• 4Q24 results exceeded expectations. Revenue beat NVDA’s own guidance by 11%, and PATMI jumped >8x YoY. FY24 revenue/PATMI was at 103%/108% of our FY24e forecasts.
• Data Centre (DC) revenue growth accelerated (409% YoY), driven by: 1) >5x YoY increase in demand for its H100 AI GPUs; 2) 3x YoY increase in network revenue from Infiniband. Forward guidance of 200+% YoY revenue growth and expanding gross margins (76.3%) in 1Q25e, indicating continued strength. We expect 1Q25e DC revenue to surpass US$20bn.
• We raise our FY25e revenue/PATMI by 29%/35% to reflect continued demand for Data Centre products. NVDA dominates (~90% share) AI GPUs that are growing 5x YoY, with demand driven by a global shift to accelerated computing for more intense workloads (Gen AI/LLMs). We maintain a BUY rating with a raised target price of US$970 (prev. US$685) as we roll over an additional year of valuations. Our WACC/g is unchanged (6.8%/4.5%).

The Positives

+ AI demand still exceptional, driving outperformance. Revenue of US$22.1bn beat guidance again by ~11%, with most of the outperformance driven by DC gains (409% YoY). Demand from consumer internet companies (META, GOOGL, etc.), Cloud Hyperscalers (CSPs), and sovereign nations remain robust, with NVDA also seeing growth across various industries – auto, healthcare, and financial services. Supply is improving, although it is still unlikely to meet the excess demand for high-spec AI GPUs anytime soon. Near-term demand remains supported by transition to accelerated computing for Gen AI applications (recommender systems), inferencing LLMs (ChatGPT, Gemini, etc.), expanding sovereign AI infrastructure.

+ Gross margin beat by 150bps, forward guidance pointing to more upside. NVDA’s gross margin (76%) continued to improve for the 6th quarter. Driven by higher-margin DC revenue mix (83% of total revenue) and lower component costs, which are expected to flow into 1Q25e, NVDA guided to a 76.3% gross margin. Prior to FY24, gross margins had historically been ~60%. NVDA also guided 1Q25e revenue to US$24bn +/- 2%, implying a 234% YoY improvement driven predominantly by DC (H100 + Infiniband). We expect DC revenue to easily cross US$20bn as NVDA works through improving supply to fulfill its order backlog.

The Negative

- China is still a question mark. US export restrictions were a significant headwind, with DC revenue from China (incl. Hong Kong) dropping to ~5% of total DC revenue in 4Q24 from ~22% in 3Q24. NVDA began shipping its lower-spec H20 GPU chips for market sampling, although management did not seem too optimistic about competing with local Chinese semicon companies like Huawei, given the ceiling imposed on GPU specifications.

Outlook

Guidance: NVDA guided to 1Q25e revenue of US$24bn (+/- 2%), implying a further acceleration in YoY growth. Gross margins were guided to 76.3%, a sequential 30bps expansion due to a more favourable shift in mix to higher-margin DC products and lower component costs. Gross margins are expected to contract for the rest of FY25e to 73-74% as the benefits from lower component costs fade. Operating expenses are expected to increase 40% YoY.

Outlook: Robust near-term growth expectations look sustainable with demand far outpacing supply. NVDA dominates the AI GPU market (~90% market share) with multiple growth drivers from 1) increasing investments from enterprises for training and inferencing LLMs, deep learning, recommender systems, and generative AI applications; 2) hyperscale CSPs expanding into new market opportunities; 3) sovereign nations building their own AI infrastructure to; and 4) growing AI adoption across multiple industries – auto, healthcare, industrial, telco, etc. In addition, NVDA has a strong product lineup for FY25e (H200, B100, Spectrum-X, etc.), each of which are expected to drive incremental growth in ASPs and margins.

The main risks to growth remain: 1) inability to compete with other Chinese manufacturers on its H20 chips, market share may be permanently lost; 2) insufficient supply to meet the growing demand for high-end GPUs and components as the world transitions towards higher accelerate computing.

RULE OF 40

The “Rule of 40” was first introduced as a benchmark to measure the balance between the growth and profitability of SaaS companies, taking into account both revenue growth as well as profitability (Revenue Growth + EBITDA Margins), with the addition of both metrics needing to exceed the 40% threshold. We have modified this slightly by averaging revenue growth over a

3-year period compared with just a single period growth rate. Adding together NVDA’s 3-year average revenue growth of 54% and its EBITDA margin of 63%, the total of 117% is more than our required threshold of 40% (Figure 2).

