The Bottom Line is a newsletter from the Hump Days Markets Team that pulls information using tools normally only those working in the industry have access to and aggregates it all in an easy-to-understand report. Use The Bottom Line to learn more about innovative and exciting companies and make more well-informed investment decisions.
Note: This is not financial advice, and any investment commentary is strictly opinion only. Consult with a licensed professional before investing.
History:
Founded in 1993 by Jensen Huang, Chris Malachowsky, and Curtis Priem, Nvidia has grown into a global leader in the technology industry, with headquarters located in Santa Clara, California, and offices and research facilities located worldwide. Nvidia's primary focus is developing and selling GPUs, which are used to create high-quality immersive gaming experiences. These GPUs are also used in professional visualization applications, such as 3D design and medical imaging. Nvidia also develops SoCs, which are used in a variety of devices, including smartphones, tablets, and other mobile devices.
Nvidia has a long history of innovation and technological advancements. One of the company's key breakthroughs came in 1999 when it released the GeForce 256 GPU. It was the first GPU to use hardware acceleration for 3D graphics. Since then, Nvidia has continued to push the boundaries of GPU technology, releasing a series of increasingly powerful and sophisticated GPUs that have set new standards for performance and gaming realism.
Pictured: Nvidia HQ in Santa Clara
Quarterly Earnings on May 24th:
Nvidia released its first quarter results last week, and the stock shot up as much as 27% the next day. While the prior quarter results themselves were more or less what investors have come to expect from the company (sales were slightly down from the prior year, gross margin slightly lower YoY, but net income was up YoY), Nvidia’s outlook for the future was anything but. Remember that the stock market is forward-looking, meaning investors take all potential information they can rely upon and use it to forecast each company into the future. To support this process, companies normally provide an outlook for the future year, which is a range of values for key inputs such as revenue, gross profit margin, EBITDA (earnings), and net income. With this release, Nvidia projected that Q2 revenue will be approximately $11bn. This would be a 33% increase over the prior year; it was 51% above the expected revenue from analysts for Q2 and would represent their best quarter ever.
The company’s CEO Jensen Huang points to two things as the driver of this, accelerated computing and generative AI. Nvidia appears to find itself at the forefront of two trends that have encapsulated the stock market. Investors are hunting for the next big thing, and they believe this is it. Other chipmakers and related companies have also seen their stock price increase based on Nvidia’s earnings. When the future of AI is so unknown, investors are betting that the new technology will be very disruptive.
Revenue Sources and Key Costs:
Graphics Segment: The Graphics segment is the largest and most well-known segment of the business. This segment is responsible for the design, development, and marketing of GeForce GPUs and related gaming technologies. The company's Graphics products have applications in gaming and professional visualization, where they are used to power sophisticated 3D designs and simulations.
Compute & Networking Segment: The Compute & Networking segment includes the design and development of high-performance GPUs and related data center technologies. These products are used by companies to process and analyze massive amounts of data, powering some of the world's most advanced artificial intelligence (AI), deep learning, and machine learning applications. Nvidia's Compute & Networking products are also used in high-performance computing (HPC) applications, including scientific research and academic institutions. This segment also includes Nvidia's Mellanox networking business, which the company acquired in 2020. Mellanox is a leading provider of high-speed interconnect solutions for data center servers and storage systems. By acquiring Mellanox, Nvidia can expand its offerings to include networking technologies that complement its GPU and data center products.
Overall, both the Graphics and Compute & Networking segments are critical to Nvidia's success. The Graphics segment provides the company with a strong foothold in the gaming and professional visualization markets, while the Compute & Networking segment enables Nvidia to participate in the rapidly growing data center market. Together, these segments help to drive Nvidia's growth and position the company as a leader in the technology industry.
The company’s main costs are the costs to manufacture and distribute products; research and development (R&D) of their products; and sales, general and administrative expenses (SG&A). These expenses are common across tech companies, as investing in R&D is imperative to maintain relevance, and from there Nvidia needs to market and sell the product to consumers and companies.
Costs of Goods Sold: $62.7 bn (32% of revenue)
Research and Development: $24.5 bn (12% of revenue)
Sales, General, and Administrative: $21.8 bn (11% of revenue)
Valuation:
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