NVIDIA Earnings Surprise

NVIDIA announced financial results for the fourth quarter and fiscal 2024 on February 21, 2024.
Financial statements are available on the company`s website. Key points to catch your attention:
-Record quarterly revenue of $22.1 billion, up 265% from a year ago — exceeded analyst’s expectations, who had predicted a little more than 21 billion.
-Record quarterly Data Center revenue of $18.4 billion up 409% from a year ago.
-Record full-year revenue of $60.9 billion.
-Earnings per share also beat market expectations. The consensus forecast was $4.72, while the company reported $5.16, which is almost 10% better!

Based on the results of the report, we revised the rating of NVDA stocks, and it increased from 132% to 144%, while 100% is the level that signals to us that the stock is good enough to become part of an investment portfolio. Right now, this is the third-ranked company in the table among all US companies (5,714) in our database. Is it worth talking about the merits of the company today, when its name is in every headline?

If only briefly. The company has no weaknesses today according to our valuation model. It’s hard to believe, but NVIDIA provides its shareholders with a nearly triple-digit return on capital! We really like to look at the components of this by the DuPont method to figure out the contribution of financial leverage to ROE. So for NVDA it is minimal — only 1.6. High profitability is supported by high margins and is based on the foundation of an extremely low debt load! Very hot and «tasty» company right now, but everyone already knows that, right?

It seems like almost every investor knows the company is good enough for their portfolios. But is the price good enough to buy? This question concerns most people much more than the analysis of financial indicators.
Not long ago, when NVIDIA Corp overtook Google for the bronze in the third largest US company battle, we reviewed NVID stock’s valuation. Our method is quite simple: we analyze the company’s valuation not relative to the market, industry, and competitors, but relative to itself over 5 years. Nothing has changed in our model, but the key indicator influencing the assessment result has changed seriously — we are talking about net profit.

Just a week ago, we were operating at $7.57 in earnings per share for the last 12 months. Now, based on the results of the quarter that ended January 28, 2024, annual EPS became $11.92. This value allowed us to reconsider all three value levels that we use as potential entry points and investment targets.
If before the release of the report, the estimate of the rapidly growing market cap to actual profit was approaching the frightening (for a «mega cap» company) level of 100, now, as of February 23, the ratio is only 66! That still seems high, but let’s not ignore the fact that NVID’s median P/E over the last 20 quarters is 59.5. This means that at the end of the week, NVID stock was only 11% higher than this level ($709.48).

Now let’s take a look at management’s expectations for the first quarter of 2025. Don’t be scared or confused. NVID set its fiscal year from February to the end of January, so the last annual report was for 2024, although physically it has just begun.

According to the press release management is waiting for a new revenue record of $24 bln which is 8.5% higher than the recent quarter result. Now the gross margin that we calculated for the last 12 months is 73%, but this value should also increase according to management calculations. As we see the management gave the market background for positive expectations. Ultimately, financial performance and expectations justify the rate of stock price growth that we have seen in recent months.

However, as we know, trees do not grow in the sky. You should be careful with NVDA shares. After all, the reason for growth is the gigantic demand for chips from companies that are developing artificial intelligence. Before this there was mining, and some of us have already forgotten it. There is an obvious shortage now, but this condition will not be permanent. Let us express our opinion: a business like NVDA should probably be in the portfolio of a long-term investor, but its weight should not be significant, but nerves should be of steel since a period of volatility will definitely come.