Maintain BUY with a raised target price of US$970 (prev. US$685)

We raise our FY25e revenue/PATMI by 29%/35% to reflect continued demand for Data Centre products. NVDA dominates (~90% share) AI GPUs that are growing 5x YoY, with demand driven by a global shift to accelerated computing for more intense workloads (Gen AI/LLMs). We maintain a BUY rating with a raised target price of US$970 (prev. US$685) as we roll over an additional year of valuations. Our WACC/g is unchanged (6.8%/4.5%).

• 3Q24 results exceeded expectations. Revenue beat NVDA’s own guidance by 13%, with PATMI spiking 13x YoY. 9M24 revenue/PATMI was at 75%/80% of our FY24e forecasts.
• Data Centre (DC) revenue grew almost 4x YoY, driven by: 1) Enterprises and nations inferencing large language models (LLMs); 2) Cloud Service Providers (CSPs) expanding into new markets; 3) 5x YoY growth in demand for InfiniBand.
• Upbeat 4Q24e revenue guidance of US$20bn implies 231% YoY growth, and US$59bn for FY24e. US export controls to China remain an uncertainty, with revenue from China expected to decrease substantially in 4Q24e.
• We raised our FY24e revenue/PATMI by 13%/27% for the stronger demand of Data Centre products. NVDA dominates AI GPUs that is growing ~4x YoY. Demand is driven by a global shift to accelerated computing for generative AI applications, and inferencing LLMs. We maintain a BUY rating with a raised target price of US$685 (prev. US$645). Our WACC/g is unchanged (6.8%/4.5%).

The Positives

+ Demand for Data Centre GPUs still outpacing supply. DC growth continues to be driven by: 1) Increased investments from consumer internet companies into inferencing LLMs and generative AI applications; 2) Hyperscale CSPs expanding into new market opportunities; 3) 5x YoY increase in demand for InfiniBand (Networking >US$10bn annual run-rate). To meet the demand, NVDA has been increasing supply QoQ this year, and expects to continue this into FY25e. DC revenue spiked 280%/41% YoY/QoQ as a result. We expect near-term demand to remain strong given overflowing customer commitments.

+ 4Q24e revenue guidance implies 231% YoY growth. NVDA guided US$20bn (+/- 2%) in revenue for 4Q24e, implying further acceleration in revenue growth – above consensus estimates of US$18bn. Most of the growth is expected to be driven by DC demand, and takes into account a significant drop in revenue contribution from China due to US export controls. Taking this guidance, our FY24e revenue is raised 13% to US$59bn, implying a 118% YoY growth. 4Q24e gross margins are also expected to increase sequentially to 74.5% due to a favourable product mix as demand for higher margin DC products continue to expand, with NVDA ending FY24e with a 72% gross margin, 1500bps higher than FY23.

The Negative

- Export controls expected to impact China revenue in 4Q24e. US government export control regulations to China are expected to impact revenue from China moving forward, with limited visibility on its long term impact. NVDA is working on regulation-compliant products for the affected markets, although the contribution from these products is not expected to be meaningful in the near term. China revenue represents 20-25% of NVDA’s total revenue.

Outlook

Guidance: NVDA guided to 4Q24e revenue of US$20bn (+/- 2%), implying a further acceleration in YoY growth as demand for its DC products is extremely robust. NVDA also guided a gross margin of 74.5%, a sequential 50bps expansion due to a more favourable shift in mix to higher-margin DC products.

• 2Q24 results exceeded expectations. 2Q24 revenue/PATMI at 54%/63% of our FY24e forecasts. 2Q24 PATMI spiked by 8-fold YoY.
• Revenue doubled and beat guidance due to Data Centre sales nearly tripling YoY. 3Q24 guidance of a 170% YoY jump in overall revenue driven by continued strong demand for accelerated computing server products, with demand visibility extending into next year.
• Gaming returns to positive YoY growth, while ProViz continues its YoY decline. Automotive saw QoQ decline as it faces lower demand from China OEMs.
• We increase our FY24e revenue/PATMI by 35%/69% to account for the stronger-than-expected growth in Data Centre business. We upgrade from ACCUMULATE to a BUY rating with an increased target price of US$645.00 (prev. US$440.00), with a WACC of 6.8%, and a terminal growth rate of 4.5%.

