What Beachman is doing with his overweight NVDA position now
Portfolio: Highlights, trends and comparative performance findings from recent earnings reports
My wife is a college professor (biochemistry, microbiology, genomics) who is usually very focused on her scientific research and sometimes mildly interested in our portfolio. Her current investigation is on the increasing amounts of medication and manufacturing chemicals entering our water system.
Last Fri, she asked me whether our NVDA stock had lost a lot of money. Apparently, her news feed alerted her to the fact that Jensen Huang, CEO of Nvidia, lost about $10B in personal wealth as the stock dropped from recent highs. Suffice to say, in perfect Beachman fashion, I walked her through the company fundamentals and recent stock price performance and what I had been doing with my holdings.
I have been quite active with my oversized, overweight NVDA position. My most recent transaction was a 5% sell at $130 in late Aug. I, then, put on a collar hedge against half of my remaining shares leading into the Q2 earnings report. I closed this collar hedge trade for a 95% gain a few days after the report came out. Since then, I have been sitting on my hands with my NVDA shares…reading, watching and thinking.
The questions on the table are what is coming up for the company and for the stock? Where do we go from here and what should I do? What should investors do? Current holders and wanna-be-holders?
Today, we will focus on action. We will look past the fear, doubt and FOMO to derive an action plan for my NVDA position. We will look at some important trends in the company’s performance, understand their forward business prospects and most importantly, we will try to extrapolate the stock’s current and future valuation…against a timeline…to decide whether now is a good time to buy, sell or hold NVDA shares.
Let’s use the most recent Q2 earnings report to make some decisions…
Table of contents
Report card
Surprises
Most important questions you should be asking
Investment thesis
Gameplan
Report card
Please refer to the financial metrics and performance trends in the charts below.
Surprises
Positives:
In what is becoming usual for NVDA, they beat Q2 revenue estimates by 5% bringing in $30B in new sales +122% yoy +15% qoq. NVDA has delivered such monster beats for six consecutive quarters now. What is special about their performance is that these beats have come against over-enthusiastic market consensus…time and again. Analysts keep raising their estimates and NVDA continues to blow past them.
Data center revenues came in at $26.3B +154% yoy, continuing their triple digit growth for five quarters now.
In Q2, networking revenue from both Infiniband and Spectrum-X Ethernet solutions rose to $3.7B +114% yoy +16% qoq, representing 14% of their data center business.
As investors we should pay attention when a company beats sales or earnings by 5% or more. This is what I would consider a positive surprise. Any lesser beat is par for the course, management and analysts playing the expectation game.
NVDA’s Q3 revenues are expected to grow +79% yoy and full year 2024 revenues are estimated at $122B +101% yoy.
RPO growth is keeping up with forward estimates and came in at $1.3B +81% yoy. This could be a continued indication of strength in industrial software (OmniVerse), automobile automation (Drive) and robotics. We need to keep looking for signs of how and when NVDA transitions away from solely depending on hardware revenue to bringing in more software revenue on a contractual, subscription basis. We might be close because software is now at a $1B+ ARR run rate and expected to double by the end of this year 2024.
Fundamentals continue to stay very healthy - expanding margins, expanding cash flow margins, lower expenses and less shareholder dilution.
Cash on the balance sheet has more than doubled over the past year to $35B.
They repurchased more than $7B of their shares in Q2 and announced an additional $50B for more share buybacks.
NVDA continues to score very highly in my Beachman score algorithm…this time clocking 24 points. They lost 6 points, all of them due to laws of large numbers and tougher comps. No shame in that at all.
Nvidia sold 92% of all AI data center GPUs in H1 2024 and commands an 80% overall data center market share.
China continues to decrease as a % of total sales as US restrictions evolve and take hold. I see this as a positive for NVDA because it removes uncertainty from future revenue forecasts.
Negatives:
Gaming revenue has continued to slow down for three quarters now. Perhaps there is a more positive Q4 holiday season boost in the making as channel inventories are normalizing.
Institutional ownership dropped in Q2…as expected and in keeping with valuations (see below).
Looking at the valuation trend in the financial map above, you can see that starting in Q2, NVDA stock has become and is still quite expensive and overvalued. Current PE is 48 and forward PE is 30. Morningstar rates the stock at an FMV of $105.
Interesting:
Concerns about delays of their new Blackwell GPUs are unfounded. CEO Jensen Huang confirmed that they will see billions of revenue from Blackwell in Q4 2024 followed by a significant ramp up in sales in 2025. The few weeks delay was not due to a GPU design issue, but because of a production issue that has been addressed by their foundry, TSMC. Additionally, orders for their current Hopper GPUS remains strong and continues to outstrip supply.
Inference workloads now represent about 40% of NVDA’s data center revenue over the past year. This is an important data point allowing us to better understand the forward timeline and trajectory of AI adoption and investments.
Automobile revenues grew to $346M +37% yoy. This segment may have bottomed over the past two quarters.