Nvidia's Insane Earnings: Is Limitless Growth on the Horizon?

I have two major regrets in my investment journey: selling all my Tesla shares in 2020 and selling all my Nvidia shares in early 2022. These were missed opportunities where I underestimated the growth potential of these companies and their strong competitive advantages in rapidly expanding markets. I keep revisiting these mistakes, determined not to repeat them in future investments.

Although I am writing this post today, please note that the content is based on my thought and analysis as of May 26th. Nvidia once again exceeded market expectations with its outstanding Q1 earnings report. I will review Nvidia's earnings and share my thoughts on investing in the company.

Overwhelming Growth and Solid Competitive Advantage

Source: NVIDIA IR

Nvidia's Q1 revenue soared 262% year-over-year to $26.04 billion, with data center revenue skyrocketing 427% to $22.6 billion. This growth was fueled by robust demand for the existing H100 GPUs, driven by surging AI computing needs across major cloud providers like Amazon, Microsoft, Google, and Oracle, as well as enterprise and consumer internet companies like Meta and Tesla.

Nvidia's positive guidance for Q2 revenue of $28 billion significantly surpasses the market's expectation of $26.84 billion. The H200 and the upcoming Blackwell are expected to further accelerate Nvidia's growth momentum.

Nvidia's competitive advantage stems from its full-stack AI platform, a comprehensive solution encompassing hardware, software, and services. The CUDA software platform, in particular, plays a crucial role in maximizing the performance of Nvidia GPUs and expanding its developer ecosystem. While competitors like AMD and Intel are striving to catch up to Nvidia's technological prowess and market dominance, Nvidia's relentless innovation and aggressive roadmap are likely to maintain its edge for the foreseeable future.

Nvidia: The Biggest Winner in the AI Race

Nvidia is reaping the rewards of the fierce competition in AI technology among businesses. As the AI market blossoms, companies are scrambling to secure Nvidia chips, even at astronomical prices. By establishing a robust CUDA ecosystem early on, Nvidia has left little room for competitors like AMD and Intel to easily enter the fray.

The AI race is not limited to competition between companies. Nvidia is also preparing to welcome governments as new customers. Through its Sovereign AI initiative, Nvidia is enabling governments to build their own AI capabilities by providing them with its technology and solutions.

Some have speculated that Nvidia's dominance in the inference chip market might wane, as inference requires less processing power than training, where Nvidia's chips excel. However, about 40% of data center revenue in the past 12 months came from the inference market. CEO Jensen Huang emphasized Nvidia's strong dominance in both training and inference.

Moreover, the new product release cycle has accelerated from two years to one year. GPT-4, which has surprised the market with its fast response time, reportedly uses Nvidia's H200 chip, enabling faster inference performance. This means that to win the AI race, companies must strive to obtain better chips from Nvidia.

The demand for the already released H100 and H200 is exceeding supply. While the lead time for the H100 has been reduced from one year to 2-3 months, the upcoming Blackwell, expected to be released this year, will likely trigger another surge in demand.

Nvidia's Wild Ride: Will it Continue?

Nvidia's revenue growth so far has frankly been beyond my wildest expectations. And the future for Nvidia continues to look bright.

Source: SeekingAlpha

So, should we buy Nvidia now? I believe there's a significant drawback to buying and holding Nvidia compared to other companies. Buying Nvidia stock without considering this aspect carries risk. Currently, most of Nvidia's revenue still relies on hardware sales. No matter how much Nvidia maintains its competitive edge, semiconductors are a cyclical industry. Right now, the AI race is driving companies to invest heavily in AI accelerators, but an oversupply of data center capacity of failures in AI product development could negatively impact Nvidia's revenue.

While software companies like Google or Microsoft can maintain consistent upward revenue trends and high margins, I honestly don't think Nvidia's current margins and growth rate are sustainable in the long run. Of course, Nvidia is aware of this and is working to expand its software business revenue. They've launched premium software products like Nvidia AI Enterprise and Omniverse. However, the absolute majority of their revenue still comes from semiconductor sales.

In the short term, Nvidia's momentum doesn't seem to be fading. If the AI investment craze continues for another 2-3 years, Nvidia's EPS growth, along with its stock price, could continue to rise. But since stock prices reflect the future, if there are signs of a cyclical downturn, Nvidia's stock price could also take a significant hit. Those who have invested heavily in Samsung Electronics or SK hynix in South Korea would understand this well. Memory semiconductors in Korea also show tremendous margins when the cycle is favorable. Unless we closely examine the industry, it is difficult to predict when this cycle will turn, so we need to understand the difficulties investors face when buying stocks at the wrong time. No matter how rosy Nvidia's future looks now, we need to invest with an awareness of these risks.

I also believe Nvidia's run can continue this year. If Nvidia exceeds expectations, avoids cyclical patterns, and maintain its high margins and decent growth rate, it doesn't seem unreasonable for its stock price to reach $3,000 by 2030. However, I personally don't believe these high margins will last. If you buy Nvidia now, you should approach it with a short-term perspective. Nvidia's CFO describes data centers using Nvidia semiconductors as AI factories where data goes in and intelligence comes out.

Nvidia's projected revenue for FY2025 is around $120 billion, a 97.79% increase year-over-year. For the following year, FY2026, the projected revenue is around $155.7 billiion, a 29.22% grwoth. Assuming a 75% gross margine, the EPS is predcited to be around $35. Therefore, if we apply a forward PER of 35x around this time next year, the stock price could rise to $1,225. As the AI industryt is just starting to bloom, investments in AI factories by many companies and governments are likely to continue this year. If the expectation of these investments continuing until next year persists, Nvidia still has upside potential. However, I personally consider Nvidia to be a high-risk stock with high volatility. Due to this volatility, I wouldn't buy at the current price level, but if Nvidia's competitve edge remains intact and the stock price drops due to external noise, I would consider buying.

Disclaimer: The valuation presented in this article is based on subjective assumptions and may be inaccurate. Please use it for reference purposes only.

All investment decisions are the sole responsibility of the investor.

Thank you.