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NVIDIA’s Q4’23 results shed light on its AI future! Buy?

Stocks, Tech Stocks

Written by:

Joo Parn (JP)

When semiconductor companies around the world were reporting more subtle forecasts after a home run in 2021, the down cycle looks imminent.

NVIDIA‘s latest results jolted the market back into a potential uptrend, as results were better than expectations while shedding light on potential catalysts and prospects.

So what exactly made investors suddenly bullish again about this company?

1. YoY drop for the fiscal year, but bright spots in Q4’23

Source: NVIDIA Corporation Q4FY23 CFO Commentary

Semiconductor stocks all rallied significantly during the lockdown, fueled by cloud migration, higher computer device sales, and also the cryptocurrency mania.

However, after a scintillating run, with the world grasping onto measures to fight inflation, NVIDIA was not spared as well.

The topline of FY 2023 was flattish versus FY 2022. However, gross margins dropped by 8.0 pts. while operating expenses ballooned up 50%. This led to a drawdown of its operating income and net income by 58% and 55% respectively.

However, if we zoom into NVIDIA’s Q4’23 results, even though revenue was up 2% QoQ, gross margin showed a surprise 63.3%, up 9.7 pts versus Q3’23. A flat operating expense meant that operating income and net income were buoyed by the higher gross margins, coming in at a QoQ improvement of 109% and 108% respectively.

If semiconductor companies are really facing a downcycle, well the margins certainly do not point in that direction.

2. Surprise growth in Automotive YoY, a rebound of other core platforms QoQ

Source: NVIDIA Corporation Q4FY23 CFO Commentary

Any gamer would know that NVIDIA’s bread and butter are in the gaming scene. But over the years, as cloud migration and adoption accelerates, NVIDIA has grown its presence in the data center industry.

YoY wise when comparing Q4’23 against Q4’22, Data Center is up by 11%. The fiscal-year increase was led by strong growth from hyper-scale customers and also
reflects purchases made by several Cloud Service Providers (CSP) partners to support multi-year cloud service agreements for NVIDIA’s new AI cloud service offerings.

Automotive revenue was a record, up 135% from a year ago and up 17% sequentially. Fiscal-year revenue was up 60%. These increases reflect growth in sales of self-driving solutions, computing solutions for electric vehicle makers, and strength in sales of AI cockpit solutions. The increase also included growth in automotive development arrangements.

As for other segments, investors too would be surprised, as on a QoQ basis, Gaming, Professional Visualization, OEM, and Others all have shown a surprise uptick.

Clearly, the AI catalyst has been working on some surprises in NVIDIA’s latest quarterly results.

3. Gross margins back at the mid-60% after a bombed-out Q3’23

Source: NVIDIA Corporation Q4FY23 CFO Commentary

After a bombed-out Q3’23 results where GAAP gross margins dipped to 53.6%) and where everything seems to be heading south, a resilient Q4’23 took everyone by surprise.

Sequentially, Nvidia’s GAAP and Non-GAAP gross margins increased, primarily
due to lower inventory charges. Lower Gaming margins were supported by a better contribution from Data Center and Automotive.

4. Firing on all cylinders in the AI movement

AI is the go-to trend word these days. But one could only be amazed by how NVIDIA made it a catalyst for all of its platforms.

For its Data Center platform, NVIDIA’s full AI stack — including GPUs, DPUs, and the NVIDIA AI Enterprise software suite will be available on 15 new Dell PowerEdge servers. It has also partnered with Deutsche Bank to accelerate the Frankfurt-based bank’s use of AI and machine learning in the financial services sector.

For Professional Visualization, Lockheed Martin (NYSE: LMT) announced a collaboration with NVIDIA to build an artificial intelligence (AI)-driven Earth Observations Digital Twin that will provide the National Oceanic and Atmospheric Administration (NOAA) with an efficient and centralized approach to monitor current global environmental conditions, including extreme weather events.

NVIDIA’s Automotive segment continues to see improvements, with a Foxconn partnership to build Automated Electric Vehicles and also prepare intelligent robots to automate industries from logistics and manufacturing to energy, retail, and more. 

5. Upbeat outlook for the upcoming quarter

Source: NVIDIA Corporation Q4FY23 CFO Commentary

Unlike TSMC and other semiconductor stocks which have dialed down their outlook, NVIDIA has provided robust and a positive outlook for its upcoming Q1’24.

A revenue expectation of USD 6.5 billion, will be a growth of 7.4% against Q4’23.

That does not look like a slowdown.

GAAP gross margins of 64.1% will be an 80 bps improvement against Q4’23’s gross margins of 63.3%.

After lackluster and even disappointing outlooks from other chip stocks, NVIDIA’s outlook has toned down the down-trend cycle of semiconductor stocks, for now.

To buy or not to buy?

AI is inevitable. But it has also become a catchphrase for many other companies who are claiming their pivot into AI-related frontiers.

Even Bing got into some unfavorable news headlines with alleged claims of being sentient and would take some time to challenge Google.

In a world where AI supremacy can be intangible, one thing that’s tangible is the infrastructure – the chips.

Chips have been and will always be the backbone and the brain for AI to improve and scale. Rather than chasing after AI stocks that might crash and burn, why not just opt for some of the chip stocks with robust balance sheets and a seemingly evergreen business model?

As for what price to buy, and how much risk one can stomach, is up to each of every one of us to decide!

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