Nvidia – Not enough cylinders.

The sky-high valuation outweighs all the good fundamentals.

• Nvidia rallied from its loss of the Arm acquisition by reporting good Q4 21 results and by winning a landmark partnership with Jaguar Land Rover (JLR), but that was not enough to support the valuation where it looks like Nvidia does not have the horsepower to justify its multiples in this more value-oriented environment.
• Expectations for Nvidia are already very high meaning that this good news was not enough resulting in a small decline in the shares in after-hours trading.
• Q4 21 revenues / EPS were $7.64bn / $1.32 broadly in line with estimates of $7.4bn / $1.22.
• Guidance was also positive with Q1 2022 revenue expected at $8.2bn handsomely beating expectations of $7.2bn.
• Q4 2021 gross margins were steady at 67% meaning that on the numbers there was nothing to grumble about.
• At the same time, Nvidia announced a partnership with JLR that will see Nvidia provide the backbone of silicon and compute software for all JLR vehicles from 2025 onwards.
• This partnership includes Nvidia’s offering for autonomous driving and raises the immediate possibility that Nvidia has managed to boot Waymo out of JLR.
• There is always the possibility that JLR decides to run Waymo’s solution on Nvidia’s platform which is perfectly possible, but using Nvidia should enable JLR to pick and choose what it wants to use or create its own.
• This is not a problem for Nvidia as while its platform is open, it does require the use of Nvidia chips for the processing and this is where the return will be made by Nvidia.
• Hence, this looks to me like Nvidia’s relatively open approach in terms of what one can run on its silicon is winning the approval of the vehicle makers.
• This is yet another blow for Alphabet’s automotive efforts where the last few years have seen lip service paid to Google Services on Android Automotive but OEMs increasingly ensuring that Google is kept out of the core data generated by the vehicle.
• For a company that makes its money by characterising and analysing data and selling the insights, this represents a complete failure in my opinion.
• Unfortunately, none of this helps Nvidia’s valuation which is already pretty high and at a significant premium to many of its peers in the industry.
• Nvidia is trading at around 45x 2022 PER and 20x 2022 EV / revenues which is far higher than Qualcomm which is on 15x 2022 PER and 5x 2022 EV / revenues.
• Nvidia is expected to grow faster, but I am far from convinced that this higher level of growth justifies the vast premium being afforded to Nvidia’s shares.
• The balance is coming from the AI, EV, Autonomous driving and Metaverse narrative where Nvidia has done an excellent job of positioning itself for these coming trends.
• At the moment with higher inflation and rising interest rates, this is not enough to keep the valuation at such a high premium, and I expect that there will be a degree of normalisation as the year progresses.
• Hence, I do not see further big rallies in Nvidia’s shares even as the news flow is likely to continue to be good but rather sideways chop as the fundamentals grow and bring the multiples down to more reasonable levels.
• I continue to prefer the value, recovery, unloved end of the technology sector where there are still plenty of bargains to be had.