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Nvidia is a leader in microchips, graphical processing units (GPUs) and software.
The company has been one of the biggest success stories of the last decade with the stock hitting a peak of $346 dollars in 2021. However, shares have lost over half their value and currently change hands for $158 dollars.
That gives the company a market cap of 389 billion. With 13.1 billion of cash on the balance sheet, including marketable securities, and 11.5 billion in debt, the enterprise value is roughly 388 billion.
Meanwhile, revenue over the last 12 months is 28.5 billion, operating expenses were 10.6 billion and net income was just under 6 billion.
This gives Nvidia a valuation around 13.6 times revenue or 65 times earnings.
Nvidia’s business can be broken down into 4 segments.
Its data center segment provides hardware and software that enables artificial intelligence and high performance computing for multiple organizations.
Its gaming segment accounts for the sale of graphical processing units used in computer games and more recently cryptocurrency mining.
Nvidia’s visualization segment provides various solutions for 3D rendering and other computing tasks.
Meanwhile, the company's automotive segment is providing supercomputing hardware and software for autonomous driving.
As you can see, recent results have been a mixed bag.
The data center segment brought in 3.83 billion of revenue in q3 which was a year on year increase of 31%. However, gaming revenue declined 51% year on year to 1.57 billion.
The visualization segment also declined, posting revenues of 200 million, a 65% decrease. But the automotive segment grew 86% with revenues of 251 million.
There’s no doubt that Nvidia is a powerful company but the business is suffering from at least two major headwinds right now.
First, an international chip ban has stopped the company from exporting its most powerful chips to China. This is intended to stop China from gaining an advantage in artificial intelligence and could cost the company around $400 million of quarterly revenue.
Second, the industries that Nvidia operates in are inherently cyclical.
When demand for microchips is high, production lines get increased, more supply comes to market and prices drop. Combined with decreasing margins you get an inevitable hit to bottom line profits. So Nvidia is coming off the top of the cycle and right now it’s also facing fierce competition from AMD.
To be fair, boom/bust cycles are nothing new to Nvidia. The company has seen declining profits in the past, most notably in 2013 and 2019. Nvidia has a history of reinventing itself and has one of the best employee satisfaction records in the business.
Let's assume a basic scenario where Nvidia grows revenue 15% per year for the next 10 years, then trades at a 25 times multiple to earnings, with a 35% net income margin, earnings would be roughly 40 billion and the company would be worth around 1 trillion in 10 years time which works out to an investment return of 10% per annum.
But that’s not a great return for such an optimistic scenario.
The problem is that Nvidia stock has rebounded 46% over the past few weeks taking the p/e multiple past 60. And that’s simply too expensive right now at this point in the cycle.
But these are my personal opinions, not financial advice.
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