The Positives

+ Data Centre driving strong revenue beat. Revenue doubled YoY to US$13.5bn, beating company guidance of US$11bn. The strong performance was attributed to Data Centre business surging by 171% YoY to make up 76% of total revenue, driven by accelerating demand from cloud service providers and consumer internet companies for NVDA’s HGX server platform. Data Centre growth mainly came from US customers, while China makes up 20-25% of the segment’s revenue, in line with historical trends. Gross margins also expanded by 550bps QoQ and 26.6pps YoY as a result of larger revenue contribution from the server business.

+ An even stronger 3Q24 guidance. NVDA guided for a revenue of US$16bn (+/- 2%), a potential 170% YoY jump, largely driven by Data Centre strength as customers continue to focus their investments on generative AI and accelerated computing. NVDA said this allows it to have demand visibility that extends into CY2024. As such, the company is working with suppliers to expand production capacity, and will be increasing supply over the next several quarters to fulfill the demand. Gross margins are expected to be at 71.5% (+/- 50bps), another strong 17.9pps YoY expansion.

+ Gaming returns to positive growth. Sales was up by 22% YoY, the first positive growth following 4 consecutive quarters of YoY decline. The increase was fueled by the solid end-customer demand for the GeForce RTX 40 Series GPUs, partly driven by the back-to-school season. NVDA believes the global end demand has returned to growth following the slowdown in CY2022. Furthermore, it also believes the segment has a large upgrade opportunity as only 47% of its installed base are on GPUs equipped with its RTX technology.

The Negatives

- Professional Visualisation down YoY, Automotive down QoQ. Professional Visualisation (3% of revenue) declined by 24% YoY, but contraction has moderated significantly from the -53% in 1Q24. In Automotive, revenue was up by 15% YoY to US$253mn, but was down 15% QoQ due to the lower overall demand from Chinese OEMs.

• 1Q24 results were within expectations. Revenue/PATMI was at 24% of our FY24e forecasts.
• Revenue beat guidance due to growth in the Data Centre segment. 2Q24 guidance of a 64% YoY growth in sales, largely driven by steep demand in Generative AI and LLMs across its customer base.
• Sales for Gaming, and Professional Visualisation continued their YoY contraction but moderated compared to their YoY decline in 4Q23. Revenue for both segments were up QoQ as NVDA ramps its new Ada Lovelace-based GPUs.
• We increase our FY24e revenue/PATMI by 30%/52% to account for the higher-than-expected growth in Data Centre business and lower-than-expected operating expenses. We downgrade from BUY to ACCUMULATE rating with an increased target price of US$440.00 (prev. US$315.00), with a WACC of 6.8%, and a terminal growth rate of 4.5%, due to the recent share price performance.

The Positives

+ Revenue beat company guidance. Revenue was down 13% YoY to US$7.2bn, but this was above company guidance of US$6.5bn. The better-than-expected performance was driven by 14% YoY growth in Data Centre sales, which set a new record of US$4.3bn. NVDA attributed the growth to the surge in demand across its customer base (cloud service providers, consumer internet, and enterprises) who are looking to harness the technology of generative AI and large language models (LLMs) that use the company’s Hopper and Ampere GPUs.  

+ Strong 2Q24 guidance. NVDA guided for a revenue of US$11bn (+/- 2%), which is ~53% above consensus estimates of US$7.2bn, and represents a 64% YoY growth, following YoY sales contraction since 3Q23. The company said the growth will largely be driven by its Data Centre business benefiting from the steep increase in demand related to Generative AI and LLMs. NVDA said this allowed it to extend its visibility of the segment’s business out a few quarters. Although no guidance was provided beyond 2Q24, NVDA noted that it will be procuring a significantly higher level of supply for 2H24, where it indicated that sales will be higher than that of 1H24. Gross margin is expected to be 68.6%, indicating a potential 25% YoY expansion (6.6% on a normalised basis as NVDA incurred a US$1.2bn inventory charge in 2Q23) as it sells more of its new H100 data centre GPUs, where we believe the price difference is as much as 200% compared to its previous A100.

