Equity Research: Nvidia Corporation
Abstract
Em conformidade com os padrões de pesquisa estabelecidos pelo CFA Institute, este equity research report apresenta uma análise detalhada da Nvidia, aproveitando as informações divulgadas publicamente disponíveis até 29 de janeiro de 2024, sendo importante salientar que a análise se baseia exclusivamente em dados até esta data especificada, sem considerar desenvolvimentos ou eventos subsequentes. O relatório começa com uma exploração detalhada sobre a estratégia e os empreendimentos operacionais da Nvidia, salientando a posição da empresa dentro da indústria de semicondutores. Foram considerados aspetos como a presença de mercado da Nvidia, vantagens competitivas e estratégias adaptativas de crescimento para acompanhar as tendências tecnológicas e dinâmicas de mercado em evolução. É dada uma ênfase particular aos desenvolvimentos da Nvidia em mercados emergentes e sua exploração de oportunidades em inteligência artificial (IA), centros de dados e jogos. As técnicas de análise financeira e avaliação utilizadas para avaliar o desempenho e o valor intrínseco da Nvidia foram a análise de fluxo de caixa descontado (DCF) e análise comparável de mercado, e o relatório demonstra o bem-estar financeiro, e perspetivas de crescimento da Nvidia. Além disso, são identificados e avaliados diversos riscos de investimento enfrentados pela Nvidia, abrangendo questões de governança corporativa, incertezas macroeconômicas e desafios regulatórios que poderiam impactar o desempenho futuro e a trajetória de preços das ações da Nvidia. Análises de sensibilidade são conduzidas para avaliar os efeitos potenciais de variáveis chave na avaliação da Nvidia, fornecendo insights sobre o perfil de risco-retorno associado ao investimento na empresa. Quanto à recomendação para a Nvidia Corporation, é sugerida uma posição de HOLD ou SELL, dependendo do horizonte de tempo do investidor, sendo o preço-alvo de 12 meses calculado até 31 de dezembro de 2024 é de $640.83, sinalizando um potencial de baixa de 27% em relação ao preço médio de fecho entre 22 de fevereiro e 12 de abril de $872.72.
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Universidade do Minho Escola de Economia e Gestão Rui Jorge Silva Moura Equity Research: Nvidia Corporation Apr 2024 Equity Research: Nvidia Corporation Rui Moura UMinho | 2024
Universidade do Minho Escola de Economia e Gestão Rui Jorge Silva Moura Equity Research: Nvidia Corporation Master’s Project Master’s in Finance Work performed under the supervision of Professor Doutor Gilberto Loureiro Apr 2024
4 DIREITOS DE AUTOR E CONDIÇÕES DE UTILIZAÇÃO DO TRABALHO POR TERCEIROS Este é um trabalho académico que pode ser utilizado por terceiros desde que respeitadas as regras e boas práticas internacionalmente aceites, no que concerne aos direitos de autor e direitos conexos. Assim, o presente trabalho pode ser utilizado nos termos previstos na licença abaixo indicada. Caso o utilizador necessite de permissão para poder fazer um uso do trabalho em condições não previstas no licenciamento indicado, deverá contactar o autor, através do RepositóriUM da Universidade do Minho. Licença concedida aos utilizadores deste trabalho. Atribuição-NãoComercial-SemDerivações CC BY-NC-ND https://creativecommons.org/licenses/by-nc-nd/4.0/
5 Acknowledgments I would like to extend my heartfelt gratitude to my wife, whose unwavering support and encouragement kept me motivated to complete my dissertation, even during the most challenging times when I juggled work and studies in another course. Without her steadfast belief in me and her constant encouragement, I would not have been able to overcome the hurdles and successfully complete my master's thesis. Her support was not only instrumental but also deeply meaningful to me, and I am forever grateful for her unwavering presence throughout this journey. I am deeply thankful to Professor Gilberto Ramos Loureiro for his invaluable guidance, supervision, and patience throughout the entire process of my thesis. His expertise and mentorship were instrumental in shaping my work and academic growth. To my family, I owe a debt of gratitude for their unconditional love, understanding, and unwavering support. Their presence and encouragement during the ups and downs of my academic journey have been invaluable. I also want to express my appreciation to my friends for their encouragement, belief in me, and the countless moments of camaraderie we shared. Their support has been a constant source of motivation. Furthermore, I extend my thanks to the teaching team of the Master’s in Finance program for imparting the necessary knowledge and practical skills that have equipped me for both professional and academic pursuits. Lastly, I am grateful to everyone who has contributed in any way to my academic and personal development, and to those whose support has made this accomplishment possible.
6 Resumo Em conformidade com os padrões de pesquisa estabelecidos pelo CFA Institute, este equity research report apresenta uma análise detalhada da Nvidia, aproveitando as informações divulgadas publicamente disponíveis até 29 de janeiro de 2024, sendo importante salientar que a análise se baseia exclusivamente em dados até esta data especificada, sem considerar desenvolvimentos ou eventos subsequentes. O relatório começa com uma exploração detalhada sobre a estratégia e os empreendimentos operacionais da Nvidia, salientando a posição da empresa dentro da indústria de semicondutores. Foram considerados aspetos como a presença de mercado da Nvidia, vantagens competitivas e estratégias adaptativas de crescimento para acompanhar as tendências tecnológicas e dinâmicas de mercado em evolução. É dada uma ênfase particular aos desenvolvimentos da Nvidia em mercados emergentes e sua exploração de oportunidades em inteligência artificial (IA), centros de dados e jogos. As técnicas de análise financeira e avaliação utilizadas para avaliar o desempenho e o valor intrínseco da Nvidia foram a análise de fluxo de caixa descontado (DCF) e análise comparável de mercado, e o relatório demonstra o bem-estar financeiro, e perspetivas de crescimento da Nvidia. Além disso, são identificados e avaliados diversos riscos de investimento enfrentados pela Nvidia, abrangendo questões de governança corporativa, incertezas macroeconômicas e desafios regulatórios que poderiam impactar o desempenho futuro e a trajetória de preços das ações da Nvidia. Análises de sensibilidade são conduzidas para avaliar os efeitos potenciais de variáveischave na avaliação da Nvidia, fornecendo insights sobre o perfil de risco-retorno associado ao investimento na empresa. Quanto à recomendação para a Nvidia Corporation, é sugerida uma posição de HOLD ou SELL, dependendo do horizonte de tempo do investidor, sendo o preço-alvo de 12 meses calculado até 31 de dezembro de 2024 é de $640.83, sinalizando um potencial de baixa de 27% em relação ao preço médio de fecho entre 22 de fevereiro e 12 de abril de $872.72. Palavras-chave: Nvidia, indústria de semicondutores, análise estratégica, avaliação financeira, DCF, análise comparativa de mercado, riscos de investimento, avaliação de riscos, perspetivas de investimento, tendências tecnológicas, dinâmica de mercado.
7 Abstract Aligned with the research standards set by the CFA Institute, this equity research report presents a thorough analysis of Nvidia, leveraging publicly disclosed information available up to January 29th, 2024. It's essential to note that the analysis is grounded solely in data up to this specified date, with no consideration given to subsequent developments or events. The report commences with a detailed exploration of Nvidia's strategic landscape and operational endeavors, delving into the company's positioning within the semiconductor industry. It was taken into account aspects such as Nvidia's market presence, competitive advantages, and adaptive growth strategies tailored to navigate evolving technological trends and market dynamics are scrutinized. Particular emphasis is placed on Nvidia's forays into emerging markets and its exploration of opportunities in artificial intelligence (AI), data centers, and gaming. The financial analysis and valuation techniques employed to assess Nvidia's performance and intrinsic value were discounted cash flow (DCF) and market comparable analysis and the report sheds light on Nvidia's financial well-being, revenue streams, and growth prospects. Furthermore, various investment risks confronting Nvidia are identified and evaluated, encompassing corporate governance issues, macroeconomic uncertainties, and regulatory challenges that could impact Nvidia's future performance and share price trajectory. Sensitivity analyses are conducted to gauge the potential effects of key variables on Nvidia's valuation, providing insights into the risk-return profile associated with investing in the company. Regarding the recommendation for Nvidia Corporation (NVDA), a HOLD or SELL approach is suggested, contingent upon the investor's time horizon. The calculated 12-month target price as of December 31st, 2024, is $640.83, signaling a downside potential of 27% from average closing price of $872.72 (between 22nd February 2024 and 12th April 2024). Keywords: Nvidia, semiconductor industry, strategic analysis, financial valuation, discounted cash flow, market comparable analysis, investment risks, risk assessment, investment outlook, technological trends, market dynamics.
8 Disclaimer The purpose of this Equity Research Report is solely academic and was created by Rui Jorge Silva Moura graduate student enrolled in the Master in Finance program at the University of Minho. The report was supervised by a faculty member who acted as an academic mentor. Neither the author nor the supervisor of this report is a certified investment advisor. This report should be viewed purely as an academic exercise conducted by a graduate student. The information used in this report is widely available to the public from various sources, and the student believes it to be reliable. However, the student takes full responsibility for the accuracy and reliability of the information used, as well as the estimates, forecasts, valuation methods applied, and views expressed. University of Minho and its faculty members take no formal or unique position on the matters discussed in this report and assume no responsibility for any consequences resulting from the use of this report.
