Nvidia Corp, the dominant supplier of chips used in AI applications, has triggered another round of upgrades from analysts following earnings for its 2QFY2024 ended July 30 that beat expectations. More critically for fast-growing industries, the company provided a sales forecast that similarly exceeded the market’s already bullish estimates.
“Wide-moat Nvidia’s results and outlook were well ahead of our expectations,” writes Brian Colello of Morningstar in his Aug 24 note. “We are now much more optimistic about the rise of AI workloads and how Nvidia’s wide moat should cement itself as an AI chip leader,” adds Colello, as he raises his fair value estimate to US$480 ($649) from US$300. Before this, of 59 analysts covering the stock, Colello was the last one with a "sell" call.
Nvidia shares, which have quadrupled year to date, extended its gains to trade at US$471.16 on Aug 23. At current levels, the company is well above a peer-beating US$1 trillion market valuation. The company is also signalling it believes its share price has more room to go.
During 2QFY2024, the company returned US$3.38 billion to shareholders in the form of 7.5 million shares repurchased for US$3.28 billion, plus cash dividends. As of the end of the second quarter, Nvidia had US$3.95 billion remaining under its share buyback mandate and on Aug 21, its board approved an additional US$25 billion in buybacks. “There is nothing an investor could ask more,” says Ipek Ozkardeskaya, senior analyst with Swissquote Bank.
Positive guidance from tech giants
In its Aug 24 note, DBS Group Research believes that positive guidance from technology bellwethers such as Nvidia, Applied Materials and Microsoft have helped lift confidence that sales recovery can be sustained for the semiconductor industry, which has already seen four consecutive months of growth between the bottom in February to June when US$41.5 billion in revenue was recorded.
See also: Nvidia forecast fails to meet loftiest estimates for AI star
Local stocks with exposure to the semiconductor industry include AEM Holdings, where one of its new customers is in the high-performance computing and AI space. AEM is also poised to meet the higher demand for systems-level testing services for more advanced chips. Meanwhile, Grand Venture Technology and Frencken Group are relatively heavily exposed to this sector too since they make the parts used.
For DBS, the top pick is UMS Holdings, following its contract renewals with its key customer Applied Materials, which is well positioned upstream because it is a key supplier of the machines used to manufacture the chips. DBS, which has a $1.32 target price on the stock, also notes that UMS has signed a new contract with another new customer. UMS closed Aug 24 at $1.20, up 4.35% for the day; AEM Holdings closed at $3.51, up 4.46%; Frencken Group and Grand Venture Technology, meanwhile, closed at $1.03 and 61 cents respectively — up 1.98% and 1.68%.
A new era
See also: Applied Materials forecast spurs concern about chip spending
Nvidia, for years a niche chip play known largely for its graphics processors, has emerged as a leading maker of chips expected to see the strongest demand from AI-related applications. More and more companies are deploying generative AI software such as ChatGPT, which requires significantly more computing muscle delivered by an ever-sprawling network of data centres. “A new computing era has begun. Companies worldwide are transitioning from general-purpose to accelerated computing and generative AI,” says CEO Jensen Huang, who founded the company in 1993.
In 2QFY2024, Nvidia reported earnings per share of US$2.70, beating estimates of US$2.07. Revenue in the same period doubled to US$13.5 billion, versus US$11 billion expected. According to Nvidia, sales for the three months ending October will be around US$16 billion, beating the market’s estimates of US$12.5 billion. The revenue for the coming third quarter, if achieved, will be nearly as high as Nvidia’s total revenue for FY2021.
Although Nvidia’s growth is largely driven by its data centres segment, its key segments include gaming, which was its core market. Morningstar’s Colello estimates data centre demaand will generate sales of US$41 billion for Nvidia’s FY2024 ending next January, up from just US$15 billion a year ago and as low as US$3 billion four years ago.
“We could be wrong but we see little evidence that these chips orders are up-front spending or a one-time build,” says Colello, adding that this segment will book further sales of US$60 billion for the year ending January 2025 and US$100 billion for the year ending January 2028.
“Such growth might be unprecedented in large-cap tech, but we foresee all types of enterprises investing in AI. Similarly, all cloud providers will need to offer Nvidia’s GPUs to allow them to train AI models, while Nvidia is making the right moves to capture AI inference workloads and branch out into networking and software,” reasons Colello.
Other commentators are equally breathless, although they warn that Nvidia will not be the only game in town. “First, clearly, AI is not just the future, it’s the present,” says Nigel Green, CEO of advisory firm deVere Group. “Investors who are serious about building their long-term wealth need exposure to this pivotal driver of innovation, competitiveness, and profitability across almost all industries,” he adds.
