This week on BRIIDGE Recaps
30 JULY 2024
As the world enters a new phase of artificial intelligence, propelled by computer models capable of learning, reasoning, and, in some instances, mimicking human traits after training on large datasets, one company emerges as the ultimate winner: NVIDIA.
While its reference industry—semiconductors—performed in line with the broader market over the past three years on an equal-weight basis, NVIDIA INC. vastly outperformed, boasting a 450+% spread against the benchmark on both an equal-weight and market-cap-weighted basis. With a current valuation of $2.7 trillion, enough to acquire the next 15 semiconductor companies trading across NYSE and Nasdaq, could there be an opportunity in sight?
Fig 1: Performance 1YR Horizon
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Fig 2: Sales Growth [1YR Rolling]
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OpenAI jump-started the AI race in November 2022 by launching what soon became the fastest-growing consumer application in history, exceeding 100 million users within eight weeks. With growing computing power requirements associated with increased web traffic, OpenAI, along with blindsided legacy AI players and startups, rushed to level up their cloud infrastructure to handle over 10 million queries daily.
At the heart of this architecture are $30K-a-unit H100 NVIDIA GPUs optimized for AI computation.
With a 10-year head start, and the foresight of a meticulous and patient founder who envisioned AI progress from early research papers and optimized chip design in anticipation, NVIDIA’s moat may be hard to challenge, given the complexity of the product. While sales growth for the semiconductor industry turned negative for the four quarters ending Q1 (evidenced by Taiwan Semiconductor Manufacturing, Advanced Micro Devices, and Intel Corporation), NVIDIA recorded triple-digit growth.
Over the same period, the operating margin for the company tripled (from 17.4% to 59.8%) while the median for the industry almost halved. The free cash flow margin for the company more than doubled while it remained flat for the industry.
Fig 3: Operating Margin [1YR Rolling]
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Fig 4: Free-Cash-Flow To Sales [1YR Rolling]
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Although fundamentals appear robust and are forecasted to remain so for the medium term, headwinds may be on the horizon. As macroeconomic conditions deteriorate and the impact of costly hardware infrastructure on the margins of mega tech firms begins to resonate among investors, alternative solutions such as proprietary chips may be prioritized.
For startup firms, basic economic principles—lack of meaningful ROI—will lead to reduced COGS in most cases (inference or distributed computing). Finally, competition from legacy semiconductor firms will progressively drive down the cost of GPUs, hence impacting NVIDIA’s record bottom-line margins.
Fig 5: Net Income Margin [1YR Rolling]
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Fig 6: Performance [1YR]
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Fig 7: Dividend Yield
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Fig 8: Net Debt To Ebitda [1YR Rolling]
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