9 Index 1. Research Snapshot ...................................................................................................................... 12 2. Business Description ................................................................................................................... 15 3. Environmental, Social and Corporate Governance ..................................................................... 20 4. Industry Overview and Competitive Positioning ........................................................................ 28 5. Financial Analysis ........................................................................................................................ 35 6. Valuation ..................................................................................................................................... 50 7. Investment Risk ........................................................................................................................... 56 8. Risks to Price Target | Sensitivity Analysis .................................................................................. 63 Appendix A - Income Statement ..................................................................................................... 66 Appendix B - Balance Sheet ............................................................................................................ 67 Appendix C - Working Capital ......................................................................................................... 68 Appendix D - Key Financial Ratios ................................................................................................... 69 Appendix E - Free Cash Flow Statement ......................................................................................... 70 Appendix F - Forecast Assumptions ................................................................................................ 71 Appendix G - Equity Risk Premium (ERP) ........................................................................................ 72 Appendix H - Beta ........................................................................................................................... 72 Appendix I - Cost of Debt ................................................................................................................ 73 Appendix J - Size Premium .............................................................................................................. 73 Appendix K - Share Value under Listed Peers Method (Full Table) ................................................ 74 Appendix L - Code of Conduct ......................................................................................................... 75 Appendix M - General Information on Current Directors ............................................................... 76 Appendix N - Skills and Competencies of Current Directors ........................................................... 76 Appendix O - Executive Committee ................................................................................................ 77 Appendix P - Executive Compensation ........................................................................................... 77 Appendix Q - Nvidia’s Insider Transactions in 2023 ........................................................................ 77 Appendix R - Company History ....................................................................................................... 78 Appendix S - Largest Semiconductor Companies ........................................................................... 78 Glossary ........................................................................................................................................... 79 Bibliography .................................................................................................................................... 81
16 of the Company’s history. The Company’s GPUs accelerate a variety of applications, including climate forecasting, molecular dynamics, and genomics, enabling advancements in critical fields. With support for over 2,800 applications, Nvidia powers more than 70% of the supercomputers on the global TOP500 list. Both cloud solution providers (CSPs) and consumer internet companies utilize the Company’s GPUs and data center-scale accelerated computing platforms to enhance services for billions of users. This includes search, recommendations, social networking, online shopping, live video, translation, AI assistants, navigation, and cloud computing. Companies in multiple industries use Nvidia’s GPUs and software to automate their products and services. The Company’s platforms support autonomous driving in transportation, enhance medical imaging in healthcare, and enable fraud detection in the financial services sector. Furthermore, professional designers rely on Nvidia’s GPUs and software to produce visual effects in movies and design a wide range of products, including cell phones and commercial aircraft. In fiscal year 2023 (ended as of January 28, 2024), Nvidia generated $60.9 billion of revenue and $33.0 billion of operating income. Its diluted EPS stood at $11.93. Table 4 - Nvidia Key Business Information // Source: 2023 10-K For reporting and operating purposes, Nvidia’s business is generally divided into two main segments: The Compute & Networking segment includes Nvidia’s Data Center accelerated computing platform, networking solutions, automotive AI Cockpit, autonomous driving development agreements, autonomous vehicle solutions, electric vehicle computing platforms, Jetson for robotics and embedded platforms, NVIDIA AI Enterprise and other software, as well as cryptocurrency mining processors (CMP). The Graphics segment comprises GeForce GPUs designed for gaming and PCs, the GeForce NOW game streaming service along with its infrastructure, gaming platform solutions, Quadro/NVIDIA RTX GPUs tailored for enterprise workstation graphics, virtual GPU (vGPU) software for cloud-based visual and virtual computing, automotive platforms for infotainment systems, and Omniverse Enterprise software for building metaverse and 3D internet applications. NVIDIA Corporation Key Data Year of foundation 1993 Headquarters Santa Clara, CA Incorporation Delaware Industry Information Technology Number of employees 26,196 CEO Jensen Huang Latest Fiscal Year ended January 28, 2024 Revenue FY23 $60.9Bn Operating Income FY23 $33.0Bn Diluted EPS FY23 $11.93 Source: Nvidia 10-K for fiscal year ended January 28th, 2024
17 In FY23 (ended as of January 28, 2024), the Compute & Networking segment, essentially synonymous with the data centre sector, generated around 78% of the Company’s total revenue for the year. This segment has grown substantially recently, overtaking the graphics segment two years ago, thanks to the strong demand for AI technologies which depend on premium GPUs, such as the H100. The H100, has been specifically designed to handle the heavy computational loads associated with training generative AI models, making it an essential tool for researchers and developers in this field. In addition to hardware, Nvidia has also made significant contributions to the software side of generative AI. The Company has developed a range of software tools and libraries, such as CUDA and cuDNN (CUDA Deep Neural Network), which have made it easier for developers to implement and optimise generative AI models. As Nvidia charts its path into the future, it does so with optimism, envisioning an inflection point for AI. The Company foresees widespread adoption of AI across diverse industries, underscoring its pivotal role in shaping the AI landscape for years to come. At present, Nvidia supports AI in various industries: Healthcare: In healthcare, generative AI has ushered in a paradigm shift in drug discovery and personalised treatments. Nvidia's AI technology expedites therapy development by crafting new drugs and tailoring treatments to individual genetics, resulting in improved patient outcomes. Finance and Insurance: Nvidia's AI plays a pivotal role in asset management by automating real-time tracking of financial instruments, preventing problems before they escalate. It also aids banks in identifying investment prospects by analysing demographic and infrastructure data, and in insurance, it assesses customer data to estimate claims risk, enhancing premium accuracy and automating complex claims analysis. Food: In the food industry, AI is revolutionising farming by optimising yields through data analysis from drones and satellites. Nvidia's AI streamlines food distribution by predicting demand and reducing waste, addressing a critical industry concern. Moreover, it enables personalised nutrition plans and recipes, enhancing dining experiences and promoting health. Robotics: For robotics, Nvidia's Isaac Sim is pivotal in simulating scenarios for industrial robots, allowing them to navigate and perform tasks accurately. This simulation is crucial for design testing, safe trials, and handling challenging real-world scenarios. Retail: Generative AI is transforming the retail sector by customising customer experiences. Nvidia's AI empowers retailers to engage customers through personalised product suggestions and virtual shopping guides, fostering innovative customer interactions.
18 Design: Nvidia's GPUs are revolutionising various design domains, enabling architectural visualisation, immersive VR experiences, product design advancements, efficient graphic design, and integration with leading design software. They facilitate visualisation, rapid iterations, and precise modelling, elevating the design process. Sports: High-performance computing and AI driven by Nvidia's GPUs are instrumental in analysing player performance, strategizing game plans, and predicting injury risks in sports. Furthermore, they enhance the fan experience by enabling immersive VR and AR experiences, offering fans engaging ways to enjoy sporting events. Entertainment and Media: In entertainment and media, generative AI powered by Nvidia's technology crafts lifelike digital content, from movie special effects to virtual characters in video games. This empowers artists and developers to create immersive experiences for global audiences. In FY23 (ended as of January 28, 2024), the Graphics segment, mainly attributable to the gaming market, generated around 22% of the Company’s total revenue for the year. Nvidia's GPUs are highly regarded by gamers, granting the Company a commanding position with a market share exceeding 80%. Notably, Nvidia recently introduced its GeForce NOW platform, which enables gamers to enjoy their favourite PC games on a wide range of devices. This innovation underscores the potential for high-quality gaming experiences without the need for expensive hardware. While the two previously mentioned segments generate the bulk of Nvidia’s revenues, other smaller segments are growing rapidly and hold substantial potential. These segments include “Professional Visualisation”, “Automotive” and “OEM and Other”. These segments may not currently be as prominent as Gaming and AI, but they are steadily evolving and represent important avenues for future growth and diversification. Figure 4 - FY23 Revenue by Operating Segment // Source: 2024 10-K Data Center, 78.0% Gaming, 17.1% Professional Visualization, 2.5% Automotive, 1.8% OEM and Other, 0.5% FY23 Revenue of $60.9Bn
19 Figure 5 - FY23 Revenue by Geographic Region // Source: 2024 10-K Figure 6 - Revenue Growth by Business Segment // Source: 2024 10-K Nvidia Stock "NVDA" Nvidia stock is currently traded under the “NVDA” symbol on the Nasdaq Stock Exchange. The Company’s market capitalization has surpassed the $1 trillion market cap which includes companies like Apple, Microsoft, Alphabet or Amazon. Following the announcement of fourth quarter fiscal 2024 financial results on February 21, 2024 (after market closing), Nvidia’s stock increased by 16.4% the following day, reaching $785.38 by the close on February 22, 2024. The average stock price since the day after the announcement of fourth quarter earnings (February 22, 2024) until April 12, 2023 (date of this report) amounts to $872.72. This average price will serve as the basis for comparison against the average 12-month Price Target calculated in this report, using commonly used valuation methods. United States, $27.0m, 44% Taiwan, $13.4m, 22% Other Countries, $10.2m, 17% China, $10.3m, 17% FY23 Revenue of $60.9Bn 3,279 6,841 11,046 15,068 47,405 7,639 9,834 15,868 11,906 13,517 FY19 FY20 FY21 FY22 FY23 Compute & Networking Graphics
20 Figure 7 - Nvidia Stock Price (at Close) Evolution // Source: Nasdaq The Company’s stock is relatively liquid with an average of 55 million shares traded daily from February 22, 2024 (date following Nvidia’s fourth quarter fiscal 2024 earnings announcement) and April 12, 2024 (date of this report). Nvidia’s float stands at 96.0%. 3. Environmental, Social and Corporate Governance Nvidia is dedicated to developing computing technologies that have a positive impact on society and tackle global challenges. The Company tries to incorporate Environmental, Social, and Corporate Governance (ESG) principles and practices throughout all of its operations. The Nominating and Corporate Governance Committee of its Board of Directors oversees the review and discussion of the Company’s ESG practices with management. Annual assessments of the programs are usually conducted, taking into account stakeholder expectations, market trends, and business risks and opportunities. These issues align with the concerns of Nvidia and all its stakeholders. Since the last full update on September 7, 2023 by Morningstar Sustainalytics department, Nvidia’s ESG Risk Rating was 13.6 (Low Risk), ranking the Company as 5th out of its industry group composed of 344 Semiconductors companies (Table 5). Table 5 - Nvidia and its peers ESG Rating // Source: Morningstar Sustainalytics $0.00 $200.00 $400.00 $600.00 $800.00 $1,000.00 ESG Rating Company ESG Rating Risk Level Industry Ranking Nvidia Corp. 13.6 Low 5/344 AMD, Inc. 15.0 Low 16/344 Qualcomm, Inc. 15.6 Low 20/344 Marvell Technology, Inc. 16.9 Low 32/344 Intel Corp. 19.0 Low 62/344 Texas Instruments, Inc. 20.7 Medium 87/344
