The semiconductor industry has been facing several challenges over the past couple of years, from supply chain glitches to chip shortages. However, things may have taken a turn as Nvidia’s financial results for Q1 were released, causing a 24% surge in stock. A closer look at the earnings report reveals the following insights:
Q1 Analysis
For the first quarter ending on April 30th, Nvidia’s total revenue was $7.2 billion, indicating a decline of 13% YoY. While data center revenue increased by 14% YoY to reach $4.3 billion, the gaming segment suffered a massive 38% slump from the previous year. Nvidia has two other revenue-generating segments, namely professional visualization and automotive, which represent less than 10% of the company’s revenue base. However, Nvidia managed to reduce its costs, and operating expenses decreased by 30%, significantly outpacing the decline in revenue. For this reason, profits increased by 26% YoY, and free cash flow doubled to $2.6 billion.
AI is a Powerful Force
Nvidia’s guidance for Q2 has reportedly increased to $11 billion from an earlier estimate of $7.2 billion. Data is increasingly becoming a necessity in decision-making, and demand for cloud computing infrastructure and AI development is on the rise. Major tech companies such as Microsoft and Alphabet have invested significant capital into developing AI applications, expanding the AI market. Nvidia plays a vital role in this market because, as the demand for machine learning and quantum computing applications grows, so will the requirement for its chips. Nvidia is at the intersection of the AI revolution, with its data center products library expanding to cater to consumer demand – making Nvidia a major player in the industry for years to come.
Valuation Proves Tricky
Currently, Nvidia trades at 218 times P/E, and using traditional valuation metrics on a growth stock like Nvidia makes it a challenging task. The stock may likely experience a pullback soon; however, the tailwinds from AI may already be priced into the stock. For long-term investors seeking technology exposure, an investment in Nvidia at the right time could yield significant gains.
Bottom Line
Despite Nvidia’s overvaluation, AI, and its applications remain the core investment thesis for the company. Thus, it should be on the radar of investors seeking exposure to new frontiers in technology.
The Motley Fool’s 10 best stocks for investors to buy right now exclude Nvidia, despite their projected triple gains on this market*.
Suzanne Frey, an executive at Alphabet, is a member of the Motley Fool’s board of directors. Adam Spatacco holds positions in Alphabet, Nvidia, and Microsoft, while The Motley Fool positions and recommends Advanced Micro Devices, Alphabet, Microsoft, and Nvidia. The Motley Fool has a disclosure policy.
*Returns from Motely Fool Stock Advisor as of May 22, 2023.