The Negatives

- Gaming, Professional Visualisation contraction continues. Gaming/Professional Visualisation revenue declined 38%/53% YoY as both businesses continue to face macroeconomic headwinds and lower sell-in to normalise channel inventory. However, the contraction has moderated compared to 4Q23 where they declined 46%/65% YoY, and sales were up QoQ by 22%/31% as NVDA ramps its new GPUs based on Ada Lovelace architecture.

• Market leadership in PC/data centre dGPU market with 88%/95% share. The leadership has been accompanied by attractive and stable gross margins of ~60%.
• Data Centre revenue quintupled in 3 years to be company’s largest segment with growth expected to continue at 2-year CAGR of 19%, leveraging on the increasing popularity of AI adoption in enterprises.
• Initiate coverage with a BUY recommendation and DCF-based target price (WACC 6.8%, g 4.5%) of US$315.00. We expect NVDA to benefit heavily from the increasing popularity of AI, and Gaming to recover as channel inventory normalizes.

Company Background

NVIDIA Corporation (NVDA) designs and sells Graphics Processing Units (GPU) that are responsible for rendering photo-realistic graphics in consumer PCs as well as other computationally intensive tasks, such as high-performance computing (HPC), artificial intelligence (AI), data science, robotics, and more recently, autonomous vehicles. NVDA reports in two business segments: Graphics (44% of FY23 revenue), which includes revenue from gaming and professional visualization; and Compute & Networking (56% of FY23 revenue), which includes its data centre, automotive, and robotics businesses.

Investment Highlights

1. Market leader in discrete GPU. NVDA possesses a dominant market presence in the discrete GPU (dGPU) market, holding ~88% share of the PC discrete GPU market and ~95% of the market for data centre graphics processors. The market leadership is attributed to its superior product performance, powering 72% of total and 90% of the new systems on the 2022 world’s top 500 supercomputers list. Its GPUs also power 23 of the top 30 supercomputers on the Green 500 list, demonstrating their energy efficiency. The programming language CUDA, developed by NVDA, was the first to allow developers to code directly to the GPU. This language is widely adopted by developers worldwide and it runs solely on NVDA GPUs, locking them into its platform and acting as a strong moat for the company.
2. Strong growth momentum in Data Centre. NVDA’s Data Centre revenue quintupled within three years from US$3bn in FY20 to US$15bn in FY23 and is expected to continue its growth trajectory. The demand for AI in data centres is growing as enterprises from various industries attempt to integrate AI into their operations. With its strong expertise in AI, NVDA stands to benefit from this trend as the worldwide spending on AI-centric systems is estimated to grow at a 4-year CAGR of 27% to surpass US$300bn by 2026. The versatility and capability of generative AI, demonstrated by OpenAI’s ChatGPT, has spurred interest in enterprises to develop and deploy the technology and we expect this to provide tailwind as it coincides with the launch of NVDA’s next-generation Hopper data centre GPU and Grace CPU.
3. Stable margins. NVDA has been able to achieve increased gross margin, from 59% in FY17 to a high 65% in FY22, while net margins were relatively stable at ~30% range. Excluding one-off inventory charges and acquisition termination charges, gross/net margins were 65%/29% in FY23 despite a 39% YoY increase in R&D expenses, indicating NVDA’s ability to pass increased costs to its customers. We view NVDA’s stable cost structure to be favourable as growth in revenue should translate to an increase in earnings. NVDA has guided for a gross margin of 66.5% in 1Q24, higher than the 63.3% it achieved in 4Q23.

We initiate coverage with a BUY rating and a target price of US$315.00 based on DCF valuation, with a WACC of 6.8% and terminal growth of 4.5%.

REVENUE

NVDA posted a total revenue of US$27bn for FY23, which was flat YoY. The company reports in two segments: Graphics and Compute & Networking, with each of them comprising revenue from different sets of end-market usage of its GPUs. The Graphics segment contains revenue from the company’s Gaming (34% of FY23 revenue) and Professional Visualization (6%) businesses, while the Compute & Networking segment is made up of NVDA’s revenue from Data Centre (56%), Automotive (3%), and OEM & other (2%) (Figure 1).

Gaming: NVDA started its business by selling graphics cards that are used to render high-definition graphics for PC games. As such, it was the company’s main revenue contributor, consistently making up the largest proportion of its total revenue since its founding until FY23, which was eventually taken over by the Data Centre segment. The Gaming business earns revenue by 1) selling graphics cards to the general PC users; 2) selling GPUs to PC component manufacturing partners; 3) charging subscription fees for its cloud game streaming service GeForce Now; and 4) selling development services for console gaming devices.