21 Environmental Nvidia prioritizes sustainability throughout its product lifecycle, addressing climate impacts and evaluating risks from regulations and market changes. The Company set a goal for FY25 to achieve 100% renewable energy usage for all its offices and data centers. Energy efficiency is a key focus in Nvidia’s R&D processes. The Company’s GPUs are optimized for performance per watt and AI workloads, leading to the recognition of Nvidia’s systems on the Green500 list of energy-efficient systems (Figure 8). Figure 8 - Nvidia Renewables and Efficiency // Source: Nvidia.com Furthermore, The Company has plans to create Earth-2, a digital twin of the Earth, using Nvidia AI and Omniverse platforms. This initiative will enable scientists, companies, and policymakers to make high-resolution predictions of climate change impacts and explore strategies for mitigation and adaptation. Within the realm of environmental considerations, Nvidia's strategic positioning aligns with the growing emphasis on sustainability and energy efficiency in the gaming industry. Key points to note include: Nvidia's commitment to sustainability and energy efficiency mirrors the increasing trend towards eco-conscious gaming. The development of energy-efficient GPUs and advocacy for responsible computing practices underscores Nvidia's alignment with the broader movement for sustainable technology. In the field of climate science, Nvidia's generative AI technology enhances the precision of climate models. This contribution leads to more accurate simulations, ultimately improving predictions related to climate change. Nvidia's AI capabilities extend to learning from historical weather patterns, enhancing the accuracy of weather forecasts. This proficiency includes early warnings for severe weather events such as hurricanes or tornadoes. Nvidia actively supports climate research initiatives through partnerships with academic institutions, providing advanced resources to facilitate comprehensive studies in the field. Purchase or generate enough renewable energy to match 100% of global electricity usage Nvidia's H100 GPUs, based on its latest Hopper architecture, are 26x more energy efficient than CPUs when measured across inferencing Nvidia powers the most efficient supercomputer on the November 2022 Green500 list
22 Figure 9 - Nvidia greenhouse gas emissions from 2020 to 2023 // Source: Statista.com Social In 2023, Nvidia had a bit more than 26 thousand employees, and the number of its employees grew at a CAGR of 23.9% between 2020 and 2023 (Figure 10). Around half of its employees in 2023 were located in the Americas (mainly the US). The remaining half is roughly divided equally between three regions: EMEA, APAC and India (Figure 11). Figure 10 - Number of Employees from 2020 to 2023 // Source: Statista.com 68,753 91,740 82,822 73,017 2020 2021 2022 2023 Emissions in metric tons of CO2 Year 13,775 18,975 22,473 26,196 2020 2021 2022 2023 Number of Employees Year
23 Figure 11 - Employees by Region in 2023 // Source: Statista.com As of the conclusion of 2023, Nvidia's global workforce was 80% male, 19% female, and 1% not declared. Throughout the course of 2023, Nvidia implemented promotions for 14% of its workforce, with both women and men experiencing nearly equal promotion rates. Moreover, Nvidia obtained in 2023 several certifications from "Great Place to Work" and "Fortune" boasted by impressive rankings (Table 6) with 97% of the Company’s employees saying that Nvidia is a great place to work compared to an average of 57% at a typical US-based company. This can partially be explained by the benefits accorded to its employees (Table 7). Table 6 - Social Awards in 2023 // Source: Great Place to Work and Fortune 50% 17% 19% 14% Americas APAC EMEA India Great Place to Work and Fortune Awards Award Ranking Best Workplaces for Parents™ 2023 (Large) #4 Fortune Best Workplaces for Women™ 2023 (Large) #32 Fortune Best Workplaces in Technology™ 2023 (Large) #2 2023 PEOPLE® Companies that Care #13 Fortune Best Workplaces for Millennials™ 2023 (Large) #2 Fortune Best Workplaces in the Bay Area™ 2023 (Large) #2 Fortune 100 Best Companies to Work For® 2023 #6
24 Table 7 - Benefits Overview as of August 1, 2022 // Source: Fortune Furthermore, in the most recent year, only 5.3% of the Company's workforce departed, which stands in stark contrast to the technology industry's average attrition rate of 13.2%. This notable retention rate underscores Nvidia's ability to provide enticing employment opportunities and signifies high employee morale, as well as the perception of meaningful and well-rewarded work. Notably, in FY 2022, over 37% of the new hires were sourced through employee referrals, a considerably higher figure than the industry standard. Moreover, Nvidia facilitates a stock purchase plan that allows employees to allocate 15% of their compensation toward purchasing company stock at a 15% discount relative to the market value. This initiative aligns employees' interests with those of shareholders and fosters collaborative engagement between the two groups. The Board of Directors is composed of 13 members and is recognized for its diversity, boasting a balanced composition of both younger and more seasoned members. In terms of gender representation, the board comprises three women and seven men. Additionally, there is commendable inclusivity as the board includes three members classified as "persons of colour", representing various ethnic backgrounds (Figure 12). Figure 12 - Board Composition // Source: 2023 Annual Report In terms of customer satisfaction, consumers appear to express a high level of satisfaction with Nvidia's products and services, contributing significantly to the Company's substantial growth and Fortune - Nvidia's Benefits Overview Benefit Comment 100% health coverage yes Subsidized childcare no Compressed work weeks no Option to work remotely yes Minimum requirement in-office attendance (days per week) none Percentage of health care premiums covered 91 Mental health coverage yes Free mental health sessions (per year) 8 Maximum $ amount covered for fertility services unlimited Fully paid maternal leave (days) 110 Fully paid paternal leave (days) 60 Fully paid adoptive leave (days) 60 Maternal leave in addition to regular time off (days) 110 Paid days off for volunteering yes 2 5 6 Age 40-59 60-65 66+ 10 3 Gender Men Women 3 10 Ethnic/Racial Diversity Ethnically/Racially Diverse White 3 3 7 Tenure < 5 years 5 - 10 years > 10 years
25 the establishment of a strong brand reputation. An illustrative metric of this satisfaction is evident in the average customer review score on Amazon, which stands at an impressive 4.6 out of 5. Corporate Governance Ownership and Shares Outstanding Nvidia is a public company with 2,464 million common shares outstanding as of January 28, 2024. This number of shares will be used in the "Valuation" section to convert the calculated Equity Value of Nvidia to a Share Value. Table 8 - Common Shares Outstanding // Source: Nvidia 10-K at January 28, 2024 The Company main shareholders include: Institutions (mainly traditional investment managers), owning around 67% of total shares outstanding, Public (mainly retail investors), owning around 29% of total shares outstanding, Individuals (mainly insiders), owning around 4% of total shares outstanding. Jensen Huang (founder and current CEO) owns more than 86 million common shares as of today, thus owning around 3.5% of Nvidia’s total shares. The relatively low level of insider ownership can be viewed as a negative factor from an investor's perspective. It suggests that a significant portion of the Company's shares is not held by those intimately involved in its operations and management. Consequently, there may be a perceived misalignment of interests between insiders and external shareholders, potentially impacting decision-making and the Company's overall governance. Appendix Q provides more background on Nvidia’s insider transactions in 2023. Board of Directors The Board of Directors is appointed and removed at each shareholders meeting. The last annual meeting was held on June 22, 2023. While the Board benefits from the experience and institutional knowledge that its longer-serving directors bring, it has also brought in new perspectives and ideas through the appointment of two new directors since 2020. The Board also regularly rotates committee membership and chairpersons to promote a diversity of viewpoints on the Board committees. Appendices M and N provide a summary of key information including tenure, independency and skills of the current 13 Directors of the Company. Figure 13 below breakdowns Nvidia’s Directors compensation in 2022 (fiscal year ending in January 29, 2023). Each Director received approximately $354k, with roughly ¾ of the compensation in Stock Awards and ¼ in Cash. Number of Shares In millions January 28th, 2024 Number of Common Shares Outstanding 2,464
32 o Ibiden, Kinsus Interconnect Technology, and Unimicron Technology: These suppliers provide substrates, further emphasising Nvidia's reliance on a limited set of suppliers for critical components. o Micron Tech and SK Hynix: These suppliers are responsible for memory supply. Nvidia's supply chain is complex, and switching suppliers can have cascading effects, making any changes a complex endeavour for management. Nvidia has invested in collaborative efforts with its suppliers to develop new products and foster innovation. This investment reflects a desire to avoid the time and energy required to establish new relationships with new suppliers. Nvidia has a well-established reputation for high-quality products. Any uncertainty or compromise in supplier quality could result in significant costs and damage to the company's reputation. Nvidia has proactively addressed the supplier dependency issue by securing several longterm contracts to ensure a stable supply of critical components. This strategic move demonstrates Nvidia's awareness of the potential risks associated with supplier power. Bargaining Power of Customers The bargaining power of customers can be considered as low. Nvidia serves both individual consumers and enterprise customers. The diversity of the customer base and the complexities associated with switching to alternative providers collectively contribute to this assessment: Nvidia has a solid customer diversity. Notably, no single customer held more than 10% of Nvidia's revenue share in the years 2021, 2022, and 2023. This diversity in the customer base reduces the vulnerability of Nvidia to the bargaining power of any one customer. In the Graphics segment, Nvidia's end customers primarily comprise individuals, a demographic traditionally possessing relatively weaker bargaining power. However, it's important to note that Nvidia doesn't engage in direct sales to end users. Instead, the Company utilises distribution channels like Amazon to facilitate sales. These channels involve larger order quantities, which, to some extent, bolster buyer power. In the Compute & Networking segment, Nvidia's products are integral components for larger systems, and transitioning to an alternative provider is not only time-consuming but also technically challenging. Such a transition demands a substantial degree of technical expertise and may lead to considerable operational disruptions and delays. These barriers significantly diminish the potential influence of buyer power in this segment. Threat of Substitute Products The threat of substitute products for Nvidia's products can be considered moderate: In the Compute & Networking segment, various hardware alternatives, such as ASICs, FPGAs, TPUs, or emerging innovations like Cerebra's WSE, may potentially offer a more suitable fit for Large Language Models (LLMs). Over the long term, this shift could have implications for Nvidia, a company predominantly centered on GPUs, potentially affecting their ecosystem and, consequently, the strength of their competitive advantage.
33 In the Graphics/Gaming segment, Nvidia’s moat is fortified by strong barriers as users contemplating a switch from Nvidia to competitors like AMD or Intel GPUs face significant challenges. This includes the need to physically install the new GPU, update system settings, and potentially make additional purchases to ensure compatibility with the new hardware. This adds to expenses and serves as a deterrent to switching. Nvidia may also face a threat of indirect substitution in its gaming segment. Consoles such as the Xbox, Nintendo, and PlayStation provide viable alternatives to traditional PC gaming. Therefore, a surge in demand for console gaming could potentially reduce the demand for GPUs used in PC gaming, posing an indirect threat to Nvidia. Finally, Cloud gaming represents another indirect substitute for conventional gaming. While Google Stadia faced closure in January 2023 due to limited consumer demand, other platforms like Amazon Luna and Xbox Cloud continue to operate. Nvidia has also entered this space with Nvidia GeForce Now, its cloud gaming platform, to compete effectively. Competitive Rivalry A distinction between Nvidia’s two operating segments is needed as the competitive landscape in each segment is unique. In the Graphics segment, factors such as the rising global middle-class, expanding populations, and increased internet penetration are expected to contribute to industry growth, particularly in developing countries where the middle class is expanding rapidly. The rivalry among existing firms in the Graphics segment can be considered as medium and is influenced by the competitive dynamics between Nvidia (~84% of market share as of Q1’23) and AMD (~12%), with Intel (~4%) emerging as a potential but currently minor player in the market (Figure 19). Figure 19 - Discrete Desktop GPU Market Shares // Source: Gurufocus AMD, in particular, stands as a strong competitor. This company offers superior value propositions and act as a check on Nvidia's pricing strategies. While Nvidia's products are often perceived as premium, AMD's offerings are notably more budget friendly. By analyzing both companies’ products on sites like Amazon (Figure 20), Nvidia seems to have better average reviews, with an average score of 4.6 compared to AMD’s 4.4. Some AMD clients
34 reported issues such as driver problems, coil whine, overheating, and, in some cases, black screens and flickering monitors following the installation of AMD GPUs. Nvidia GPUs, on the other hand, seemed to enjoy a better reputation. Figure 20 - Reviews on Nvidia and AMD Products // Source: Amazon.com It should be noted, however, that the prevailing sentiment is that Nvidia's offerings are on the pricier side. This sentiment is particularly pronounced among recent purchasers, indicating that Nvidia may have limited room to further increase prices in the gaming segment without risking market share erosion. In the Compute and Networking segment, the AI industry is poised for significant expansion in the near future, driven by several key factors: Big Data Era: The proliferation of "big data" necessitates vast quantities of data for training AI models, underpinning the growth of the AI industry. Cost Accessibility: The cost of AI hardware and software has experienced a significant reduction, democratizing access to AI technology for both businesses and individuals. Growing Awareness: A heightened awareness of the potential benefits of AI is driving its adoption across sectors. The rivalry among existing firms in the Compute & Networking segment can be considered as low to medium. In conclusion, Nvidia's position as a provider of high-quality GPUs for AI applications, coupled with the inelastic nature of demand due to the immense benefits of AI, reinforces its competitive advantage. Indeed, while alternative hardware options to GPUs may present potential challenges, when considering the broader context, including competition within the industry, Nvidia's robust position remains favourable for sustained success. The promising growth prospects within the industry further bolster Nvidia's outlook.
