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Nvidia and AI: Invigorated, infatuated, possibly inflated… Wall St wonders just how big this will get

The ultimate AI proxy, Nvidia will report first-quarter results and hold its conference call on Wednesday evening in New York. … Read More
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Published

12 months ago

May 22, 2023

This article was originally published by Stockhead

The ultimate AI proxy, Nvidia will report first-quarter results and hold its conference call on Wednesday evening in New York.

According to data complied by Refinitiv, 70% of analysts rate the stock a buy. Zero rate it a sell.

The same Wall Street brokers expect NVDA to earn 92 US cents per share on revenue of US$6.52 billion, that’s against the same time last year when earnings hit US$1.36 a pop on revenue of US$8.29 billion.

Those numbers, BTW would represent an earnings crash of almost a full third. No one will care.

To say the upcoming data for the world’s leading graphics card designer are highly anticipated, is a to casually employ the gift of understatement upon many, many levels all at once.

So very much is riding on what the leading silicon AI enabler – as NVDA is being called – tells us on Wednesday, after the close. It’s quite possibly going to offer the market’s first clear numbers-based referendum on the reality of Artificial Intelligence.

On one hand, with the stock surging way past 110% this year – from US$146 to US$313.

It’s up about 15%, since mid April, when the S&P 500 index could only muster 0.8% over the same time.

And if things go well, Nvidia’s near-term performance could well assure its new ascension to the rarified heights of the Olde School FAANG family of companies.

On the other hand, NVDA’s fortunes are similarly bound for now at least, to the future opportunity in artificial intelligence (AI), which has the investing world once again dreaming in incandescent returns.

Ahead of the earnings drop the bulls at KeyBanc lifted the Nvidia Price Target from US$320 to US$375.

That’s the very top of Wall Street’s analyst coverage and it suggests KeyBanc sees NVDA stock climbing a further 20% once the numbers drop.

Meet NVDA

NVIDIA Corporation (NVDA) designs and manufactures graphic processing units (GPUs) which essentially accelerate the way a computer solves a problem or task.

NVDA has two major business segments, but a growing family of tools reside under the two houses.

The Compute & Networking segment includes its data center accelerated computing platform; networking; automotive artificial intelligence (AI) cockpit, autonomous driving development agreements and autonomous vehicle solutions; electric vehicle computing platforms; Jetson for robotics and other embedded platforms; NVIDIA AI Enterprise and other software; and cryptocurrency mining processors (CMP).

This little vid from BMW is worth it just for the accent, although the tech is impressive and shows why fears abound over the impact AI could have on today’s workforce.

On the Graphics side of NVDA, the segment includes:

GeForce GPUs for gaming and personal computers (PCs), the GeForce NOW game streaming service and related infrastructure, and solutions for gaming platforms; Quadro/NVIDIA RTX GPUs for enterprise workstation graphics; virtual GPU (vGPU), software for cloud-based visual and virtual computing; automotive platforms for infotainment systems; and omniverse enterprise software for building and operating metaverse and three-dimensional Internet applications.

Here’s a simpler, practical example on the graphics side of why AI is getting people excited:

When Microsoft met Nvidia

On Tuesday, ahead of the earnings drop, light around exactly how deeply embedded NVDA is into the future of just one of its clients – Microsoft (MSFT) – will be shed during the 3-day Microsoft developers conference. According to MSFT, the event will cover many of the new Microsoft APIs, products and services on the way, as well as feature sessions on Nvidia’s AI Enterprise, the Nvidia H100 GPU-powered VM series for generative AI, and the new Nvidia Omniverse Cloud on Azure.

NVDA’s GPU data centre accelerators will likely form the spine of Microsoft’s insanely large investments in its own AI infrastructure. Microsoft certainly did it’s bit to ignite the fire of hype that’s been burning about Wall Street – earlier announcing its own US$10 billion investment in OpenAI – the firm behind the viral large language tool, ChatGPT.

But the positioning to get in on the two majors has been underway for some time.

Essentially, since bottoming in mid-October last year NVDA has become the pin up for AI and its potential.

NVDA has left it’s major US competitors in its wake since the new year.

The value of Qualcomm (QCOM) stock is somehow down over 3% YTD.

Intel (INTC) has barely made an impact ( up 14%) considering its former strengths.

AMD (AMD) shares are ahead circa 60% on the year and even Apple’s (AAPL) 35% gain is looking Microsoft-ish (30%).

But with the forward P/E now closed to 65, is it time to take profits, Josh asks?

“Nvidia is by far the market leader in developing graphics chips, and this is exactly what is needed to handle the complex calculations required to power AI applications, meaning investors believe Nvidia will reap the rewards from growing demand.

“However, outside of AI, the PC market is seeing considerable weakness affecting AMD and Intel this quarter. So the focus for investors will be if AI demand can offset other areas of weakness and if Nvidia can provide strong guidance for the rest of the year.”

This month, a 13F filing lodged by the billionaire US investor Stanley Druckenmiller’s Duquesne Family Office revealed just how he wanted to play the artificial intelligence game.

Druckenmiller snapped up 791,475 shares of NVDA worth about US$230m, taking its holding in the chipmaker from 582,915 shares worth $85.1 million as of end-2022.

Duquesne’s new investment in Microsoft saw the company buy 729,040 shares worth $210 million in the first quarter.