Revenue from this segment was US$9bn in FY23, falling by 27% YoY. The drop was due to NVDA having lower sell-in to partners since 2Q23 to help reduce channel inventory levels as gaming demand was hindered by the macroeconomic environment and COVID-19 related disruptions in China. The decrease could also be attributed to the transition of Ethereum from proof-of-work to proof-of-stake, which caused lower graphics cards demand from cryptocurrency miners. The Gaming segment saw a 16% QoQ revenue increase in 4Q23 due to the improvements in channel inventory levels as well as the ramp-up of NVDA’s new GeForce RTX GPUs based on the Ada Lovelace architecture (GeForce RTX 40 series). NVDA is expecting a strong QoQ revenue growth for the segment in 1Q24 as it believes the channel inventory correction has concluded.

Data Centre: The Data Centre segment took over Gaming as NVDA’s largest revenue contributor in FY23. This segment sells GPUs that are designed for data centre use cases, such as data analytics, artificial intelligence, machine learning and inferencing, as well as data centre networking solutions, including network interface cards and advanced Ethernet connections. NVDA also has a software licensing business that mainly stems from its NVIDIA AI Enterprise offerings. The data centre segment earns revenue by: 1) selling data centre GPUs; 2) selling supercomputing systems to enterprises; and 3) charging software subscription fees for NVIDIA AI Enterprise.

Revenue from this segment grew 41% YoY to US$15bn in FY23. The increase was mainly attributed to the continued strong growth in sales to hyperscale customers as well as cloud service providers. In 4Q23, the segment faced a 6% QoQ decline, 11% YoY increase in revenue. The QoQ decline was due to cloud service providers tightening spending towards the end of the year as they recalibrate their respective build plans. The lower QoQ sales were also attributed to lower sales in China, reflecting the COVID-related and other domestic issues in the country. Although there was no breakdown between hardware and software revenue, management indicated that the latter is currently contributing hundreds of millions in revenue to the company’s business. NVDA is expecting continued strong growth in its Data Centre business as it further ramps up the shipment of its new H100 data centre GPU as well as the strong customer interest in generative AI.

MARGINS

NVDA’s gross margins have generally been stable at ~60% levels since FY17. However, the company experienced a decline in gross margins to 57% in FY23. This was because of the US$2bn inventory charge due to the excess supply of Ampere-based gaming and data centre GPUs as demand was lower than its projection, particularly for the expected demand in China. Excluding this inventory charge, the gross margin for FY23 would have been 65%. We expect gross margin to rebound and reach 67% in FY24e as NVDA can pass on the higher costs to its customers and benefit from the absence of negative impact due to inventory charges.

Net margins were 16% for FY23 as the company saw a 50% YoY increase in OPEX while revenue was flat compared with FY22. Net margins reached a high level of 36% in FY22 due to the spike in demand for NVDA’s GPUs during the pandemic, causing the revenue growth of 61% to far outpace the 27% increase in OPEX. We expect net margins to recover to 29% in FY24e due to the absence of one-off charges.

BALANCE SHEET

Assets: NVDA has total assets of US$41bn. Cash and cash equivalents were US$3bn in FY23 while marketable securities make up the largest proportion of NVDA’s total assets at US$10bn. As a result, cash, cash equivalents and marketable securities totalled US$13bn in FY23, down from US$21bn in FY22, primarily due to a decrease in net income, a US$10bn share repurchase, and lower marketable securities purchases and higher sales and maturities of such assets during the year.

Inventory was US$5bn, double from FY22, as NVDA prepares the ramp-up of its new products in Data Centre and Gaming. Goodwill has remained stable at ~US$4bn since FY21 where it increased by US$3.6bn from US$618mn in FY20 due to NVDA’s acquisition of Mellanox

Liabilities: Majority of NVDA’s total liabilities come from its long-term debt of US$9.7bn (55% of total liabilities), down from the US$11bn in FY22 as the company did not issue new debt in FY23. Accrued and other liabilities increased to US$4bn in FY23 from US$2bn in FY22 mainly due to the increase in inventory purchase obligations and taxes payable. Total liabilities were US$19bn, a slight increase from US$17.5bn in FY22.