35 5. Financial Analysis Income Statement Nvidia’s income statement for the 2018-2023 historical period and the 2024-2028 projected period is presented in Appendix A. The Company breakdowns its revenue into two reportable segments in its annual reports: “Compute & Networking” and “Graphics”. In fiscal year ended on January 28, 2024 3 , the Company’s revenue amounted to $60.9 billion. The “Compute & Networking” segment generated $47.4 billion of revenue while the “Graphics” segment revenue amounted to $13.5 billion (Figure 21). Figure 21 - FY 2023 Revenue by Segment // Source: 2024 10-K Revenue more than doubled in FY 2023, increasing at a rate of 125.9%. The two segments, however, showed different dynamics during this year. The “Compute & Networking” segment revenue increased by 214.6% year over year. This increase was due to higher Data Center revenue. Compute grew 266% due to higher shipments of the NVIDIA Hopper GPU computing platform for the training and inference of LLMs, recommendation engines and generative AI applications. Networking was up 133% due to higher shipments of InfiniBand. The increase in revenue of the “Graphics” segment was much smaller, at 13.5% only. This was led by growth in Gaming of 15% driven by higher sell-in to partners following the normalization of channel inventory levels. Figure 22 below summarizes Nvidia's revenue breakdown by segment on a quarterly basis, from Q4'21 to Q2'24 (ending July 2023). 3 Presented in this report as fiscal year 2023 (FY 2023) as the fiscal year of Nvidia Corporation covered 11 months in 2023 and only 1 month in 2024. Compute & Networking, 47.4, 78% Graphics, 13.5, 22% FY23 Revenue of $60.9Bn
36 Figure 22 - Quarterly Revenue by Segment // Source: Annual and Quarterly Reports Geographically, the United States accounted for 44% of the revenue generated for FY 2023 versus 31% in FY 2022. The decline in revenue generated outside the US was mainly driven by China and Taiwan relating to Data Center and Gaming. The Company had no customer representing 10% or more of total revenue for FY 2023 and FY 2022. It should also be noted that the Company breakdowns its revenue by the four large market its platforms address: Data Center, Gaming, Professional Visualization, and Automotive. Table 9 breakdowns the revenue for FY 2023 by market and the growth rates of each market year over year. Table 9 - FY 2023 Revenue Breakdown by Market // Source: 2024 10-K Over the 2018-2023 fiscal period, Nvidia grew its revenues from $11.7 billion in FY 2018 to 60.9 billion in FY 2023, inducing a CAGR of 39.1% during this period. Cost of Revenue amounted to $16.6 billion in FY 2023 and mainly relates to the cost of semiconductors. Thus, gross profit reached $44.3 billion during this year. In FY 2022, Nvidia’s gross margin declined year over year. This decline was primarily due to inventory charges amounting to $2.17 billion. These charges were mainly attributed to an excess supply of NVIDIA Ampere architecture Gaming and Data Center products, which did not align with the expected demand, particularly in China. In FY 2023, however, Nvidia’s gross margin recovered to 73% mainly due to strong Data Center revenue growth of 217% and lower net inventory 1,903 2,048 2,366 2,936 3,263 3,750 3,806 3,833 3,616 4,284 10,323 14,514 18,404 2,495 2,760 3,061 3,221 3,420 3,620 2,042 1,574 1,831 2,240 2,486 2,856 2,865 605 853 1,080 946 960 918 856 524 604 668 698 750 834 Q4'21 Q1'22 Q2'22 Q3'22 Q4'22 Q1'23 Q2'23 Q3'23 Q4'23 Q1'24 Q2'24 Q3'24 Q4'24 Data Center Gaming Other Revenue by Market In $Bn Revenue In % of tot. vs LY Data Center 47.5 78.0% 216.8% Gaming 10.4 17.1% 14.8% Professional Visualization 1.6 2.5% 3.5% Automotive 1.1 1.8% 21.2% OEM and Other 0.3 0.5% -38.8% Total 60.9 100.0% 125.9%
37 provisions as a percentage of revenue (Figure 23). Figure 23 - Gross Margin from FY18 to FY23 // Source: 10-Ks for the 2018-2023 period Nvidia’s main operating expenses include Research and Development (R&D), Sales, General and Administrative (SG&A) and Stock Compensation Expenses. R&D expenses amounted to $8.7 billion in FY 2023, i.e. 14.2% of total revenue. This substantial investment reflects Nvidia's commitment to innovation and staying at the forefront of technology trends. The company's agility in responding to market dynamics has not only maintained its competitive edge but also enabled it to shape the future of the industry. SG&A expenses reached $2.7 billion in FY 2023, i.e. 4.4% of total revenue. These cover essential operational and administrative functions, crucial for sustaining the Company's day-to-day operations and market presence. Stock-based Compensation expenses amounted to $3.5 billion in FY 2023. They are associated with restricted stock units (RSUs) and performance stock units (PSUs). These expenses are included in R&D ($2.5 billion), SG&A ($876 million) and Cost of Revenue ($141 million). Notably, in recent years, stock compensation expenses have surged due to Nvidia's impressive growth and the remarkable appreciation of its share price. Recently, stock compensation emerged as the secondlargest expense, reaching an unusually elevated level. The Company’s operating expenses increased in FY 2023, mainly driven by R&D expenses, particularly compensation, data center infrastructure, and engineering development costs. Note that operating expenses in FY 2022 included a $1.35 billion termination “break-up” fee related to the Arm transaction collapse 4 . 4 In February 2022, Nvidia and SoftBank Group Corp., announced the termination of the Share Purchase Agreement whereby Nvidia would have acquired Arm Limited, from SoftBank. The parties agreed to terminate because of significant regulatory challenges preventing the completion of the transaction. The Company recorded an acquisition termination cost of $1.35 billion in FY 2022 reflecting the write-off of the prepayment provided at signing. 61.2% 62.0% 62.3% 64.9% 56.9% 72.7% 55% 60% 65% 70% 75% FY18 FY19 FY20 FY21 FY22 FY23
38 Figure 24 - Operating Margin from FY18 to FY23 // Source: 10-Ks for the 2018-2023 period Other income reached a net figure of $846 million in FY 2023. This amount is the sum of interest income of $866 million, interest expenses of $257 million and other income for $237 million. The increase in interest income was due to higher yields on higher cash balances. Interest expense is comprised of coupon interest and debt discount amortization related to Nvidia’s notes. Other income/expenses mainly relates to realized or unrealized gains and losses from investments in non-affiliated entities and the impact of changes in foreign currency rates. Nvidia recognized an income tax expense of $4.1 billion in FY 2023. The effective tax rate for FY 2023 of 12.0% was lower than the US federal statutory rate of 21% mainly due to tax benefits from the Foreign Derived Intangible Income (FDII) deduction, tax benefits related to stock-based compensation and a US federal research tax credit. The Company net income reached $29.8 billion, i.e. 48.8% of total revenue. Diluted earnings per share (EPS) reached $11.93 in FY 2023, up 585% year over year (Figure 25). Figure 25 - Diluted Earnings per Share (EPS) // Source: 10-Ks for the 2018-2023 period Balance Sheet Nvidia’s balance sheet is presented in Appendix B. 32.5% 26.1% 27.2% 37.3% 15.7% 54.1% 10% 20% 30% 40% 50% 60% FY18 FY19 FY20 FY21 FY22 FY23 $1.66 $1.13 $1.73 $3.85 $1.74 $11.93 $0.0 $2.0 $4.0 $6.0 $8.0 $10.0 $12.0 $14.0 FY18 FY19 FY20 FY21 FY22 FY23
39 Nvidia capital employed amounts to $30.4 billion as of January 28, 2024 (Figure 26). It includes: Fixed assets of $10.8 billion, Structurally positive working capital of $13.5 billion, Deferred income tax assets of $6.1 billion. Figure 26 - Capital Employed Breakdown (in $m) as of January 28, 2024 // Source: 2024 10-K The Company fixed assets mainly include goodwill and property and equipment. Goodwill mainly relates to the acquisition of Mellanox Technologies in April 2020 for a total purchase consideration of $7.1 billion. Following a Purchase Price Allocation exercise, most of the purchasing price was allocated to both goodwill ($3.4 billion) and intangible assets ($3.0 billion) which explains the significant increase of these assets as of January 31, 2021. Property and equipment amounted to $3.9 billion as of January 28, 2024. It mainly includes equipment, computer hardware, and software ($5.2 billion of gross value) and buildings, leasehold improvements, and furniture ($1.8 billion of gross value). Nvidia’s working capital is structurally positive and amounts to $13.5 billion as of January 28, 2024. Its components are presented in Appendix C. Current assets amount to $22.9 billion as of January 28, 2024 and mainly include account receivables ($10.0 billion), inventories ($5.3 billion) and prepaid supply agreements ($2.5 billion) which are included in “Prepaid Expenses and Other”. Current liabilities amount to $9.4 billion as of January 28, 2024 and mainly include account payables ($2.7 billion), customer program accruals ($2.1 billion) and excess inventory purchase obligations ($1.7 billion). Working capital level as of January 28, 2024 reached 22.1% or 81 days of FY 2023 revenue. Average working capital level in the last six fiscal periods reached 21.4% or 78 days of revenue (Figure 27). Fixed Assets, $10,802, 36% Working Capital, $13,480, 44% Deferred Tax (Net) , $6,081 , 20% Jan 28, 2024 Capital Employed of $30.4Bn
40 Figure 27 - Working Capital in Days of Sales // Source: 10-Ks for the 2018-2023 period Going back to the balance sheet, deferred income tax assets reached $6.1 billion as of January 28, 2024 and mainly relate to the tax effect of temporary differences relating to capitalized R&D expenditures. The Company invested capital amounts to $30.4 billion as of January 28, 2024 and is mainly composed of Equity (Figure 28). Figure 28 - Invested Capital Breakdown (in $m) as of January 28, 2024 // Source: 2024 10-K Net worth (equity) increased from $9.3 billion at January 27, 2019 to $43.0 billion at January 28, 2024, driven by strong earnings. In FY 2023, Nvidia returned to its shareholders $9.7 billion in share repurchases and $0.4 billion in quarterly cash dividends. Finally, the Company had a balance of net cash of $12.6 billion as of January 28, 2024 which mainly includes: Long-term debt balance of $8.5 billion, comprising unsecured senior notes only, Short-term debt balance of $1.3 billion, Long-term operating lease liabilities of $1.1 billion, 60 days 38 days 81 days 97 days 112 days 81 days 30 45 60 75 90 105 120 FY18 FY19 FY20 FY21 FY22 FY23 Equity, $42,978, 77% Net Cash, - $12,615, -23% Jan 28, 2024 Invested Capital of $30.4Bn
