Nvidia & Peloton – Chalk and cheese

Two very different sets of results.

Nvidia Q2 2023 – As good as it gets.

• Despite results that substantially beat expectations, the shares jumped much less than they did last quarter in an indication of just how much good news is already built into the valuation.
• Q2 2023 revenues / EPS were $13.5bn / $2.70 significantly ahead of expectations of $11.2bn / $2.03 as demand for chips to train and run generative AI continues to exceed all expectations.
• This demand is driven by every man and his dog deciding that they must use generative AI for something even if they are not quite sure what that something is.
• It is also driven by excessive demand from China where companies there fear further export restrictions from the Department of Commerce and are rushing to get their orders in now.
• This is resulting in 20% to 25% of revenues coming from China which will take a hit either when new regulations come in or the Chinese have enough inventory.
• Nvidia says that it has excellent visibility which means that its order book is so full that customers ordering now are going to have to wait many months to get their orders filled.
• This means that for the next few quarters, there is likely to be only good news but as these monster quarters roll by, more and more will be priced into the shares.
• Hence, while I can’t justify holding this stock on valuation grounds, there is little point in selling yet as the momentum remains only in one direction.
• Given how much smaller the share price reaction is compared to last quarter, the time to exit is getting closer.

Peloton FQ4 23 – As bad as it gets (I hope!)

• Peloton reported results that were pretty much the polar opposite of Nvidia’s where hardware caused yet more problems and management appeared to lack confidence and direction when speaking to the market.
• FQ4 23 revenues / EPS were $642m / LOSS$0.68 broadly in line with expectations of $642m / LOSS$0.40 but guidance was weak, and management failed to inspire any confidence that there is a recovery in the pipeline.
• Here FQ1 24 revenues are expected to be $580m – $600m below the $654m consensus estimate largely on the back of weaker than expected hardware shipments.
• This means that the company will remain free cash flow negative for at least the next 2 quarters and recovery is being further hampered by the ongoing product recall.
• This recall on defective bike seat posts has been much more difficult than expected and has resulted in some users cancelling their subscriptions.
• However, the replacements should be with users by the end of September putting yet another expensive problem in the rear-view mirror.
• The underlying subscription business which is where all the value of the company lies continues to be stable which how the investment case for this company is made.
• The problem is that hardware is causing more problems than expected and management’s halting and stilted performance on the conference call further undermines any confidence in a turnaround.
• At some point, Barry McCarthy will get hardware under control, and it will be then that the market will be able to see the value in the subscription business.
• The Peloton brand remains strong, and management has several strategies to return subscription to growth but to see value in the shares growth is not needed.
• Instead, all that needs to happen is for hardware to stop bleeding the company dry and for subscription to be stable which seems like a big ask now but I am confident will eventually happen.
• This can get one to a valuation of $19 on DCF basis using a 10% discount rate.
• In other words, the current share price of $5.49 is offering a 20% IRR which I think is pretty good value as the brand and the service remain very popular with users.
• I took a small position ahead of the numbers and am now looking to add, but I suspect that I have plenty of time to execute given how the market loathes this company.