ii view: why Nvidia shares are nudging record high

Another quarterly revenue record for this hot US technology stock. We assess prospects.

Second-quarter results to 1 August

• Revenue up 68% to $6.51 billion
• Adjusted earnings per share up 89% to $1.04
• Cash dividend of $0.04 per share

Founder and chief executive Jensen Huang said:

“Nvidia’s pioneering work in accelerated computing continues to advance graphics, scientific computing and AI.” 

“Enabled by the Nvidia platform, developers are creating the most impactful technologies of our time – from natural language understanding and recommender systems, to autonomous vehicles and logistic centres, to digital biology and climate science, to metaverse worlds that obey the laws of physics.”

ii round-up:

US computer chip maker NVIDIA (NASDAQ:NVDA) again reported record revenue in its latest quarterly results, pushed higher by strong demand for both its gaming and data centre products. 

Gaming related sales rose by 85% to just over $3 billion, as it introduced two new products delivering up to 50% more performance over its previous generation. Data centre related sales rose by 35% to $2.37 billion. 

The UK’s Competition and Markets Authority recently announced an investigation into Nvidia’s proposed $40 billion takeover of British microchip designer ARM Holdings. 

Nvidia shares are trading a fraction shy of their all-time high above $208 per share. In June, its shares underwent a four-for-one share split. Shares for fellow semiconductor company ASML Holding (EURONEXT:ASML) are up by a similar 60% year-to-date. Intel (NASDAQ:INTC) is up less than 5% in 2021.

Adjusted earnings per share of $1.04 for the quarter to the start of August beat analyst expectations of nearer to $1.01 per share. Total revenue of $6.51 billion exceeded forecasts closer to $6.3 billion. Both revenue and earnings were up around 15% compared to the prior first quarter. 

Sales of Nvidia chips to game console makers, such as the processor used in the Nintendo Switch, aided its gaming segment. Like the broader industry, Nvidia confirmed some supply issues it was suffering. 

Revenue for its automotive related business rose 37% year-over-year to $152 million. Self-driving start-up AutoX’s Gen5 robotaxi platform uses Nvidia product to achieve level four autonomy.

Nvidia's third-quarter guidance pointed to revenue of around $6.8 billion. First-quarter sales had risen 84% year-over-year to $5.66 billion. 

ii view:

Nvidia’s chip computing abilities are touching on areas from gaming, cloud computing, artificial intelligence and robotics to self-driving cars, genomics and crypto currency mining. The potential joining of a major player in the gaming and data centre arena with a key force in the mobile phone chip world like ARM would be seismic. The planned purchase of ARM is expected by Nvidia management to accelerate innovation and growth at ARM. 

For investors, uncertainty regarding its proposed purchase of ARM, given the UK’s competition investigation, now persists. Questions over tech valuations also remain, while government concern regarding the power of major tech concerns also needs to be remembered. 

That said, growing demand for its products and expanding areas for their use continues to help drive sales. A hoped-for coming together with ARM adds to potential growth prospects. The previous share split is also likely to leave more retail investors taking an interest. For now, momentum appears to remain in favour of this semiconductor favourite.  

Positives: 

• Exposure to growth in gaming and data centres
• A potential purchase of ARM

Negatives:

• US and China tensions
• A price to net asset ratio of 30.6 times, above the 3-year average of 14.1 times

The average rating of stock market analysts:

Buy