41 Other long-term liabilities of $2.5 billion, mainly comprising income tax payables of $1.4 billion. Cash and cash equivalents for $7.3 billion, and, Marketable securities for $18.7 billion. Net Debt / Net Cash In order to calculate the Equity Value (12-month Share Price Target) of Nvidia as of December 31, 2024 5 , the forecasted net debt (cash) balance as of January 26, 2025 will be subtracted (added) from (to) the calculated Enterprise Value. Nvidia’s adjusted forecasted net cash balance as of January 26, 2025 amounts to $49.3 billion, as presented in Table 10. Table 10 - Adjusted Net Cash (in $m) as of January 26, 2025 // Source: 2024 10-K I made an adjustment to exclude the long-term operating lease liabilities of $1.2 billion as operating lease (rent) cash outflows will already be included in the business plan presented afterwards. Thus, both operating income like EBITDA and EBIT used in the listed peers method and the free cash flow to firm used in the discounted cash-flow (DCF) method will already be including the expense relating to operating leases. Thus, the adjusted net cash balance of $49.3 billion will be considered in the Enterprise Value to Equity Value bridge. Quality of Earnings and Balance Sheet The following factors demonstrate the quality of Nivida’s reported earnings: Non-Recurring Expenses: In FY 2022, Nvidia incurred a non-recurring termination cost of $1.35 billion related to the termination of the Arm transaction. Importantly, this one-time expense is not expected to recur in the future. Consequently, it is prudent to consider adding this amount back to the current year's earnings for analytical purposes. 5 For simplicity, the calendar year is being used here as a proxy and Nvidia’s share is evaluated as of December 31, 2024 instead of January 26, 2025 Net Financial Debt / Cash In $m January 26, 2025 Long-Term Debt 8,459 Short-term Debt 1,250 Long-Term Operating Lease Liabilities 1,231 Other Long-term Liabilities 2,795 Financial Debt 13,735 Cash and Cash Equivalents -16,242 Marketable Securities -45,590 Cash and Equivalents -61,832 Net Financial Debt (+) / Cash (-) -48,097 Adjusted Net Financial Debt / Cash In $m January 26, 2025 Net Financial Debt (+) / Cash (-) -48,097 Long-Term Operating Lease Liabilities Adjustment -1,231 Adjusted Net Financial Debt (+) / Cash (-) -49,328
48 billion in FY 2024 and FY 2028 respectively. It was assumed a stable level of cost of revenue in percentage of revenue, set at 27.3% of revenue, corresponding to the historical level of this cost in FY 2023. Thus, gross margin should remain stable throughout the BP at 72.7%. Research and development (R&D) and Sales, General and Administrative (SG&A) expenses from FY 2024 to FY 2028 were assumed to equal the historical level in FY 2023, similar to cost of revenue. Moreover, they are assumed to decrease gradually as a percentage of revenue throughout the BP period, in line with the projected decrease in depreciation & amortization (D&A) as the latter is included in both R&D and SG&A expenses. Therefore, R&D and SG&A expenses will represent respectively 13.4% and 3.5% of Nvidia’s 2028 revenue. As the acquisition termination cost of $1.4 billion was a one-time and non-recurrent fee, I did not assume any break-up fees over the BP period. Income from operations (equivalent to EBIT) is expected to grow at a CAGR of 38.6% over the 20232028 period and reach $168.4 billion by 2028. Corporate Income Tax (CIT) is projected to increase gradually and converge to the Federal statutory rate of 21% over the long term. Net Operating Profit After Tax (NOPAT) should reach $40.5 billion and $144.2 billion by FY 2024 and FY 2028 respectively. Capex should grow at a CAGR of 46.3% during the 2023-2028 period, and represent a range of 2.4% to 4.1% of revenue. This level of Capex was considered as adequate to finance the revenue growth and the expansion of the operating margin. As the projected capex level (as a percentage of revenue) is lower than historical levels, D&A is expected to decrease (as a percentage of revenue) to a level of 2.4% of revenue by 2028. Figure 33 - Capex and D&A versus Revenues (in $m) // Source: 10-Ks and Author Projections It was assumed a working capital level of 21.4% of revenue (or 78 days of revenue) over the BP period (2024 to 2028), in line with the average working capital level observed during the historical 0 40,000 80,000 120,000 160,000 200,000 240,000 280,000 320,000 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 18 19 20 21 22 23 24E 25E 26E 27E 28E Total Revenues Capex and D&A Revenue Capex D&A
49 2018 to 2023 period. The Company working capital level is expected to increase naturally, in line with revenue growth. Thus, cash outflows relating to change in working capital are expected to reach a total of $50.9 billion over the BP period. Nvidia’s free cash-flow should grow at a solid CAGR of 39.5% over the BP period (2024 to 2028) and reach $127.5 billion by 2028. Figure 34 - Forecasted Free Cash Flow (in $m) // Source: 2024 10-K and Author Projections 2,965 24,126 35,848 49,109 68,439 93,248 127,535 0 20,000 40,000 60,000 80,000 100,000 120,000 22 23 24E 25E 26E 27E 28E Free Cash Flow
50 6. Valuation Selected Valuation Methods The share value assessment of Nvidia has been performed under the two commonly used methods below and is based on the Business Plan presented in Appendix E: Discounted Cash-Flow method (DCF): Under the DCF method, value is determined by performing a prospective financial analysis of the subject business to estimate future available cash flows, which yields a value that is available to the invested capital holders. Market Comparable Companies (Listed Peers): This method estimates the value of a company by looking at the pricing of peers relative to a common variable such as sales, EBITDA or EBIT. This method requires identification of listed peers engaged in similar businesses and the determination of multiples. DCF Method Calculation of the Discount Rate A Weighted Average Cost of Capital (“WACC”) is usually calculated to discount Free Cash-Flow to Firm (FCFF). Its calculation is presented below: A WACC of 10.5% was used to discount the FCFF of Nvidia, based on the following assumptions: Risk-free rate of 4.3% corresponding to the 10-year US treasury yield, 1-month average closing rate as of April 12, 2024 (Source: Market Watch); Equity risk premium (ERP) of 4.6%, equivalent to the latest equity risk premium calculated by Damodaran for the US (Appendix G); Unlevered beta of 1.42 corresponding to the average 3-year beta of Nvidia and other listed comparable companies including AMD, Intel, Qualcomm, Broadcom and Texas Instruments (Source: S&P Capital IQ – Appendix H); Gearing of 5.0%, corresponding to the forecasted debt/equity ratio of Nvidia in 2028, also presented in Appendix D; Slightly negative size premium of -0.3%, considering the higher market capitalization of Nvidia compared to its peers (source: Ibbotson SSBI Valuation Yearbook – Appendix J). A gross cost of debt of 4.9% (Souce: Damodaran – Appendix I) and a net cost of debt of 3.9%, considering the current statutory corporate rate in the US of 21%. CAPM Formula: Cost of equity = Risk free rate + (Levered β x ERP) WACC Formula: WACC = E/(E+D)*Cost of equity + D/(E+D)*Cost of debt*(1-CIT)
51 Table 12 - Nvidia’s WACC Calculation // Source: Multiple (specified in Table) Calculation of Free Cash-Flow Based on my forecasts and assumptions on the Company’s future free cash flow up to 2028, outlined in Appendices E and F respectively, I calculated the free cash-flow to firm (FCFF) as presented below: FCFF = After-tax EBIT (NOPAT) + D&A – Capex +/- Change in Working Capital The Company free cash-flow and discounted free cash-flow (future free cash-flow discounted at the WACC presented above) are presented in Table 13: Table 13 - Calculation of Discounted Free Cash-Flows // Source: Author Projections Free Cash-Flow should amount to $35.8 billion in FY 2024 and reach $127.5 billion in FY 2028. Since I’m calculating Nvidia’s share value (share price target) as of December 31st, 2024 6 , the first 6 For simplicity, the calendar year is being used here as a proxy and Nvidia’s share is evaluated as of December 31, 2024 instead of January 26, 2025 WACC Calculation Risk Free Rate (1) 4.3% Equity Risk Premium (2) 4.6% Unlevered Beta (3) 1.42 Gearing (4) 3.3% Levered Beta (5) 1.46 Size premium (6) -0.3% Cost of Equity (7) 10.8% Cost of debt (8) 4.9% CIT rate (9) 21.0% Cost of debt after tax 3.9% D/(D+E) 3.1% E/(D+E) 96.9% Weighted Average Cost of Capital (10) 10.5% (1) 10Y Treasury Yield (1-month average as of Apr. 12th, 2024) (6) Ibbotson Size Premium (2) Equity Risk Premium in USA: Damodaran (7) CAPM formula (3) Average Beta 3 year of Nvidia and listed peers (8) Source: Damodaran (4) Gearing of Nvidia in FY 2028E (9) Long Term Statutory Corporate Rate in USA (5) Hamada formula (10) Formula 1-D/(D+E)=E/(D+E) Consolidated Free Cash Flow Statement FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 BP BP BP BP BP NOPAT 40,521 56,124 77,887 105,899 144,205 In % of Revenue 47.5% 47.3% 47.7% 47.5% 47.8% Depreciation & Amortization 3,569 4,444 5,405 6,406 7,341 In % of Revenue 4.2% 3.7% 3.3% 2.9% 2.4% Capex -3,474 -4,338 -5,296 -6,307 -7,274 In % of Revenue -4.1% -3.7% -3.2% -2.8% -2.4% Working Capital 18,248 25,368 34,925 47,675 64,412 In % of Revenue 21.4% 21.4% 21.4% 21.4% 21.4% in days of sales 78d 78d 78d 78d 78d Change in Working Capital -4,768 -7,120 -9,557 -12,750 -16,736 Free Cash-Flow 35,848 49,109 68,439 93,248 127,535 Period 0.00 1.00 2.00 3.00 4.00 Discounted factor 1.00 0.90 0.82 0.74 0.67 Discounted Free Cash-Flow 35,848 44,426 56,009 69,035 85,415 In $m
52 period of Discounted Free Cash-Flows is FY 2025. Hence, Discounted Free Cash-Flow should reach $44.4 billion in FY 2025 and $85.4 billion in FY 2028. Calculation of Terminal Value and Nvidia’s Share Value The terminal value of Nvidia was determined based on a normative free cash-flow, calculated using the Gordon-Shapiro formula on the basis of the following assumptions: A perpetual growth rate (PGR) estimated at 4.3%, determined according to the risk-free rate presented above, which corresponds to the 10-year Treasury Yield (1-month average as of April 12, 2024), A normative operating (EBIT) margin of 56.3%, which corresponds to the operating margin of 55.9% projected for FY 2028, adjusted for the 44 basis points of decrease in D&A to achieve a normative D&A level of 2.0% of revenue, A normative Corporate Income Tax rate of 21.0%, corresponding to the US federal statutory corporate rate currently in place, D&A equal to capex. Capex level has been set to 2.0% of revenue, a level that is realistic, considering historical levels of capex, and will support the normative perpetual annual revenue growth of 4.3% and the normative operating margin of 56.3%, A normative working capital level of 21.4% of revenue (or 78 days of revenue) corresponding to the average working capital level observed during the historical FY 2018 to FY 2023 period. Considering these assumptions, the normative free cash-flow should amount to $137.1 billion, as presented in Table 14: Table 14 - Calculation of the Normative Free Cash-Flow // Source: Author Projections Nvidia’s Equity and Share values under the DCF method are presented in Table 15. Consolidated Free Cash Flow Statement FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 BP BP BP BP BP NOPAT 40,521 56,124 77,887 105,899 144,205 139,843 In % of Revenue 47.5% 47.3% 47.7% 47.5% 47.8% 44.5% Depreciation & Amortization 3,569 4,444 5,405 6,406 7,341 6,288 In % of Revenue 4.2% 3.7% 3.3% 2.9% 2.4% 2.0% Capex -3,474 -4,338 -5,296 -6,307 -7,274 -6,288 In % of Revenue -4.1% -3.7% -3.2% -2.8% -2.4% -2.0% Working Capital 18,248 25,368 34,925 47,675 64,412 67,198 In % of Revenue 21.4% 21.4% 21.4% 21.4% 21.4% 21.4% in days of sales 78d 78d 78d 78d 78d 78d Change in Working Capital -4,768 -7,120 -9,557 -12,750 -16,736 -2,787 Free Cash-Flow 35,848 49,109 68,439 93,248 127,535 137,056 Period 0.00 1.00 2.00 3.00 4.00 Discounted factor 1.00 0.90 0.82 0.74 0.67 Discounted Free Cash-Flow 35,848 44,426 56,009 69,035 85,415 In $m Normative
