Wide-moat Nvidia NVDA continues to fire on all cylinders as the firm reported fiscal second-quarter results and a third-quarter forecast that were ahead of our prior expectations and FactSet consensus estimates. Our confidence in Nvidia remains, as the company is still prospering from insatiable demand for graphics processors, or GPU, and related products used in data centers to run artificial intelligence. However, Nvidia’s earnings beat wasn’t as eye-popping as in quarters past, which may explain why shares fell after hours.

We maintain our $105 per share fair value estimate. In the near term, we still assume that Nvidia will increase its data center, or DC, revenue by a few billion per quarter as additional GPU production capacity comes online. Yet our fair value estimate is mostly driven by our longer-term assumptions for AI adoption and robust DC spending by Nvidia’s key AI customers. We maintain our Very High Morningstar Uncertainty Rating as both assumptions will be opaque and may shift in the years ahead.

Revenue in the July quarter was $30 billion, up 15% sequentially, up 122% year over year, and ahead of guidance of $28 billion. DC revenue was $26.3 billion, up 154% year over year. Even with Nvidia’s next-generation Blackwell products arriving later this year, the firm saw no slowdown in demand for its existing Hopper family of products. Nvidia expects to earn “several billions” of Blackwell revenue in its fiscal fourth quarter ending January 2025. In the meantime, management anticipates that Hopper shipments and revenue will still see growth in the second half of fiscal 2025, as customers won’t pause their purchases of Hopper while waiting for Blackwell.

Nvidia expects October-quarter revenue to be $32.5 billion, which would be up 8% sequentially and 79% year over year. Nvidia’s key AI customers still intend to invest heavily in AI capital expenditure, and we still expect Nvidia to reap most of the rewards of such spending.

Business strategy and outllok

Nvidia has a wide economic moat, thanks to its market leadership in graphics processing units, or GPUs, hardware and software tools needed to enable the exponentially growing market around artificial intelligence. In the long run, we expect tech titans to strive to find second-sources or in-house solutions to diversify away from Nvidia in AI, but most likely, these efforts will chip away at, but not supplant, Nvidia’s AI dominance.

Nvidia’s GPUs handle parallel processing workloads, using many cores to efficiently process data at the same time. In contrast, central processing units, or CPUs, such as Intel's processors for PCs and servers, or Apple’s processors for its Macs and iPhones, process the data of "0's and 1's" in a serial fashion. The wheelhouse of GPUs has been the gaming market, and Nvidia’s GPU graphics cards have long been considered best of breed.

More recently, parallel processing has emerged as a near-requirement to accelerate AI workloads. Nvidia took an early lead in AI GPU hardware, but more important, developed a proprietary software platform, Cuda, and these tools allow AI developers to build their models with Nvidia. We believe Nvidia not only has a hardware lead, but benefits from high customer switching costs around Cuda, making it unlikely for another GPU vendor to emerge as a leader in AI training.

We think Nvidia’s prospects will be tied to the AI market, for better or worse, for quite some time. We expect leading cloud vendors to continue to invest in in-house, while CPU titans AMD and Intel are working on GPUs and AI accelerators for the data center. However, we view Nvidia’s GPUs and Cuda as the industry leaders, and the firm’s massive valuation will hinge on whether, and for how long, the company can stay ahead of the rest of the pack.

Our fair value and profit drivers

Our fair value estimate is $105 per share after the firm completed a 10/1 stock split on Monday, June 10. This fair value estimate implies an equity value of roughly $2.5 trillion. Our fair value estimate implies a fiscal 2025 (ending January 2025, or effectively calendar 2024) price/adjusted earnings multiple of 37 times and a fiscal 2026 forward price/adjusted earnings multiple of 27 times.

Our fair value estimate, and Nvidia’s stock price, will be driven by its prospects in the data center, or DC, and AI GPUs, for better or worse. Nvidia’s DC business has achieved exponential growth already, rising from $3 billion in fiscal 2020 to $15 billion in fiscal 2023 and more than tripling thereafter to $47.5 billion in fiscal 2024. DC revenue appears to be supply constrained and we think that Nvidia will continue to steadily boost revenue in each of the four quarters in fiscal 2025 as more supply comes online. Based on Nvidia’s strong forecast start to fiscal 2025, we model DC revenue rising 133% to $111 billion in fiscal 2025. We model a 23% CAGR for the three years thereafter, as we anticipate strong growth in capital expenditures in data centers at leading enterprise and cloud computing customers. We think it is reasonable that Nvidia may face an inventory correction or a pause in AI demand at some point in the medium term thereafter. Excluding this one-year blip that we model, we anticipate average annual DC growth of 10% thereafter and consider this to be a reasonable long-term growth rate as AI matures.

In gaming, which was formerly Nvidia’s largest business, we model $11.8 billion of revenue in fiscal 2025, and 10% average annual revenue growth thereafter. We have high hopes for Nvidia’s automotive business as greater processing power will be required in active safety systems and autonomous driving. We model $1.4 billion of revenue in fiscal 2025 and revenue growing at a 20% CAGR over the next decade.

In summation, Nvidia achieved 126% revenue growth in fiscal 2024, and we anticipate another massive year with 107% growth to $126 billion in fiscal 2025. We model long-term midcycle revenue growth of roughly 10% per year for the business as a whole, resulting in a 29% CAGR over the next decade.

Nvidia’s massive DC growth has been gross margin-accretive, as GAAP gross margin expanded from 57% in fiscal 2023 to 73% in fiscal 2024. We model near-term GAAP gross margin rising to 75% in fiscal 2025 and compressing modestly to the low-70% range in the long-run.

We anticipate that revenue will grow faster than operating expenses, leading to operating leverage. Nvidia earned a 54% GAAP operating margin in fiscal 2024 and we model expansion to 62% in fiscal 2025 and 64% each year from fiscal 2026 to fiscal 2028. We model modest compression thereafter to the low-60% range thereafter. We expect increased competition that may strive to chip away at Nvidia’s significant pricing power, but we ultimately expect Nvidia to be able to fend off these competitive pressures, thanks to the high switching costs associated with the Cuda platform.

Nvidia bulls say

  • Nvidia’s GPUs offer industry-leading parallel processing, which was historically needed in PC gaming applications, but has expanded into crypto mining, AI, and perhaps future applications too.
  • Nvidia’s data center GPUs and Cuda software platform have established the company as the dominant vendor for AI model training, which is a use case that should rise exponentially in the years ahead.
  • The firm has a first-mover advantage in the autonomous driving market that could lead to widespread adoption of its Drive PX self-driving platform.

Nvidia bears say

  • Nvidia is a leading AI chip vendor today, but other powerful chipmakers and tech titans are focused on in-house chip development.
  • Although Cuda is a leader in AI training software and tools today, leading cloud vendors would likely prefer to see greater competition in this space and may shift to alternative open-source tools if they were to arise.
  • Nvidia’s gaming GPU business has often seen boom-or-bust cycles based on PC demand and, more recently, cryptocurrency mining.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn more about how to identify companies with an economic moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.