While NVDA’s shares and reputation have gone on a happy rampage this year, courtesy of its AI chops and the escalating expectations it’s head start on the generative side of the business will help it become the new technology’s Tesla, there are gnawing fears that so much has been priced in so quickly.

KeyBanc acknowledges the run up on its valuation is impossible to ignore:

“While we do recognize our valuation framework for NVDA is aggressive, as our $375 price target is based on 31x LT earnings power of $12, we believe NVDA’s outsized share position and ability to monetize growth in generative AI at 70%+ GM should warrant a meaningful premium vs. its semiconductor peers.”

Valuation leaves no room for error

XM CEO Peter McGuire said last week that aside from lacking a vowel, Nvidia’s share valuation was its only Achilles Heel.

“The stock is trading at 59 times what analysts think earnings will be over the next year, which seems excessive even for a company with such rosy growth prospects.”

In other words, McGuire says, exponential profit growth has already been baked into the cake, leaving the stock in a vulnerable position if reality falls short of expectations. For Nvidia shares to keep on rising, the company would have to exceed a bar that is already set very high.”

JP Morgan this week declared that the bottom line is simply that NVDA, “continues to be 1-2 steps ahead of its competitors in accelerated computing silicon/systems, software, and ecosystems.”

“With leading silicon (GPU/DPU/Networking), hardware/software platforms, and a strong ecosystem, Nvidia is well-positioned to continue to benefit from major secular trends in AI, high performance computing, gaming, and autonomous vehicles, in our view.”

eToro’s Josh Gilbert told Stockhead that shares of Nvidia have taken an impressive year so far and made an even more impressive show of it over the last four or five weeks.

“But question marks now lie over its valuation with its rally this year.”

“The conversation of AI in the investment world has been rife so far in 2023, and earnings season in the US was no different, with thousands of mentions of AI on earnings calls from US tech. The investor excitement for this developing technology has sent Nvidia’s shares soaring this year, and so far, the tech giant wears the crown for the S&P500’s best-performing stock of 2023,” Josh says.

KeyBanc, meanwhile, accepts all this and even factors in the lacklustre reception NVDA’s newest gaming chip garnered earlier in the year, setting all aside on the unique hold it supposedly has over generative AI.

“While supply is likely to limit more meaningful NT upside for NVDA data center GPUs including both the A100 and H100, and the disappointing launch of the RTX4070 could result in a modest miss in gaming, we anticipate investors will look through these concerns.

“We believe NVDA represents one of the best positioned companies in semis this year given: 1) its dominate positioning in generative AI; and 2) multiple new product cycles across both data centre (H100) and gaming (RTX40).”

Best in class

Pete says that, all told, ‘Nvidia has evolved into a best-in-class company in the field of graphics.’

The rally in Nvidia has been ‘stunning’ and the broad application across a potential gaggle of sectors makes its first mover status a rare opportunity in trying times.

“With AI models such as ChatGPT bursting into the scene and capturing the public imagination, investors are betting heavily that the next technological revolution will be powered by Nvidia graphics cards.

“Industries such as education, healthcare, logistics, finance and much more are likely to be disrupted by the dramatic rise of artificial intelligence. Hence, Nvidia is seen as the obvious bet for investors to gain exposure to this innovative trend, which can fuel tremendous growth for chip demand,” McGuire said.

Earnings contraction, focus on guidance

While the future is certainly promising, the ‘problem’ is that the AI transformation is still in its early stages.

It might take years before it translates into a massive boost in sales and profits. In the here and now, the company has to grapple with a slowdown in gaming and data center demand, which are its bread and butter.

Inventory levels have been rising steadily for several quarters, which suggests that demand for its products has started to dwindle and lower prices might be needed to attract customers.

“It’s a classic case of oversupply after severe pandemic shortages, and the buzz around AI has masked these issues,” McGuire notes.

Analysts expect Nvidia to report $0.92 in earnings per share on $6.5 billion in revenue. These numbers would represent an earnings decline of 32% and a revenue reduction of 21% from the same quarter last year.

“Of course, investors are already fully aware that the company is facing a difficult period, but are willing to forgive that for the promise of stronger numbers ahead. Therefore, the lion’s share of attention will fall on the guidance by company executives for the second quarter and beyond,” Pete adds, before getting technical.

Technically speaking

Analyst estimates point to an aggressive recovery in earnings growth during the rest of the year, so if management reaffirms or upgrades that outlook, it could eclipse everything else.

But turning to the technical chart, Peter sees the space above US$304 as territory yet to be claimed.

“A batch of surprisingly strong earnings or cheerful guidance could propel Nvidia shares towards 304.00, which is the next resistance zone after 292.00 was breached.

“On the flip side, if investors are left disappointed by this earnings report, the first area to provide support might be around 280.00, where a violation would turn the focus to 263.00.”

On a year-to-date basis the performance looks even better. The graphics chip giant has gained over 116%, while the S&P 500 index has risen 9.3%.

Meanwhile the Bank of America analyst Vivek Arya has been gushing for the business all year, calling NVDA’s accelerated silicon, systems, software and developers the “full stack” which puts it in a position to “lead the nascent generative AI arms race among global cloud and enterprise customers.”

To clarify, take a look at this pic.

The numbers, my word, the numbers…