NVIDIA Corp (NVDA) USD0.001

NVIDIA has beaten market expectations for both revenue and earnings in the first quarter.

Revenue was up 262% to $26.0bn. The key driver was data center growth, fueled by accelerating demand for its artificial intelligence (AI) focussed computing platforms.

Gross margins improved by 12.1 percentage points to 78.9%, which combined with relatively modest increases in operating expenses, allowed operating profit to rise 690% to $16.9bn.

Free cash flow rose from $2.6bn to $14.9bn. Net cash stood at $21.7bn.

NVIDIA has raised the quarterly dividend by 150% to 10 cents per share, and repurchased $7.7bn of its own stock in the first three months of the year. There will also be a ten-for-one stock split in June. This will re-base the share price but has no direct impact on valuation or financial performance.

Revenue in the second quarter is expected to be around $28.0bn. Full-year guidance on gross margins is for a range in the mid 70s.

The shares were up 6.4% in after-hours trading.

Our view

NVIDIA's first quarter provided a further boost to its valuation, with continuing rampant demand for systems powering the Artificial Intelligence (AI) boom. Its high-tech chips are used to train models like ChatGPT and its Data Center division has been driving triple-digit growth in revenues and profits.

Other so-called generative AI products and services are becoming increasingly important, with tech companies spending big on gearing up their own offerings. The chips needed for this are the backbone of the business model, and their advanced capabilities allow NVIDIA to earn higher margins than chip companies with a greater bias towards consumer electronics.

AI has the potential to transform a wide range of industries, from healthcare to education. Whilst there can be no guarantees, we think this underpins forecasts of high double-digit growth in the AI market beyond the end of the decade. Much of the growth is expected to be driven by infrastructure spending, which caters to NVIDIA's strengths. The continuing evolution of NVIDIA's technology stack means it's well-placed to maintain its dominant position.

We're impressed at NVIDIA's efforts to position itself as a key enabler of AI adoption and development. The likes of META, Amazon, Alphabet and Microsoft have been making big promises about their intentions to integrate AI into their offerings. They're all customers. It's little surprise that this boom is attracting competition and these same names are also developing their own chips . It’s something to watch out for but we think the company’s competitive advantage remains strong. Meanwhile, efforts are underway to become more deeply embedded with the client base. Another headwind is the export restrictions that have seen sales to China fall significantly.

The company has seen cash flows increase in line with profits, which combined with a strong balance sheet should help NVIDIA to stomach ups and downs and fund innovation. It also supports share buybacks and dividend payments. However, despite the recent uplift in the dividend, we don’t see the sub 1% yield as a key part of the investment case. As ever, no shareholder payouts are ever guaranteed.

There's a lot to be excited about. But the company's stratospheric growth has not gone unnoticed by the market, with it now being one of just a handful with a market value of over $2 trillion. The valuation sits near the long-term average on a forward price-to-earnings basis, which doesn't look too demanding to us. But there remains considerable pressure to deliver against expectations. We’re impressed with NVIDIA’s recent record on this front but, with the comparatives getting ever harder, there’s no guarantee this will continue.

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