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NVIDIA - warns of weaker outlook

First quarter underlying revenue rose 46% to $8.3bn, reflecting record revenue in Gaming and Data Center.

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First quarter underlying revenue rose 46% to $8.3bn, reflecting record revenue in Gaming and Data Center. Despite a 35% increase in operating costs, underlying operating profit rose 55% to $4.0bn.

Revenue for the current quarter is expected to be within 2% of $8.1bn, including a $500m impact from Russia and Covid lockdowns in China. CEO Jensen Huang has also said the gaming market is slowing.

The shares fell 4.9% in pre-market trading following the announcement.

View the latest NVIDIA share price and how to deal

Our view

Headlines are focussed on the failed deal to acquire ARM. And while we can't say we're not disappointed - we viewed ARM's footprint and products as great potential assets - the bigger, underlying picture is what NVIDIA investors should be thinking of.

Gaming has been enjoying a golden era and NVIDIA's chips are right at the heart of it - its RTX 30 series has been described as "the most revolutionary graphics card in years". But the power of NVIDIA's chips means they're increasingly in demand outside the world of consoles and joysticks.

The group has actively altered its mainstream chips to make them less effective for cryptocurrency mining (which was eating up global supply). The 'Professional Visualisation' division supports digital design and engineering work in architecture, oil & gas and medical imaging. Meanwhile the DRIVE platform gives it a stake in the potentially exciting self-driving car market, with a product that can "perceive and understand in real-time what's happening around the vehicle...and plan a safe path forward". Both end markets have seen sales accelerate as the economy recovers from coronavirus.

However, it's the Data Centres business which has been the real engine room of growth in recent times.

As well as powering some of the world's most powerful supercomputers, NVIDIA produces cutting edge hardware for training artificial intelligence (AI) software. It's this AI expertise, enhanced by the $6.9bn acquisition of Mellanox.

The gaming boom of recent times is serving NVIDIA well - although the rate of growth is slowing. The other bump in the road comes from lockdowns in China which has caused well-documented issues across the globe. None of these issues are deal breakers but could increase the risk of ups and downs for now.

Looking back at the core NVIDIA business, the group enjoys a neat business model of its own. NVIDIA outsources all its manufacturing. Avoiding the costs, capital and risk associated with owning manufacturing facilities has generally helped NVIDIA deliver impressive gross margins and cash flow.

High gross margins help fund the research & development budget, which stood at $3.9bn last year. Recent innovations have included real time ray tracing, which could revolutionise gaming graphics with ultra-realistic imagery.

With net cash on the balance sheet and hefty operating cash flows, they come across as a very high-quality business. Unusually for a US tech company, the group's willing to return surplus cash to shareholders, mostly through share buybacks.

Overall, it's hard not to be impressed by a business at the cutting edge of some pioneering industries. This isn't necessarily reflected in the current valuation, NVIDIA has been swept up in the wider tech sell off in recent months, with the supply chain question mark weighing. We can't rule out further pressure.

NVIDIA key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

First Quarter Results

Data Center revenue rose 83% to $3.8bn, a record for the group. NVIDIA released a number of new chip products and updates, with some said to have very significant improvements in performance. It's also worked with supermarket giant Kroger on an AI shopping experience. Growth was led by cloud computing and "hyperscale customers".

Gaming revenue benefited from its GeForce tech based on the group's Ampere architecture, rising 31% to $3.6bn. Divisional performance was also a record.

Sales of NVIDIA Ampere architecture products were boosted by increased business demand from hybrid working, which meant Professional Visualization revenue rose 67% to $622m.

Automotive and OEM and Other revenue fell 10% and 52% respectively.

Underlying operating expenses were up 35%, reflecting increased headcount, compensation costs and engineering development. Hiring is expected to slow in the second half of this financial year. NVIDIA recognised a $1.4bn charge in relation to the termination of its attempted acquisition of ARM.

Free cash flow of $1.4bn was lower than last year's $1.6bn and the group had net cash of $9.4bn as at the start of May.

On 23 May, NVIDIA increased and extended the share buyback programme to $15bn up until December next year.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th May 2022