53 Table 15 - Share Value under DCF Method // Source: Author Calculations The Discounted Terminal Value of $1,477.0 billion was calculated using the Gordon-Shapiro formula: 𝑉𝑇=𝑁𝑜𝑟𝑚𝑎𝑡𝑖𝑣𝑒 𝐹𝐶𝐹𝐹 (𝑊𝐴𝐶𝐶 − 𝑔) 𝑥 𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟 As presented in Table 14, the Normative FCFF was assumed to equal $137,056m. I divided this amount by 6.21% (WACC of 10.5% - PGR of 4.3%) to obtain the Terminal Value. Finally, this terminal value has been discounted using the Discounted Factor of the fourth year of our projections (i.e. 2028) of 0.67 (1/(1+WACC)^4). The Enterprise Value of Nvidia, calculated using the DCF method, amounts to $1,731.9Bn. Considering an adjusted forecasted net cash balance of $49.3Bn as of January 26, 2025, the value of Nvidia’s equity, calculated under the DCF approach, amounts to $1,781.2Bn. Considering the outstanding number of shares of 2,464 million as at January 28, 2024, the Share Value (12-month Price Target) of Nvidia, calculated under the DCF approach, stands at $722.90. Considering the closing share price average from February 22, 2024 to April 12, 2024 of $872.72, this valuation analysis leads to the conclusion that the Share of Nvidia presents a potential downside of 17.2% under the DCF method. Listed Peers Method Selected Comparable Peers From analysis and analysts reports, Table 16 presents a sample of listed peers companies which operate in the semi-conductor sector. Share Value under DCF Method In $m Cumulated Discounted Cash Flows 254,885 Discounted Terminal Value 1,477,012 Enterprise Value 1,731,896 Net Financial Debt (-) / Cash (+) 49,328 Equity Value 1,781,224 Number of Outstanding Shares (in m) 2,464 Share Value ($) $722.90 Upside (+) or Downside (-) -17.2%
54 Table 16 - Presentation of Listed Comparable Companies // Source: S&P Capital IQ Advanced Micro Devices, Inc. is headquartered in Santa Clara (CA) and listed on Nasdaq. It operates as a semiconductor company worldwide in four segments: Data Center, Client, Gaming, and Embedded segments. AMD is one of Nvidia’s closest competitors and is a supplier of hardware and software for discrete and integrated GPUs, custom chips and other accelerated computing solutions, including solutions offered for AI. Intel Corporation is headquartered in Santa Clara (CA) and listed on Nasdaq. It operates as a semiconductor company worldwide in these segments: Client Computing Group, Data Center and AI, Network and Edge, Mobileye, Accelerated Computing Systems and Graphics and Intel Foundry Services. Intel is one of Nvidia’s closest competitors and is a supplier of hardware and software for discrete and integrated GPUs, custom chips and other accelerated computing solutions, including solutions offered for AI. Qualcomm Incorporated is headquartered in San Diego (CA) and listed on Nasdaq. It engages in the development and commercialization of foundational technologies for the wireless industry worldwide through its three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI). Qualcomm is one of Nvidia’s closest competitors and is a supplier of SoC products that are used in servers or embedded into automobiles, autonomous machines, and gaming devices. Texas Instruments Incorporated is headquartered in Dallas (TX) and listed on Nasdaq. The company designs, manufactures, and sells semiconductors to electronics designers and manufacturers in the US and internationally, through its two segments: Analog and Embedded Processing. Texas Instruments is one of Nvidia’s closest competitors and is a large semiconductor player. Marvell Technology, Inc. is headquartered in Wilmington (DE) and listed on Nasdaq. The company provides data infrastructure semiconductor solutions, spanning the data center core to network edge. Marvell Technology is a competitor of Nvidia and an important semiconductor player. Listed Peers Valuation: Multiples and Share Value of Nvidia I decided to compute Nvidia’s Equity and Share Value using four different multiples, covering the Presentation of comparable companies Listed peers Country Average market capitalization (in $m)* Net sales 2023 (in $m) Advanced Micro Devices, Inc. United States 289,688 22,680 Intel Corporation United States 175,485 54,228 QUALCOMM Incorporated United States 190,111 35,820 Texas Instruments Incorporated United States 155,387 17,519 Marvell Technology, Inc. United States 60,332 5,920 Mean 174,200 27,233 Median 175,485 22,680 *1 month average at 12/04/24
55 2024-2026 period: - The EV/Net Sales, EV/EBITDA and EV/EBIT multiples which are based on Enterprise Value (Equity + Debt), since both EV and the corresponding metrics (Sales, EBITDA and EBIT) belong to all the Company’s stakeholders (i.e. both debtholders and shareholders of the Company); - The Price Earnings Ratio (PER) which is based on the Market Capitalization since both the latter and the corresponding metric (Net Profit) belong to the shareholders of the Company only. Therefore, it is an apples-to-apples comparison. The market capitalization retained is based on an average over the last trading month. The Enterprise Value (EV) of listed peers corresponds to the market capitalization increased by the consolidated adjusted net debt. Table 18 displays all these multiples for the five retained listed comparable companies, covering the period from 2024 to 2026. Table 17 - Multiples of Listed Peers // Source: S&P Capital IQ (April 12, 2024) Nvidia’s Equity and Share Values (12-mont Price Targets) resulting from the application of the selected multiples are presented below. The complete table is presented in Appendix K. Table 18 - Share Value under Comps Method // Source: S&P Capital IQ and Author The average Enterprise Value of Nvidia, calculated using the listed peers method, amounts to $1,327.4Bn. Considering an adjusted forecasted net cash balance of $49.3Bn as of January 26, 2025, the value of Nvidia’s equity, calculated under the listed peers approach, amounts to $1,376.8Bn. Considering the outstanding number of shares of 2,464 million as at January 28, 2024, the Share Value (12-month Price Target) of Nvidia, calculated under the listed peers approach, stands at $558.76. Multiples of Comparable Companies EV/Net sales EV/EBITDA EV/EBIT Price Earnings 2024 2025 2026 2024 2025 2026 2024 2025 2026 2024 2025 2026 Advanced Micro Devices, Inc. 11.2x 8.9x 7.3x 55.6x 30.3x 22.7x 43.3x 28.7x 22.2x 49.8x 32.9x 24.4x Intel Corporation 3.5x 3.2x 2.9x 12.6x 9.4x 7.6x 32.6x 19.1x 14.7x 30.4x 17.8x 12.7x QUALCOMM Incorporated 5.1x 4.6x 4.4x 13.3x 12.2x 12.1x 15.1x 13.5x 12.8x 17.4x 15.6x 14.8x Texas Instruments Incorporated 10.2x 8.9x 7.9x 22.7x 17.1x 14.9x 29.7x 23.0x 19.1x 32.9x 25.5x 21.1x Marvell Technology, Inc. 11.6x 12.0x 9.1x 66.4x 35.5x 22.3x n/a 43.5x 25.7x n/a 48.5x 28.0x Median 10.2x 8.9x 7.3x 22.7x 17.1x 14.9x 31.1x 23.0x 19.1x 31.6x 25.5x 21.1x n/a: not applicable Listed peers Share Value under Listed Peers Method Enterprise Value 1,053,839 1,180,891 1,488,700 1,474,028 1,327,459 Adjusted Net Cash 49,328 49,328 49,328 49,328 49,328 Equity Value 1,103,167 1,230,218 1,538,028 1,523,356 1,376,787 # Shares (in m) 2,464 2,464 2,464 2,464 2,464 Share Value ($) 447.71 $ 499.28 $ 624.20 $ 618.25 $ 558.76 $ Upside / Downside -36.0% Overall Median In $m EV/Sales Median EV/EBITDA Median EV/EBIT Median PER Median
56 Considering the closing share price average from February 22, 2024 to April 12, 2024 of $872.72, this valuation analysis leads to the conclusion that the Share of Nvidia presents a potential downside of 36.0% under the listed peers method. 7. INVESTMENT RISK The following potential negative developments could pose a risk for individuals or institutions looking to invest in Nvidia’s stock. This analysis would help get a better understanding of the multifaceted risk landscape associated with the Company. Corporate Risk | Supply Chain Dependence (CR1) Nvidia does not engage in manufacturing and instead relies on third-party suppliers for sourcing raw materials. This reliance introduces a risk factor, as the Company lacks direct control over the quality, quantity, and manufacturing yields of its primary suppliers. Numerous factors exert influence on the dynamics of demand and supply, rendering efficient management of working capital a formidable challenge for Nvidia. These complexities arise from the following key elements: Nvidia's expansion into nascent AI markets, characterised by speculative and relatively unknown demand patterns. The inflexibility of the supply chain necessitates accurate demand forecasts provided to manufacturers like TSMC. Any underestimation leads to prolonged lead times, while overestimation results in excessive inventory and write-downs. Rapid technological advancements render inventory quickly obsolete and diminish its value. Geopolitical events, pandemics, natural disasters, and unforeseen circumstances necessitate the inclusion of buffers and adaptability within the supply chain. In light of recent uncertainties, management has adopted a more conservative approach to their net working capital reserves. Consequently, they currently maintain a higher-than-usual inventory level and a more substantial provision for potential write-offs. This strategic shift has had an adverse impact on the gross profit margin in the most recent fiscal year.
