Justin Sullivan
Elevator Pitch
I have a Buy investment rating assigned to NVIDIA Corporation’s (NASDAQ:NVDA) shares. I previously analyzed NVIDIA’s long-term prospects for the next decade with my earlier July 26, 2022 article.
The focus of my latest write-up for NVDA is the company’s outlook for the following calendar year. NVIDIA’s financial year ends on January 31, so the company’s fiscal year 2024 (February 1, 2023 to January 31, 2024) is roughly equivalent to calendar year 2023.
I take the view that NVDA will witness a faster rate of top line expansion and positive bottom-line growth in the coming year, and I think that there is ample room for NVIDIA’s share price to rise. This explains why I continue to award a Buy rating to NVDA.
NVDA Stock Key Metrics
NVIDIA Corporation’s key metrics such as its recent Q3 FY 2023 revenue and its forward-looking Q4 FY 2023 top line guidance were satisfactory and largely in line with market expectations.
According to its Q3 FY 2023 financial results press release, NVDA achieved a top line of $5,931 million in the most recent quarter which was equivalent to a -12% QoQ contraction. Specifically, a +1% QoQ increase in revenue contributed by the data center market was more than offset by a -23% QoQ drop in sales generated by the gaming market. But NVIDIA’s actual third quarter revenue still surpassed the market’s consensus estimate of $5.82 billion by +2%.
As part of its recent third quarter earnings announcement, NVIDIA also issued a midpoint revenue guidance of $6 billion for the fourth quarter of fiscal 2023. This translates into expectations of 1% QoQ growth and a -21% YoY decline in NVDA’s top line in the final quarter of the current fiscal year. More critically, the company’s fourth quarter top line guidance was just marginally (-1% as per S&P Capital IQ data) below the analysts’ consensus forecast prior to the recent quarterly results release.
In the two weeks following NVDA’s Q3 FY 2023 financial results announcement on November 16, 2022, NVIDIA’s shares (+2.3%) have outperformed the S&P 500 (+1.7%) slightly. This validates my view that the company’s third quarter top line and fourth quarter revenue guidance met investor expectations to a large degree.
What Are Nvidia Catalysts To Watch For?
Investors will be watching out for any catalysts that could potentially re-rate NVDA’s shares in the future. In this section, I identify a number of re-rating catalysts for NVIDIA Corporation in the coming calendar year.
The first potential catalyst is a return to positive revenue for the gaming segment in tandem with the normalization of channel inventories. NVDA saw its gaming segment sales decrease on a QoQ basis for two consecutive quarters (Q2 FY 2023 and Q3 FY 2023), but there are signs that things are getting better.
NVIDIA’s gaming segment performed poorly in absolute terms for Q3 FY 2023, but this turned out to be better what the market anticipated earlier. Revenue for NVDA’s gaming segment dropped by -23% QoQ and -51% YoY to $1,574 million in the most recent quarter. However, the sell-side was expecting the company’s gaming segment to deliver much wider QoQ and YoY declines of -30% and -56%, respectively as per S&P Capital IQ data.
Also, NVIDIA highlighted at its Q3 FY 2023 earnings briefing that “channel inventories (for the gaming segment are on track to approach normal levels as we exit Q4 (of fiscal 2023).” Moreover, NVDA emphasized that “we expect to resume sequential growth (in Q4 FY 2023) with our (gaming) revenue still below end demand as we continue to work through the channel inventory correction.”
The second potential catalyst is that NVIDIA’s alternative product strategy for Chinese data center clients continues to work well.
NVDA’s data center segment saw its revenue grow by +31% YoY and +1% QoQ for the most recent quarter. This was better than the analysts’ consensus data center segment top line growth expectations of +27% YoY and -2% QoQ based on S&P Capital IQ data.
NVIDIA previously announced on August 31, 2022 that the US government “imposed a new license requirement, effective immediately, for any future export to China” relating to its “A100 and forthcoming H100 integrated circuits.” The fear that NVDA’s data center revenue contributed by Chinese clients will drop significantly due to these new restrictions explained why Wall Street analysts had a conservative view of NVDA’s Q3 FY 2023 data center segment performance.
But NVIDIA has managed to find a way to work around the US government’s new restrictions. At its recent third quarter investor call, NVDA disclosed that it has been “offering alternative products to data center customers in China”, or more specifically the new “A800” product which the company claims to “meet U.S. government’s clear tests for export control.”
Assuming that Chinese clients are willingly to buy the new A800 as a substitute for A100 and there are no further changes to export restrictions, NVIDIA’s data center segment should be able to continue its positive growth momentum which will serve as another catalyst for the stock.
The third potential catalyst is continued share repurchases.
NVIDIA Corporation revealed at the company’s Q3 FY 2023 earnings call that it has “$8.3 billion remaining under our share repurchase authorization through December ‘23 (calendar year).” As a reference, NVDA has already allocated more than $9 billion of excess capital to share buybacks in the first nine months of fiscal 2023.
Sustained share buybacks will be a positive boost for NVDA’s future earnings per share, and also send a message about the management’s views regarding the undervaluation of NVIDIA’s shares.
In the next section, I touch on the financial outlook for NVIDIA Corporation in the subsequent year.
What Is The Forecast For 2023?
NVDA is forecasted to deliver a much better set of financial results for calendar year 2023 or fiscal year 2024 (February 1, 2023 to January 31, 2024).
According to the sell-side’s consensus financial figures sourced from S&P Capital IQ, NVIDIA Corporation’s revenue growth is estimated to accelerate from +0.1% in fiscal 2023 to +11.4% for fiscal 2024. The analysts also see NVDA turning around from a -26.4% fall in its non-GAAP adjusted earnings per share for FY 2023 to achieve a +33.8% jump in its normalized EPS in FY 2024.
In the preceding section, I elaborated on the potential turnaround of the gaming segment with the clearance of channel inventories approaching an end, and this is expected to be the most significant catalyst and growth driver for NVIDIA in calendar year 2023. Sustained share buybacks and the continued success of its approach of selling alternative products to Chinese data center clients will also be supportive of positive earnings expansion for NVDA next year.
In a nutshell, NVDA should experience an acceleration in top line expansion and resume positive bottom-line growth in calendar year 2023/FY 2024.
What Do Analysts Believe About Nvidia?
Wall Street analysts believe that NVIDIA’s stock offers a potential upside of +29% based on the sell-side’s consensus target price of $203.63.
The analysts’ average price target of $203.63 for NVDA is equivalent to a consensus forward fiscal 2025 normalized P/E multiple of approximately 36.3 times as per S&P Capital IQ’s valuation data.
In my prior late-July write-up for NVIDIA, I discussed the company’s favorable outlook in the long-term relating to “superior profitability and a more balanced revenue mix.” In that respect, I don’t think that a target P/E multiple in the mid-30s range for NVDA is particularly demanding. As such, I view the analysts’ target price and capital appreciation potential estimates for NVIDIA as reasonable.
Is NVDA Stock A Buy, Sell, or Hold?
My rating for NVDA’s stock stays as a Buy. I have a positive view of NVIDIA’s shares, taking into account its calendar year 2023/fiscal 2024 financial outlook and its upside potential as indicated by the consensus price target.
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