ever seen.

Munster noted that it is rare for a company to recover from such a result in a subsequent quarter.

However, he said the company’s long-term outlook remains positive, with great potential in the automotive market.

Should Nvidia be able to grow by 60% annually, Munster said it is undervalued. However, it is overvalued should it only grow between 25% to 30%.