57 Figure 35 - Historical inventory level at the end of fiscal years // Source: Annual Reports Corporate Risk | Capacity to Innovation & Competition (CR2) Nvidia specialises exclusively in GPUs. While GPUs have a broad range of applications and AI is poised to influence numerous industries, it's essential to note that Nvidia operates within a defined niche of expertise and does not diversify into unrelated goods or services, as it is not a conglomerate. Nvidia must maintain a continuous cycle of innovation to safeguard its competitive edge, as patents will inevitably expire over time. Given the rapid pace of advancements in this industry, patents may potentially become obsolete before reaching their expiration date. It's important to acknowledge that certain patents may not hold enforceable status in countries with differing intellectual property laws. Many nations lack the robust patent protection seen in the United States. Although Nvidia has a commendable track record in Research and Development (R&D), there remains no certainty that R&D investments will yield profitable inventions or lead to the exploration of new business sectors. The potential for consecutive R&D failures exists. The advent of groundbreaking technologies, such as quantum computing, has the potential to catalyse significant transformations within the industry, which could adversely affect Nvidia's established business model. Corporate Risk | Debt Refinancing (CR3) Nvidia currently holds a substantial amount of debt with an effective annual interest rate of 0.485%. However, this low-cost debt is set to mature in 2023 and 2024. If it needs to be refinanced, it is likely to incur a significantly higher market interest rate. $1,575 $979 $1,826 $2,605 $5,159 $5,282 $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 FY18 FY19 FY20 FY21 FY22 FY23
64 the Price Target as well as the recommendation, since these two variables are key in any DCF model. As seen in Table 20, a 200 basis points increase (decrease) in the discount rate would decrease (increase) the Price Target by 25.2% and 49.4%, respectively. Besides, an increase (decrease) of the PGR would increase (decrease) the Price Target by 40.6% and 20.8%, respectively. Table 19 - Price Target Sensitivity to WACC and PGR // Source: Author Calculations Operating (EBIT) Margin and Corporate Income Tax (CIT) A change in the assumed normative EBIT margin due to any of the Corporate Risks highlighted above or the Corporate Income Tax (CIT) rate due to a change in Federal Statutory Corporate Tax rate in the US might potentially affect the Price Target as well as the recommendation, since these two variables are key in the calculation of the Normative Free Cash Flow, used in the Terminal Value of the DCF model. As seen in Table 21, a 600 basis points increase (decrease) in the operating margin would increase (decrease) the Price Target by 9.0%. Besides, a 600 basis points increase (decrease) of the CIT rate in the US would increase (decrease) the Price Target by 6.4%. Table 20 - Price Target Sensitivity to EBIT Margin and CIT // Source: Author Calculations Long-term Maintenance Capex and Working Capital Levels A change in the assumed long-term Maintenance Capex or Working Capital levels due to any of the Corporate Risks highlighted above might potentially affect the Price Target as well as the recommendation, since these two variables are key in the calculation of the Free Cash Flows of the DCF model. As seen in Table 22, a 75 basis points increase (decrease) in the normative maintenance capex level would decrease (increase) the Price Target by 2.0%. Besides, a 1,000 basis points increase (decrease) of the normative working capital level of the Company would decrease (increase) the Price Target by 2.2%. Price Target (in $) Sensitivity Table Perpetual Growth Rate 723 2.3% 3.3% 4.3% 5.3% 6.3% 8.5% $767.15 $893.46 $1,079.70 $1,381.83 $1,956.78 9.5% $656.13 $744.57 $866.94 $1,047.37 $1,340.06 WACC 10.5% $572.35 $637.19 $722.90 $841.48 $1,016.33 11.5% $506.93 $556.15 $619.00 $702.09 $817.04 12.5% $454.48 $492.86 $540.58 $601.53 $682.09 Price Target (in $) Sensitivity Table EBIT Margin 723 50.3% 53.3% 56.3% 59.3% 62.3% 15.0% $699.22 $734.29 $769.35 $804.42 $839.48 18.0% $678.47 $712.30 $746.13 $779.95 $813.78 CIT 21.0% $657.72 $690.31 $722.90 $755.49 $788.08 24.0% $636.97 $668.32 $699.67 $731.03 $762.38 27.0% $616.22 $646.33 $676.45 $706.56 $736.68
65 Table 21 - Price Target Sensitivity to Capex and Working Capital // Source: Author Calculations Price Target (in $) Sensitivity Table Working Capital Level 723 11.4% 16.4% 21.4% 26.4% 31.4% 0.5% $753.42 $745.52 $737.63 $729.73 $721.83 1.3% $746.06 $738.16 $730.26 $722.36 $714.47 Capex 2.0% $738.70 $730.80 $722.90 $715.00 $707.10 2.8% $731.33 $723.43 $715.54 $707.64 $699.74 3.5% $723.97 $716.07 $708.17 $700.27 $692.37
Appendix A - Income Statement Consolidated Income Statement In $m FY 2018 Year ended on January 27th, 2019 FY 2019 Year ended on January 26th, 2020 FY 2020 Year ended on January 31st, 2021 FY 2021 Year ended on January 30th, 2022 FY 2022 Year ended on January 29th, 2023 FY 2023 Year ended on January 28th, 2024 FY 2024E Year ended on January 26th, 2025 FY 2025E Year ended on January 31st, 2026 FY 2026E Year ended on January 31st, 2027 FY 2027E Year ended on January 30th, 2028 FY 2028E Year ended on January 29th, 2029 CAGR 20182023 CAGR 20232028 CAGR 20182028 Compute & Networking (Data Center - AI) n/a 3,279 6,841 11,046 15,068 47,405 70,065 101,648 144,857 202,924 279,632 n/a 42.6% n/a % growth n/a n/a 108.6% 61.5% 36.4% 214.6% 47.8% 45.1% 42.5% 40.1% 37.8% Graphics (mainly Gaming) n/a 7,639 9,834 15,868 11,906 13,517 15,313 17,045 18,551 20,138 21,737 n/a 10.0% n/a % growth n/a n/a 28.7% 61.4% -25.0% 13.5% 13.3% 11.3% 8.8% 8.6% 7.9% Revenue 11,716 10,918 16,675 26,914 26,974 60,922 85,378 118,694 163,408 223,062 301,369 39.1% 37.7% 38.4% % growth n/a -6.8% 52.7% 61.4% 0.2% 125.9% 40.1% 39.0% 37.7% 36.5% 35.1% Cost of Revenue -4,545 -4,150 -6,279 -9,439 -11,618 -16,621 -23,293 -32,382 -44,582 -60,857 -82,221 29.6% 37.7% 33.6% In % of Revenue -38.8% -38.0% -37.7% -35.1% -43.1% -27.3% -27.3% -27.3% -27.3% -27.3% -27.3% Gross Profit 7,171 6,768 10,396 17,475 15,356 44,301 62,085 86,311 118,826 162,206 219,148 43.9% 37.7% 40.8% In % of Revenue 61.2% 62.0% 62.3% 64.9% 56.9% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% Research and Development (R&D) -2,376 -2,829 -3,924 -5,268 -7,339 -8,675 -12,157 -16,643 -22,556 -30,304 -40,286 29.6% 35.9% 32.7% In % of Revenue -20.3% -25.9% -23.5% -19.6% -27.2% -14.2% -14.2% -14.0% -13.8% -13.6% -13.4% Sales, General and Administrative (SG&A) -991 -1,093 -1,940 -2,166 -2,440 -2,654 -3,719 -4,912 -6,406 -8,259 -10,501 21.8% 31.7% 26.6% In % of Revenue -8.5% -10.0% -11.6% -8.0% -9.0% -4.4% -4.4% -4.1% -3.9% -3.7% -3.5% Acquisition Termination Cost 0 0 0 0 -1,353 0 0 0 0 0 0 n/a n/a n/a In % of Revenue 0.0% 0.0% 0.0% 0.0% -5.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Operating Income (EBIT) 3,804 2,846 4,532 10,041 4,224 32,972 46,208 64,756 89,864 123,643 168,361 54.0% 38.6% 46.1% In % of Revenue 32.5% 26.1% 27.2% 37.3% 15.7% 54.1% 54.1% 54.6% 55.0% 55.4% 55.9% Other Income and Expense, Net 92 124 -123 -100 -43 846 1,186 1,648 2,269 3,098 4,185 55.9% 37.7% 46.5% In % of Revenue 0.8% 1.1% -0.7% -0.4% -0.2% 1.4% 1.4% 1.4% 1.4% 1.4% 1.4% Income before Tax (EBT) 3,896 2,970 4,409 9,941 4,181 33,818 47,394 66,405 92,133 126,740 172,546 54.1% 38.5% 46.1% In % of Revenue 33.3% 27.2% 26.4% 36.9% 15.5% 55.5% 55.5% 55.9% 56.4% 56.8% 57.3% Income Tax Expense/Benefit 245 -174 -77 -189 187 -4,058 -5,687 -8,633 -11,977 -17,744 -24,156 n/a 42.9% n/a CIT Rate -6.3% 5.9% 1.7% 1.9% -4.5% 12.0% 12.0% 13.0% 13.0% 14.0% 14.0% Net Income 4,141 2,796 4,332 9,752 4,368 29,760 41,707 57,772 80,156 108,997 148,390 48.4% 37.9% 43.0% In % of Revenue 35.3% 25.6% 26.0% 36.2% 16.2% 48.8% 48.8% 48.7% 49.1% 48.9% 49.2% Net Income per Share: Basic $1.70 $1.15 $1.76 $3.91 $1.76 $12.05 $16.89 $23.40 $32.46 $44.15 $60.10 47.9% 37.9% 42.8% Diluted $1.66 $1.13 $1.73 $3.85 $1.74 $11.93 $16.72 $23.16 $32.14 $43.70 $59.50 48.4% 37.9% 43.1% Weighted Average Shares Basic 2,432* 2,439 2,467 2,496 2,487 2,469 2,469 2,469 2,469 2,469 2,469 0.3% 0.0% 0.2% Diluted 2,500* 2,472 2,510 2,535 2,507 2,494 2,494 2,494 2,494 2,494 2,494 0.0% 0.0% 0.0% Source: Nvidia 10-K for the 2018-2023 period, and Author Projections *Adjusted for a four-for-one stock split announced in May 2021
Appendix B - Balance Sheet Consolidated Balance Sheet In $m January 27, 2019 January 26, 2020 January 31, 2021 January 30, 2022 January 29, 2023 January 28, 2024 January 26, 2025 January 31, 2026 January 31, 2027 January 30, 2028 January 29, 2029 Property and Equipment, Net 1,404 1,674 2,149 2,778 3,807 3,914 3,819 3,713 3,604 3,505 3,438 Operating Lease Assets 0 618 707 829 1,038 1,346 1,481 1,629 1,792 1,971 2,168 Goodwill 618 618 4,193 4,349 4,372 4,430 4,430 4,430 4,430 4,430 4,430 Intangible Assets, Net 45 49 2,737 2,339 1,676 1,112 1,112 1,112 1,112 1,112 1,112 Fixed Assets 2,067 2,959 9,786 10,295 10,893 10,802 10,842 10,884 10,938 11,017 11,147 Current Assets 3,243 2,911 6,638 11,462 13,597 22,861 31,970 44,445 61,188 83,526 112,848 Current Liabilities -1,329 -1,784 -2,926 -4,335 -5,313 -9,381 -13,722 -19,077 -26,263 -35,851 -48,436 Working Capital 1,914 1,127 3,712 7,127 8,284 13,480 18,248 25,368 34,925 47,675 64,412 Deferred Income Tax Assets 560 548 806 1,222 3,396 6,081 7,471 9,374 11,923 15,329 19,853 Deferred Income Tax Liabilities 0 0 0 0 0 0 0 0 0 0 0 Deferred Tax (Net) 560 548 806 1,222 3,396 6,081 7,471 9,374 11,923 15,329 19,853 Capital Employed 4,541 4,634 14,304 18,644 22,573 30,363 36,561 45,626 57,786 74,021 95,412 Share Capital 1 1 3 3 2 2 2 2 2 2 2 Issuance Premium 6,051 7,045 8,719 10,385 11,971 13,132 13,132 13,132 13,132 13,132 13,132 Treasury Stock, at Cost -9,263 -9,814 -10,756 0 0 0 0 0 0 0 0 Accumulated Other Comprehensive Loss -12 1 19 -11 -43 27 0 0 0 0 1 Retained Earnings 12,565 14,971 18,908 16,235 10,171 29,817 71,524 129,296 209,451 318,448 466,838 Equity 9,342 12,204 16,893 26,612 22,101 42,978 84,658 142,430 222,585 331,582 479,973 Long-Term Debt 1,988 1,991 5,964 10,946 9,703 8,459 8,459 8,459 8,459 8,459 8,459 Short-term Debt 0 0 999 0 1,250 1,250 1,250 1,250 1,250 1,250 1,250 Long-Term Operating Lease Liabilities 0 561 634 741 902 1,119 1,231 1,354 1,489 1,638 1,802 Other Long-term Liabilities 633 775 1,375 1,553 1,913 2,541 2,795 3,075 3,382 3,720 4,092 Cash and Cash Equivalents -782 -10,896 -847 -1,990 -3,389 -7,280 -16,242 -28,519 -45,629 -68,941 -100,825 Marketable Securities -6,640 -1 -10,714 -19,218 -9,907 -18,704 -45,590 -82,422 -133,751 -203,687 -299,339 Net Financial Debt (+) / Cash (-) -4,801 -7,570 -2,589 -7,968 472 -12,615 -48,097 -96,803 -164,800 -257,561 -384,560 Invested Capital 4,541 4,634 14,304 18,644 22,573 30,363 36,561 45,626 57,786 74,021 95,412 Source: Nvidia 10-K for the 2018-2023 period, and Author Projections
