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NVDA Q1CY22 (Q1FY23) Earnings Review

31-May-22 Current Price: $186
Wisdom Global: NVDA : 1QCY22 result review
USD Mn 1QCY22 YoY QoQ Remarks
Revenue 8,288 46.4% 8.4% primarily driven by growth in Datacenter segment followed by Gaming. Gaming also includes crypto demand.
Gross profit 5,431 49.7% 8.6%  primarily due to a higher-end mix of GeForce GPUs within Gaming and sales mix shift in favor of Data center GPUs partially offset by higher sales of SOCs for game consoles
EBIT (Normalized) 3,221 64.7% 8.5% normalized excluding one time charge for the failed ARM transaction. Positive operating leverage offset by Costs from employee growth, compensation-related costs and engineering costs
Net profit (Normalized) 2,971 67.2% 9.2% lower taxes and positive operating leverage
Gross Margin 65.5% 140 bps 10 bps product mix of higher-end GeForce GPUs in Gaming & contribution from Data Center segment
EBIT margin 38.9% 430 bps 0 bps product mix, operating leverage partially offset by higher employee and engineering costs
NPM 35.8% 440 bps 20 bps lower taxes
Major Segments Rev. (USD Mn) 1QCY22 YoY % of Total Remarks
Gaming 3,620 31.2% 43.7% YoY increase reflects higher sales of GeForce GPUs based NVIDIA Ampere architecture.
Data Center 3,750 83.1% 45.2% Growth was led by cloud computing and hyperscale customers for workloads such as natural
language processing and deep recommenders.
Professional Visualization 622 67.2% 7.5%  growth in workstations as enterprises supported hybrid work environments.
Auto 138 -10.4% 1.7%  YoY decrease was due to automakers’ supply constraints and the decline of legacy cockpit revenue. The sequential increase was driven by AI cockpit revenue.
OEM & Other 158 -51.7% 4.2% YoY decrease was due to a decline in Cryptocurrency Mining Processor (CMP) revenue, which was nominal in the quarter compared with $155 million from a year ago. The sequential decrease was driven by lower entry level notebook GPU sales. Crypto GPU demand which is the larger revenue generator is clubbed with Gaming segment.
Outlook
– Revenues: Data center has become the largest segment at 45% of revenues. We expect this growth in data centers to continue for the next few years as NVDA chips are increasingly  used in deep learning for AI. Our concern though, in the near term, is from the Gaming segment (44% of revenues). Since NVDA can’t tell the end use of its chips accurately, all of the crypto mining demand is also clubbed with the Gaming segment. As the Crypto market has crashed oflately, demand may soften for the Gaming segment. Ethereum mining profitability is at its lowest in the last 18 months (chart below). Covid era demand pull for gaming in CY20-21 also is a headwind in CY22 and so Gaming growth may be slower or even below pre-pandemic levels in CY22. Price of  nVidia’s GeForce RTX 30 graphics cards are at its lowest as a premium to MSRP in the last 18 months; currently selling at only 6% premium to MSRP. See historical price chart below.  NVDA’s products in  Auto and robotics are breaking new ground, the scale compared to Gaming is insignificant. Moreover, Auto may not reach Gaming’s scale for the next 2-3 years and so in the near term Data center is the only driver as Gaming growth declines.
– EBIT: NVDA’s vacuum cleaner effect with negative operating leverage is likely to manifest in the next quarter (Q2CY22) as its estimated YoY expense growth of 39%  exceeds its estimated revenue growth of 24% leading to a sharp decline in estimated EBIT growth from 65% YoY growth in Q1CY22 to an estimated 15% in Q2CY22. Other covid beneficiaries such as NFLX & AMZN have seen sharply negative operating leverage kick-in due to flat or lower growth in Sales just when expenses were on the rise from additional hiring and other costs in Q1CY22. NVDA escaped negative operating leverage in Q1CY22 in spite of increase in hiring and engineering costs since the Data center segment growth has offset lower growth in Gaming but the next quarter is likely to be the beginning of negative operating leverage for NVDA.
– EPS: The 50-100% EPS growth of the last couple of years may be a thing of the past. As we enter the more normalized post pandemic era, we expect the company to clock an EPS CAGR of 19% for CY21-23.
– TAM: Deep learning to automate intelligence is driving companies across industries to adopt NVIDIA for AI computing. Data center will continue to drive growth at NVDA in the near term. NVDA GPUs for Evs is the next growth segment for the company. DRIVE Orin SOC is now in production and kicks off a major product cycle, with over 35 customer wins from automakers, truck makers and robotaxi companies. Auto design win pipeline now stands at $11B over the next six years. NVDA is also a pioneer in AI factory software, NVIDIA AI enterprise engine and omniverse engine. As of now they don’t share the metrics and details of the software business as most of it is provided free as part of the hardware sales but in the in near future they will provide metrics quarterly around the software business. NVDA is in the process of launching Grace, their first CPU which could be another leg of growth for the company moving forward.
Valuation
– The stock trades at 36.5x CY23 PE multiple which is expensive compared to its own historical multiples as well as its closes competitor AMD which trades at 24.5x CY23 PE.

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