The case for NVIDIA

As someone who has been actively investing for only a year and a half, I am significantly underwater not only for 2022 but in total. As I write this, my portfolio is down -50.73%. That’s unrealized loss. My realized losses for 2022 are -42.6%. Last year (my first year in) was better. I ended with only the loss I decided to take for taxes.

So for other newer investors reading, I feel your pain. I have no history of gains to cushion the fall. While it seems like the bottom is either in or close to it, I decided to do some balancing in my portfolio to give me some ballast as I continue to hold more volatile names. And that leads me to NVIDIA (NVDA).

Yes, it break’s Saul’s (wise) rule about investing in companies that are not capital intensive. NVIDIA makes semiconductor chips, servers, switches and the like. However, the company is on the move into software and meets many other criteria in the Knowledge Base.

First, some links.

Here is the summary of their Q1 earnings from May 25, 2022. (Note, this is Q1 of their fiscal 2023).….

And here is the transcript of the call:…

Market cap: 420.8b

Their total revenue for Q1 was 8.29b, representing growth of 46% YoY and 8% QoQ, despite a 1.3 bn hit for the collapse of the ARM deal, which regulators would not approve. That growth, however, is an average of their different segments. Their revenue from Data Centers was up 83% YoY and 15% QoQ. Their professional visualization segment was up 67% YoY but down 3% QoQ. Gaming (where they already have considerable market penetration) was up just 31% YoY and 6% QoQ. Automotive was down 10% YoY but up 10% QoQ.

Gross margins came in at 67.1%, up 90bps YoY. They expect that to remain steady for the next quarter and then begin to ramp up. Here’s the relevant section of the call transcript:

CFO Colette Kress: We expect to maintain gross margins at current levels in Q2. Going forward, as new products ramp and software becomes a larger percent of revenue, we have opportunities to increase gross margins longer term. GAAP operating margin was 22.5%, impacted by a $1.35 billion acquisition termination charge related to the ARM transaction. Non-GAAP operating margin was 47.7%.

They have lots of cash and founder/CEO Jensen Huang has a 98% approval rating on Glassdoor (from 994 reviews) and 95% of the over 4k reviews would recommend working there to a friend. Lots of awards, current and past.

There is zero customer concentration, in fact, they have so many customers in so many industries that it’s hard to keep up.

They guided down a bit for Q2 because of Russia (war) and China (lockdown). Expenses are increasing as they ramp up newer segments.

As I write this, the stock is up 20% off it’s early July lows and 51.5% below it’s high from last November. They pay a dividend and have authorized $15 billion in buybacks through the end of 2023 (fiscal, so end of calendar 2022).

So what is NVIDIA’s special sauce? On the one hand, it hardly has a niche, since it is in everything that uses chips and servers. And that now includes everything. Just the hardware TAM is enormous. But Jensen Huang is not known for sitting on his laurels.

In addition to the CFO quote about software ramping above, here are some bits of the call (in order of their appearance) that caught my attention.

From CFO comments:

Data Center has become our largest market platform, and we see continued strong momentum going forward.

If you’re concerned that gaming is saturated…

And NVIDIA RTX has set new standard for the industry with demand from both first-time GPU buyers as well as those upgrading their PCs to experience the 250-plus RTX-optimized games and apps, double from last year. We estimate that almost a third of the GeForce Gaming GPU installed base is now on RTX. RTX has brought tremendous energy into the gaming world, and has helped drive a sustained expansion in our higher-end platforms and installed base with significant runway still ahead.

Although there is some near-term softness in gaming:

However, we started seeing softness in parts of Europe related to the war in the Ukraine and parts of China due to the COVID lockdowns. As we expect some ongoing impact as we prepare for a new architectural transition later in the year, we are projecting Gaming revenue to decline sequentially in Q2. Channel inventory has nearly normalized and we expect it to remain around these levels in Q2. The extent in which cryptocurrency mining contributed to Gaming demand is difficult for us to quantify with any reasonable degree of precision.

That’s all hardware stuff. But in the gaming segment in software:

Driving this growth are not just gamers, but also the fast-growing category of content creators from whom we offer dedicated NVIDIA studio drivers. We’ve also developed applications and tools to empower artists from Omniverse for advanced 3D and collaboration to broadcast for live streaming to canvas for painting landscapes with AI. The creator economy is estimated at $100 billion and powered by 80 million individual creators and broadcasters.

And this:

Gamers can now access RTX 3080 class streaming, our new top-tier offering with subscription plans of $19.99 a month. We added over 100 games to the GeForce NOW library, bringing the total to over 1,300 games. And last week, we launched Fortnite on GeForce NOW with touch controls for mobile devices, streaming through the Safari web browser on iOS and the GeForce NOW Android app.

Now from the area of “Pro Visualization”

My impression is that this category, like gaming, includes both hardware and software. Here are use cases highlighted by the CFO:

Top use cases include digital content creation at customers such as Sony Pictures Animation and medical imaging at customers such as Medtronic. In just its second quarter of general availability, our Omniverse enterprise software is being adopted by some of the world’s largest companies. Amazon is using Omniverse to better optimize warehouse design and flow and to train more intelligent robots. Kroger is using Omniverse to optimize store efficiency with digital twin store simulation.

And PepsiCo is using Omniverse digital twins to improve the efficiency and environmental sustainability of the supply chain. Omniverse is also expanding our GPU sales pipeline, driving higher end and multiple GPU configurations. The Omniverse ecosystem continues to rapidly expand with third-party developers in the robotics, industrial automation, 3D design and rendering ecosystems developing connections to Omniverse.

