Data Center, Automotive And Blackwell Sectors Will Shape Future Success

Key Takeaways

• Heavy reliance on the U.S. market for data center tech poses risks to international revenue growth due to potential regulatory changes.
  
• NVIDIA's automotive and gaming sectors face growth challenges, impacting revenue projections and highlighting supply and geopolitical constraints.
  
• Reliance on manufacturing scalability, geopolitical tensions, and supply constraints could affect NVIDIA's growth, revenue, and margins in various segments.

Catalysts

A computing infrastructure company, provides graphics and compute and networking solutions in the United States, Singapore, Taiwan, China, Hong Kong, and internationally.

• The company's significant reliance on the U.S. market for its data center technology poses potential risks if there are any regulatory changes impacting other geographies, which could affect NVIDIA's revenue growth and lead to a lower-than-expected market expansion internationally.
  
• Although NVIDIA's automotive revenue is climbing with partnerships like those with Hyundai and Uber, the overall market for autonomous vehicles and robotics is still in the early stages, potentially slowing the pace of expected growth and impacting revenue projections.
  
• Despite robust demand for NVIDIA's Blackwell architecture, the complexity and customization required for its manufacturing could temper gross margin improvements and hinder target margin recovery, thus affecting earnings expectations.
  
• NVIDIA's Gaming sector saw a decrease due to shipment supply constraints, indicating potential ongoing challenges in meeting demand, which may affect near-term revenue growth projections for this segment.
  
• If geopolitical factors in China remain unchanged, NVIDIA's growth in data center sales in this key region could be constrained, potentially limiting revenue and effective market penetration, contrary to more optimistic expectations.
  

NVIDIA Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on NVIDIA compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming NVIDIA's revenue will grow by 19.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 51.7% today to 56.3% in 3 years time.
• The bearish analysts expect earnings to reach $143.7 billion (and earnings per share of $5.51) by about July 2028, up from $76.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 29.0x on those 2028 earnings, down from 54.3x today. This future PE is lower than the current PE for the US Semiconductor industry at 30.9x.
• Analysts expect the number of shares outstanding to decline by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.46%, as per the Simply Wall St company report.

NVIDIA Future Earnings Per Share Growth

Risks

• NVIDIA's reliance on rapidly scaling manufacturing to meet Blackwell demand means any disruption could impact gross margins and future revenues.
  
• Ongoing complexities and customization requirements for Blackwell systems could delay production, impacting delivery timelines and projected revenues.
  
• Increasing geopolitical tensions and export regulations affecting China shipments could restrict growth in data center sales, potentially impacting revenue and earnings.
  
• Declining gaming revenue, influenced by supply constraints and competition, could pressure overall revenue growth and affect net margins.
  
• Prospects of changing U.S. tariff policies introduce uncertainties that could increase operational costs, potentially impacting gross margins and profit.

Valuation

• The assumed bearish price target for NVIDIA is $132.47, which represents two standard deviations below the consensus price target of $179.55. This valuation is based on what can be assumed as the expectations of NVIDIA's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $250.0, and the most bearish reporting a price target of just $100.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $255.0 billion, earnings will come to $143.7 billion, and it would be trading on a PE ratio of 29.0x, assuming you use a discount rate of 9.5%.
• Given the current share price of $170.78, the bearish analyst price target of $132.47 is 28.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.