Designer of graphics chips, NVIDIA Corporation (NVDA), reported disappointing results for the fourth quarter and full-year 2023. Furthermore, the company is expected to face macroeconomic challenges in the near term, including supply chain disruptions, high borrowing costs, and eroding consumer spending amid inflationary and recessionary pressures.

Despite a weak performance in fiscal 2023, shares of NVDA have gained 127.1% over the past six months. Improved investor sentiment is driven by optimism about the chipmaker’s growth prospects amid the AI boom. While NVDA is making enormous efforts to boost its expansion in high-growth areas, it could be wise to wait for a better entry point in this stock due to its fundamental weakness, elevated valuation, and near-term macro headwinds.

Reflecting the uncertain prospects, our proprietary POWR Ratings system has rated this chip stock C (Neutral).

With a $666.95 billion market cap, NVDA provides graphics and compute & networking solutions in the United States, Taiwan, China, and internationally. The company reported fourth-quarter revenue of $6.05 billion, down 21% year-over-year.

In addition, NVDA’s non-GAAP net income and EPS declined 35% and 33% year-over-year to $2.17 billion and $0.88, respectively.

Furthermore, analysts are bearish about the company’s near-term prospects as it grapples with macroeconomic headwinds, including declining consumer spending amid still-elevated inflation, rising interest rates, supply chain constraints, and growing export restrictions.

However, the graphic chips maker is working effectively in customizing its products to meet the rules and regulations of the country they are being exported to. On March 21, 2023, NVDA announced that it had modified its flagship product H100 into version H800 which is legal to export to China, an important market for its computer hardware and software.

Also, the company said it would ship the BlueFlied-3 data processing unit (DPU), a primary product to boost the speed of computing infrastructure, to China.

Despite macroeconomic challenges dampening near-term demand for its solutions, AI is viewed as a long-term growth opportunity for NVDA since AI adoption is at its starting point with the recent viral success of Open AI’s ChatGPT.

“AI is at an inflection point, setting up for broad adoption reaching into every industry. From startups to major enterprises, we are seeing accelerated interest in the versatility and capabilities of generative AI,” said Jensen Huang, founder and CEO of NVDA.

The company is partnering with leading cloud service providers to offer AI-as-a-service that provides businesses access to NVIDIA’s world-leading AI platform. Enterprises and customers could use each NVIDIA AI layer – the AI supercomputer, acceleration libraries software, or generative AI models – as a cloud service.

Here’s what could influence NVDA’s performance in the upcoming months:

Positive Latest Developments

On March 21, 2023, NVDA and Adobe (ADBE) announced a partnership in which the companies would co-develop a new generation of advanced AI models using NVIDIA Picasso and Adobe tools like Creative Cloud. This partnership, primarily focusing on the deep integration of generative AI in creative workflows, might boost NVDA’s growth and profitability.

Moreover, on the same day, NVDA and Google Cloud delivered a new generative AI platform, built on the new L4 GPU and Vertex AI, to accelerate the work of companies making a rapidly expanding number of generative AI applications. This new introduction should bode well for the company.

Bleak Financials

For the fourth quarter of fiscal 2023, NVDA’s revenue decreased 20.8% year-over-year to $6.05 billion. The company’s non-GAAP gross profit declined 23.3% year-over-year to $3.83 billion. Also, its non-GAAP operating expenses increased 22.7% year-over-year to $1.78 billion.

Furthermore, the company’s non-GAAP income from operations declined 39.5% year-over-year to $2.22 billion. Also, its non-GAAP net income decreased 35.1% year-over-year to $2.17 billion, while its non-GAAP EPS came in at $0.88, down 33.3% year-over-year.

Mixed Analyst Estimates

Analysts expect NVDA’s revenue for the fiscal 2024 first quarter (ending April 2023) to decline 21.3% year-over-year to $6.52 billion. The consensus earnings per share estimate of $0.91 for the current quarter indicates a decline of 33.1% year-over-year.

However, analysts expect NVDA’s revenue and EPS for the fiscal year (ending January 2024) to increase 11.3% and 35.7% year-over-year to $30.03 billion and $4.53, respectively. Also, the company’s revenue and EPS for fiscal 2025 are expected to grow 24.5% and 33.7% year-over-year to $37.39 billion and $6.06, respectively.

Robust Profitability

NVDA’s trailing 12-month gross profit margin of 56.93% is 12.7% higher than the 50.54% industry average. Its trailing 12-month EBITDA margin of 26.40% is 183.8% higher than the 9.30% industry average. Also, the stock’s trailing 12-month net income margin of 16.19% is 502% higher than the industry average of 2.69%.

Furthermore, NVDA’s trailing 12-month ROCE, ROTC, and ROTA of 17.93%, 9.61%, and 10.61% compare to the industry averages of 1.96%, 2.06%, and 0.67%, respectively.

Elevated Valuation

In terms of forward non-GAAP P/E, NVDA is currently trading at 59.96x, 197.4% higher than the industry average of 20.16x. The stock’s forward EV/Sales of 22.23x is 710.8% higher than the industry average of 2.74x. Moreover, its forward EV/EBITDA multiple of 66.86 is 389.9% higher than the industry average of 13.65.

In addition, the stock’s forward Price/Sales of 22.27x is 725.7% higher than the industry average of 2.70x. Its forward Price/Cash Flow multiple of 63.54 is 238.5% higher than the industry average of 18.77.

POWR Ratings Reflect Uncertainty

NVDA has an overall C rating, equating to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. NVDA has a B grade for Quality, in sync with higher-than-industry profitability. Also, it has a B grade for Momentum. The stock is currently trading above its 50-day and 200-day moving averages of $144.89 and $178.17, respectively.

NVDA has a C grade for Growth, consistent with its weak financials and mixed analyst expectations.

On the other hand, the stock has an F grade for Value, consistent with its higher valuation relative to its industry peers. Also, its 24-month beta of 2.01 justifies a D grade for Stability.

NVDA is ranked #63 out of 91 stocks in the Semiconductor & Wireless Chip industry. 

Click here to access all POWR Ratings for NVDA.

Bottom Line

NVDA reported deteriorating financials in the fourth quarter and fiscal year 2023. While the company is well-positioned to cash in on the open-ended growth opportunities present by AI in the long run, its revenues and earnings are expected to be affected by ongoing macroeconomic uncertainties and the growing risk of a recession.

Given NVDA’s disappointing financials, significantly high valuation, and near-term macroeconomic headwinds, it could be wise for investors to wait for a better entry point in this chip stock.

Stocks to Consider Instead of NVIDIA Corporation (NVDA)

Given its uncertain short-term prospects, the odds of NVDA outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these three A-rated (Strong Buy) stocks from the Semiconductor & Wireless industry instead:

United Microelectronics Corp. (UMC)

SUMCO Corporation (SUOPY)

Tower Semiconductor Ltd. (TSEM)

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NVDA shares were trading at $277.55 per share on Tuesday morning, up $7.53 (+2.79%). Year-to-date, NVDA has gained 89.95%, versus a 8.54% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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