Nvidia has taken steps to leverage its GPU prowess into other markets such as data center and automotive that represent meaningful growth opportunities. To stay at the cutting edge of GPU technology, Nvidia has a large research and development budget relative to AMD and smaller GPU suppliers, which allows it to continuously innovate and fuel a virtuous cycle for its high-margin chips.
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We think the market has significant barriers to entry in the form of advanced intellectual property, as even chip leader Intel INTC was unable to develop its own discrete GPUs (despite its vast resources) and ultimately needed to license IP from Nvidia to integrate GPUs into its PC chipsets (though, more recently, Intel is vying to develop its own discrete GPU). The firm is the originator of and leader in discrete graphics, having captured the lion’s share of the market from longtime rival AMD. We believe Nvidia possesses a wide economic moat stemming from its intangible assets related to the design of graphics processing units. Read more about Nvidia’s fair value estimate.
In automotive, we think Nvidia will capture a healthy portion of the self-driving opportunity, culminating in a 39% CAGR in automotive revenue through fiscal 2028, following a soft fiscal 20 due to the coronavirus and the chip shortage that hampered auto production. Over the next five years, we project that gaming revenue will rise at an 8% CAGR. We estimate gaming GPU sales will be up 7% in fiscal 2024 following a sharp decline of 27% in fiscal 2023. While we expect gaming to remain a major source of revenue, the cryptocurrency crash has materially curbed demand for Nvidia’s GPUs for mining purposes. Key workloads that supported this growth included large language models (such as ChatGPT), other forms of generative AI, deep recommendation engines, and autonomous vehicle fleet data processing and training. We think the data center segment will rise at a 30% CAGR through fiscal 2028 as we expect the firm to dominate the training portion of deep-learning AI workloads. We project revenue will increase at a 23% compound annual growth rate through fiscal 2028 as the firm continues to diversify its revenue sources to areas of strong potential.
Our $300 fair value estimate assumes a fiscal 2024 (year ending January 2024) adjusted price/earnings ratio of 37 times. Specifically, we think the robust demand for its H100 GPUs will drive second-quarter data center revenue to $7.6 billion, which would be up 100% year over year.Īt a 2-star rating, Nvidia stock is overvalued compared with our fair value estimate.
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We believe the data center segment will be the primary driver of management’s rosy second-quarter revenue outlook of $11 billion. Relative to its predecessor, the H100 is 9 times faster in artificial intelligence training and up to 30 times faster in AI inferencing for transformer-based large language models such as Open AI’s ChatGPT. The uplift was primarily driven by unsatiated demand for Nvidia’s latest H100 data center graphics processing unit. We have increased our fair value estimate to $300 per share from $200 per share, as we raised our forecast for Nvidia’s data center segment revenue to grow at a 30% compound annual growth rate over the next five years (up from 19% previously). Management expects second-quarter revenue to be at a midpoint of $11 billion, which would be up 64% year over year and 53% sequentially. Wide-moat Nvidia reported first-quarter sales ahead of management’s guidance, while providing guidance for the second quarter significantly above our prior estimates. Here’s Morningstar’s take on what to think of Nvidia’s earnings and stock. Nvidia NVDA released its first-quarter earnings report on May 24.
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