Does the 10:1 stock split make NVDA an attractive buy today?
Portfolio: Beachman's quick take on whether to buy or sell NVDA after their Q1 earnings report
Well, everyone breathed a sigh of relief this evening after NVDA released their Q1 2024 earnings report. It was a classic NVDA beat-and-raise…they beat on the top line and bottom line with these Q1 results. Then they went on to raise their outlook for the next quarter along with bullish commentary for the rest of the year.
A big surprise was that they announced a 10:1 stock split for anyone owning the stock as of market close on Thu June 6th. The 10:1 split will be executed at market close on Fri June 7th and the new split shares will start trading on Mon June 10th, meaning…
…if you own a share of NVDA on June 6th, then on the evening of June 7th (likely over the weekend), your brokerage account will receive 9 extra shares of NVDA. On Mon June 10th, you will own 10 shares of NVDA with each of them sporting a value = 1/10th of the value it had on June 7th.
When a highly followed and widely owned company decides to split their stock, retail investors often ask whether they should buy the stock. With NVDA, this chatter took off right after the earnings release and is bound to be a major online discussion point for the next two weeks. Stock splits often attract new buyers who believe that they are getting a better deal…more value for their buck because they will own more shares of the company after the split. A $100 share is worth the same as ten $10 shares after the stock is split 10:1. However, naive investors often don’t understand this simple math and the cosmetic change. They get enticed by misleading information and fintwit pitches. Traders take advantage of such pre-split action to make short term profits.
That said, the question still stands…
Should one buy NVDA now?
We will answer this question by taking a look at past business performance, future business potential, the stock’s price action and overall market conditions.
Past business performance
NVDA’s Q1 revenues came in at $26B +262% yoy +18% qoq. They beat Q1 estimates by 6%. NVDA has been blowing past analyst and market expectations for the past 5 quarters…even though consensus estimates have been revised higher multiple times prior to each of these reports. Impressive!
Data center revenues rose to $22.5B +427% yoy +23% qoq. This is where they are selling more highly profitable AI GPUs…where demand far outstrips the supply…where their order book is full up well into 2025.
Gross margin rose to 78% and has been expanding for 7 quarters now. Such a high, SaaS software like gross margin, that too, in a cyclical product company denotes very strong pricing power and gives them multiple vectors for cash flow generation, new product development and shareholder ROI.
NVDA has generated almost $40B of free cash flow in the past 12 months, leading to one of the best balance sheets in the semiconductor industry.
Future business potential
NVDA raised their outlook for Q2 2024 to revenues of $28B +107% yoy +8 qoq. This will be one of their first quarters facing tougher comps since their AI GPU business took off in 2023. So forward growth rates might seem lower…mathematically they are…however in terms of business growth, this company is expected to sell $115B of semiconductor chips and software in 2024 and $143B in 2025.
NVDA’s product roadmap has now transitioned to an annual, new-GPU cycle, meaning they will be rapidly releasing a new, more powerful GPU every year going forward. Today, they sell H100s and H200s. Starting in Q2, they are selling their new Blackwell B100 GPU at scale along with GB200s. In 2025, B200s are coming along.
CEO Jensen Huang clearly and slightly emphatically stated that they will see a lot of new Blackwell GPU revenue in 2024. These next-gen GPUs will ship in Q2, ramp up in Q3 and data centers will be stood up in Q4. This was a new, bullish surprise during the earnings call and is likely to rerate the stock higher.
If one is worried about a slowdown in demand for NVDA’s GPUs, as I mentioned above, their order pipeline is booked solid well into 2025. Cloud providers have announced plans to spend about $180B in AI and data center capex in 2024 and $200B in 2025. A large chunk of this is slated for NVDA GPU and AI infrastructure orders. Hyperscalers are offering cloud space based on each of NVDA’s GPUs at menu card pricing depending on the customers needs. This allows NVDA to sell multiple generations of their GPUs at the same time, reducing the risk of cannibalization. The company also released spend and earnings potential information about how cloud providers can earn about $5 for every $1 spent on NVDA AI infrastructure.
Several analysts expect data center revenues themselves to hit about $150B in 2024 and upto $200B in 2025. These estimates are about 50% higher than current company guidance.
Markets seem to be constantly catching up to where the company is headed. NVDA’s business has not stopped accelerating and is not showing signs of slowing down either.
Now onto the question of what should an investor do…
Prospective stock price
As I look at how NVDA has traded over the past few months and factoring this latest earnings report into the mix…