I believe this press release from March 2022 is more in-depth about the software end of this:…. It leads by saying:

Omniverse Cloud, a suite of cloud services that gives artists, creators, designers and developers instant access to the NVIDIA Omniverse™ platform for 3D design collaboration and simulation from up to billions of devices.

And then there’s automotive:

Our DRIVE O-RAN [sic] SoC is now in production and kicks off a major product cycle with auto customers ramping in Q2 and beyond. O-RAN [sic] has great traction in the marketplace with over 35 customer wins from automakers, truck makers, and robotaxi companies. In Q1, BYD, China’s largest EV maker, and Lucid, an award winning EV pioneer, were the latest to announce that they are building their next-generation fleets on DRIVE O-RAN. [sic]

The transcript creator has written O-RAN when it is Orin. More about it here:….

Like with much of NVIDIA, this sounds like a combination hardware/software solution.

PSA: The auto software space bears watching, I think. Not just with NVIDIA but elsewhere. I was traveling this past weekend and heard a news report about BMW launching a subscription service for heated seats. As someone who lives in the Northeast, I was horrified that a car manufacturer was going to start soaking people every year for heated seats. I mean, what sort of monster does that! But then I realized that such things likely signaled a trend toward auto features becoming CaaS (Comfort as a Service) that would provide the recurring revenue we investors look for. Watch for it on all fronts. /end PSA

Back to NVIDIA…

Just to get a sense of the scope of this beast of a company:

Top verticals driving growth this quarter include; consumer Internet companies, financial services, and telecom. Overall, Data Center growth was driven primarily by strong adoption of our A100 GPU for both training and inference with large volume deployments by hyperscale customers and broadening adoption across the vertical industries.

Top workloads includes recommender systems, conversational AI, large language models, and cloud graphics. Networking revenue accelerated on strong broad-based demand for our next-generation 25, 50, and 100-gig ethernet adapters. Customers are choosing NVIDIA’s networking products for their leading performance and robust software functionality. In addition, networking revenue is benefiting from growing demand for DGX super pods and cross-selling opportunities.

Customers are increasingly combining our compute and networking products to build what are essentially modern AI factories with data as the raw material input and intelligence as the output. Our networking products are still supply constrained though we expect continued improvement throughout the rest of the year. One of the biggest workloads driving adoption of NVIDIA AI is natural language processing, which has been revolutionized by transformer based models. Recent industry breakthroughs traced to transformers include large language models like GPT-3, NVIDIA Megatron BERT for drug discovery, and DeepMind AlphaFold for a protein structure prediction.

And…again…it’s hardware and software together…

To run these giant models without sacrificing low inference times, customers like Microsoft are increasingly deploying NVIDIA AI, including our NVIDIA Ampere architecture-based GPUs and full software stack.

I believe NVIDIA will be the next $1T business. Whether there’s too much hardware for this board to consider is, of course, an individual decision. A certain company with a fruit-based logo has made the hardware shot/software chaser combo work quite well for them. I think NVIDIA has the vision, leadership chops, and proven record to go the distance.

While nervousness around the production of semiconductors and the global challenges have beaten down the stock, I saw that as an opportunity to get back in (I held last year and fortunately sold at the high). I sold my positions in ZS and BILL and trimmed a bit of NET to build what is now a 17.6% position in NVDA, roughly the same size as my (beaten down) DDOG position. I’m hoping that will provide both strong growth and some price stability. We’ll see.

My portfolio now looks like this:

CRWD: 23.3%
NVDA: 17.6%
DDOG: 17.3%
UPST: 13.2%
MQ: 12.4% (Marqeta)
NET: 11.2%
PCT: 4% (PureCycle Technologies)
Tiny position in AI ( that I hold for my brother.
Under $100 in cash



Hi JabbokRiver,

Thank you for sharing. NVidia is a great company enabling the move to the cloud and the AI/ML computing. I’m a big fan of Nvidia and its visionnary CEO Jensen Huang and I do own some NVDA stocks in my portfolio (4% position).

Yes, it break’s Saul’s (wise) rule about investing in companies that are not capital intensive. NVIDIA makes semiconductor chips, servers, switches and the like. However, the company is on the move into software and meets many other criteria in the Knowledge Base.

NVidia does not make chips, they design them. Most products are usually manufactured by the likes of Taiwan Semiconductor. NVidia is the perfect exemple of a fabless semiconductor company. They spend roughly 5% of their revenues on CAPEX, which I wouldn’t say is so capital intensive (Intel spends 35% for example). Their gross margins is quite high at 67%, which is more than SentinelOne.

However, despite its >60% growth, I doubt that Nvidia is likely to remain an hypergrower in the future and therefore it should not belong to the board. NVidia WAS an hypergrowth stock in the past few years because of a combination of high GPUs demand for datacenter and cryptocurrency mining, as well as a gaming boost during COVID. Datacenter segment is still dynamic but the others are unlikely to be the tailwinds NVDA needs to keep growth at its current level, despite multiple growth relays with the omniverse, self-driving cars, software and so on.

As Saul regularly highlights, unlike SaaS stocks and their recurring revenues, Nvidia revenues are reset every year as of Jan. 1st and its sales teams need to go find new buyers to maintain the growth. This also expose the company to supply chain risks and market cyclicity.

So, yes, amazing company, but so are Salesforce, Intuit, Veeva or PaloAlto Networks. As you mention, Nvidia will one day be a $1B company. Still, I consider that all those great companies do not qualify as ‘Saul stocks’.

Besides, it would be quite challenging to find Saul stocks in the semiconductor universe. I like for example SiTime (someone introduced here few months ago) which needs to confirm its current trend or Indie that still needs to fulfill its promises. But despite a strong growth, both would still be handicaped here by their lack of recurring revenue.

Have a great day,