Appendix C - Working Capital Working Capital In $m January 27, 2019 January 26, 2020 January 31, 2021 January 30, 2022 January 29, 2023 January 28, 2024 January 26, 2025 January 31, 2026 January 31, 2027 January 30, 2028 January 29, 2029 Account Receivables, Net 1,424 1,657 2,429 4,650 3,827 9,999 12,775 17,760 24,450 33,376 45,093 in days of sales 44 days 55 days 53 days 63 days 52 days 60 days 55 days 55 days 55 days 55 days 55 days Inventories 1,575 979 1,826 2,605 5,159 5,282 10,080 14,013 19,292 26,335 35,579 in days of sales 49 days 33 days 40 days 35 days 70 days 32 days 43 days 43 days 43 days 43 days 43 days Prepaid Expenses and Other 244 275 2,383 4,207 4,611 7,580 9,116 12,672 17,447 23,816 32,176 in days of sales 8 days 9 days 52 days 57 days 62 days 45 days 39 days 39 days 39 days 39 days 39 days Current Assets 3,243 2,911 6,638 11,462 13,597 22,861 31,970 44,445 61,188 83,526 112,848 in days of sales 101 days 97 days 145 days 155 days 184 days 137 days 137 days 137 days 137 days 137 days 137 days Accounts Payable -511 -687 -1,149 -1,783 -1,193 -2,699 -4,699 -6,533 -8,994 -12,277 -16,586 in days of sales -16 days -23 days -25 days -24 days -16 days -16 days -20 days -20 days -20 days -20 days -20 days Accrued and Other Current Liabilities -818 -1,097 -1,777 -2,552 -4,120 -6,682 -9,023 -12,544 -17,270 -23,574 -31,850 in days of sales -25 days -37 days -39 days -35 days -56 days -40 days -39 days -39 days -39 days -39 days -39 days Current Liabilities -1,329 -1,784 -2,926 -4,335 -5,313 -9,381 -13,722 -19,077 -26,263 -35,851 -48,436 in days of sales -41 days -60 days -64 days -59 days -72 days -56 days -59 days -59 days -59 days -59 days -59 days Working Capital 1,914 1,127 3,712 7,127 8,284 13,480 18,248 25,368 34,925 47,675 64,412 Change in Working Capital -857 787 -2,585 -3,415 -1,157 -5,196 -4,768 -7,120 -9,557 -12,750 -16,736 Revenue 11,716 10,918 16,675 26,914 26,974 60,922 85,378 118,694 163,408 223,062 301,369 Working capital in days of Revenue 60 days 38 days 81 days 97 days 112 days 81 days 78 days 78 days 78 days 78 days 78 days Working capital in % of Revenue 16.3% 10.3% 22.3% 26.5% 30.7% 22.1% 21.4% 21.4% 21.4% 21.4% 21.4% Source: Nvidia 10-K for the 2018-2023 period, and Author Projections
Appendix D - Key Financial Ratios Key Financial Ratios FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024E FY 2025E FY 2026E FY 2027E FY 2028E Liquidity Ratios Current Ratio (x) 8.0 7.7 6.2 7.5 5.1 5.2 6.8 8.1 9.2 9.9 10.6 Quick Ratio (x) 6.7 7.0 4.8 6.0 3.2 3.8 5.4 6.7 7.8 8.5 9.2 Cash Ratio (x) 5.6 6.1 4.0 4.9 2.5 2.8 4.5 5.8 6.8 7.6 8.3 Efficiency Ratios Total Assets Turnover (x) n/a 0.8 1.0 0.9 0.6 1.5 1.3 1.1 0.9 0.8 0.8 Fixed Asset Turnover (x) n/a 5.3 5.6 2.8 2.6 5.6 7.9 10.9 15.0 20.4 27.4 Days Inventory Outstanding (DIO) 126 days 86 days 106 days 101 days 162 days 116 days 158 days 158 days 158 days 158 days 158 days Days Sales Outstanding (DSO) 44 days 55 days 53 days 63 days 52 days 60 days 55 days 55 days 55 days 55 days 55 days Days Payables Outstanding (DPO) 41 days 60 days 67 days 69 days 37 days 59 days 74 days 74 days 74 days 74 days 74 days Cash Conversion Cycle 130 days 81 days 93 days 95 days 176 days 117 days 139 days 139 days 139 days 139 days 139 days Profitability Ratios Gross Margin (%) 61% 62% 62% 65% 57% 73% 73% 73% 73% 73% 73% EBIT Margin (%) 32% 26% 27% 37% 16% 54% 54% 55% 55% 55% 56% Net Profit Margin (%) 35% 26% 26% 36% 16% 49% 49% 49% 49% 49% 49% ROA (%) n/a 21% 25% 34% 10% 72% 63% 52% 46% 41% 39% ROE (%) n/a 30% 35% 58% 16% 135% 97% 68% 56% 49% 45% ROTE (%) n/a 32% 37% 77% 20% 168% 108% 72% 58% 50% 45% ROCE (%) n/a 62% 93% 68% 23% 132% 137% 158% 176% 189% 200% Solvency Ratios Debt Ratio (%) 19.7% 19.2% 31.2% 30.0% 33.4% 20.3% 12.3% 8.0% 5.5% 3.9% 2.9% Long-term Debt Ratio (%) 19.7% 19.2% 27.7% 30.0% 30.4% 18.4% 11.1% 7.3% 5.1% 3.6% 2.6% Debt to Equity Ratio (%) 28.1% 27.3% 53.1% 49.8% 62.3% 31.1% 16.2% 9.9% 6.6% 4.5% 3.3% Equity Multiplier (x) 1.4 1.4 1.7 1.7 1.9 1.5 1.3 1.2 1.2 1.2 1.1 Source: Nvidia 10-K for the 2018-2023 period, and Author Projections
Appendix E - Free Cash Flow Statement Consolidated Free Cash Flow Statement FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 CAGR CAGR CAGR Hist. Hist. Hist. Hist. Hist. Hist. BP BP BP BP BP FY18-23 FY23-28 FY18-28 Compute & Networking (Data Center - AI) n/a 3,279 6,841 11,046 15,068 47,405 70,065 101,648 144,857 202,924 279,632 n/a 42.6% n/a % growth n/a n/a 108.6% 61.5% 36.4% 214.6% 47.8% 45.1% 42.5% 40.1% 37.8% Graphics (mainly Gaming) n/a 7,639 9,834 15,868 11,906 13,517 15,313 17,045 18,551 20,138 21,737 n/a 10.0% n/a % growth n/a n/a 28.7% 61.4% -25.0% 13.5% 13.3% 11.3% 8.8% 8.6% 7.9% Revenue 11,716 10,918 16,675 26,914 26,974 60,922 85,378 118,694 163,408 223,062 301,369 39.1% 37.7% 38.4% % growth n/a -6.8% 52.7% 61.4% 0.2% 125.9% 40.1% 39.0% 37.7% 36.5% 35.1% Cost of Revenue -4,545 -4,150 -6,279 -9,439 -11,618 -16,621 -23,293 -32,382 -44,582 -60,857 -82,221 29.6% 37.7% 33.6% In % of Revenue -38.8% -38.0% -37.7% -35.1% -43.1% -27.3% -27.3% -27.3% -27.3% -27.3% -27.3% Gross Profit 7,171 6,768 10,396 17,475 15,356 44,301 62,085 86,311 118,826 162,206 219,148 43.9% 37.7% 40.8% In % of Revenue 61.2% 62.0% 62.3% 64.9% 56.9% 72.7% 72.7% 72.7% 72.7% 72.7% 72.7% Research and Development (R&D) -2,376 -2,829 -3,924 -5,268 -7,339 -8,675 -12,157 -16,643 -22,556 -30,304 -40,286 29.6% 35.9% 32.7% In % of Revenue -20.3% -25.9% -23.5% -19.6% -27.2% -14.2% -14.2% -14.0% -13.8% -13.6% -13.4% Sales, General and Administrative -991 -1,093 -1,940 -2,166 -2,440 -2,654 -3,719 -4,912 -6,406 -8,259 -10,501 21.8% 31.7% 26.6% In % of Revenue -8.5% -10.0% -11.6% -8.0% -9.0% -4.4% -4.4% -4.1% -3.9% -3.7% -3.5% Acquisition Termination Cost 0 0 0 0 -1,353 0 0 0 0 0 0 n/a n/a n/a In % of Revenue 0.0% 0.0% 0.0% 0.0% -5.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Income from Operations (EBIT) 3,804 2,846 4,532 10,041 4,224 32,972 46,208 64,756 89,864 123,643 168,361 54.0% 38.6% 46.1% In % of Revenue 32.5% 26.1% 27.2% 37.3% 15.7% 54.1% 54.1% 54.6% 55.0% 55.4% 55.9% Corporate Income Tax 245 -174 -77 -189 187 -4,058 -5,687 -8,633 -11,977 -17,744 -24,156 n/a 42.9% n/a CIT rate -6.4% 6.1% 1.7% 1.9% -4.4% 12.0% 12.0% 13.0% 13.0% 14.0% 14.0% NOPAT 4,049 2,672 4,455 9,852 4,411 28,914 40,521 56,124 77,887 105,899 144,205 48.2% 37.9% 42.9% In % of Revenue 34.6% 24.5% 26.7% 36.6% 16.4% 47.5% 47.5% 47.3% 47.7% 47.5% 47.8% Depreciation & Amortization 262 381 1,098 1,174 1,544 1,495 3,569 4,444 5,405 6,406 7,341 41.7% 37.5% 39.6% In % of Revenue 2.2% 3.5% 6.6% 4.4% 5.7% 2.5% 4.2% 3.7% 3.3% 2.9% 2.4% Capex -600 -489 -1,128 -976 -1,833 -1,087 -3,474 -4,338 -5,296 -6,307 -7,274 12.6% 46.3% 28.3% In % of Revenue -5.1% -4.5% -6.8% -3.6% -6.8% -1.8% -4.1% -3.7% -3.2% -2.8% -2.4% Working Capital 1,914 1,127 3,712 7,127 8,284 13,480 18,248 25,368 34,925 47,675 64,412 47.8% 36.7% 42.1% In % of Revenue 16.3% 10.3% 22.3% 26.5% 30.7% 22.1% 21.4% 21.4% 21.4% 21.4% 21.4% in days of sales 60d 38d 81d 97d 112d 81d 78d 78d 78d 78d 78d Change in Working Capital -857 787 -2,585 -3,415 -1,157 -5,196 -4,768 -7,120 -9,557 -12,750 -16,736 43.4% 26.4% 34.6% Free Cash-Flow 2,854 3,351 1,840 6,635 2,965 24,126 35,848 49,109 68,439 93,248 127,535 53.3% 39.5% 46.2% Source: Nvidia 10-K for the 2018-2023 period, and Author Projections In $m
Appendix F - Forecast Assumptions Consolidated Free Cash Flow Statement Assumptions FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 BP BP BP BP BP Compute & Networking (Data Center - AI) 70,065 101,648 144,857 202,924 279,632 FY24 to FY28: Based on Global AI market future growth rates, increased by 10% (source: Statista) % growth 47.8% 45.1% 42.5% 40.1% 37.8% Graphics (mainly Gaming) 15,313 17,045 18,551 20,138 21,737 FY24 to FY28: Based on Global Video Game market future growth rates, increased by 10% (source: Statista) % growth 13.3% 11.3% 8.8% 8.6% 7.9% Revenue 85,378 118,694 163,408 223,062 301,369 % growth 40.1% 39.0% 37.7% 36.5% 35.1% Cost of Revenue -23,293 -32,382 -44,582 -60,857 -82,221 FY24 to FY28: Based on historical level Gross Margin in FY23 (source: Author) In % of Revenue -27.3% -27.3% -27.3% -27.3% -27.3% Gross Profit 62,085 86,311 118,826 162,206 219,148 In % of Revenue 72.7% 72.7% 72.7% 72.7% 72.7% Research and Development (R&D) -12,157 -16,643 -22,556 -30,304 -40,286 FY24 to FY28: Based on historical R&D level in FY23, adjusted for the gradual decrease in D&A (source: Author) In % of Revenue -14.2% -14.0% -13.8% -13.6% -13.4% Sales, General and Administrative -3,719 -4,912 -6,406 -8,259 -10,501 FY24 to FY28: Based on historical SG&A level in FY23, adjusted for the gradual decrease in D&A (source: Author) In % of Revenue -4.4% -4.1% -3.9% -3.7% -3.5% Acquisition Termination Cost 0 0 0 0 0 Non recurrent cost. No acquisition termination cost forecasted In % of Revenue 0.0% 0.0% 0.0% 0.0% 0.0% Income from Operations (EBIT) 46,208 64,756 89,864 123,643 168,361 In % of Revenue 54.1% 54.6% 55.0% 55.4% 55.9% Corporate Income Tax -5,687 -8,633 -11,977 -17,744 -24,156 FY24 to FY28: Gradual increase to converge to the Federal Statutory Rate of 21% in the Long Term CIT rate 12.0% 13.0% 13.0% 14.0% 14.0% NOPAT 40,521 56,124 77,887 105,899 144,205 In % of Revenue 47.5% 47.3% 47.7% 47.5% 47.8% Depreciation & Amortization 3,569 4,444 5,405 6,406 7,341 FY24 to FY28: Gradual decrease to a normative 2.0% level, with normative D&A = normative Capex (source: Author) In % of Revenue 4.2% 3.7% 3.3% 2.9% 2.4% Capex -3,474 -4,338 -5,296 -6,307 -7,274 FY24 to FY28: FY24 based on historical average from FY21 to FY23, followed by a gradual decrease to a normative 2.0% level (source: Author) In % of Revenue -4.1% -3.7% -3.2% -2.8% -2.4% Working Capital 18,248 25,368 34,925 47,675 64,412 In % of Revenue 21.4% 21.4% 21.4% 21.4% 21.4% in days of sales 78d 78d 78d 78d 78d Change in Working Capital -4,768 -7,120 -9,557 -12,750 -16,736 FY24 to FY28: Working capital level based on historical average level of 78 days from FY18 to FY23 Free Cash-Flow 35,848 49,109 68,439 93,248 127,535 In $m Consolidated Balance Sheet Assumptions In $m January 26, 2025 January 31, 2026 January 31, 2027 January 30, 2028 January 29, 2029 Fixed Assets 10,842 10,884 10,938 11,017 11,147 Increase in line with the projected Capex and D&A. No M&A activity or goodwill impairment assumed Working Capital 18,248 25,368 34,925 47,675 64,412 Based on historical average (from FY18 to FY23) Working Capital level of 78 days Deferred Tax (Net) 7,471 9,374 11,923 15,329 19,853 Balance the accounts in the Balance Sheet Capital Employed 36,561 45,626 57,786 74,021 95,412 Equity 84,658 142,430 222,585 331,582 479,973 No share repurchases or dividends assumed. Earnings are 100% retained. No share issuance assumed Net Financial Debt (+) / Cash (-) -48,097 -96,803 -164,800 -257,561 -384,560 Increase in net cash position in line with the projected increase in FCF. No debt repayment assumed Invested Capital 36,561 45,626 57,786 74,021 95,412
Appendix G - Equity Risk Premium (ERP) Appendix H - Beta Date updated: Created by: What is this data? Data website: Year Earnings Yield Dividend Yield S&P 500 Earnings* Dividends* Dividends + Buybacks Change in Earnings Change in Dividends T.Bill Rate T.Bond Rate Bond-Bill Implied ERP (FCFE) 2023 4.61% 1.46% 4769.83 219.70 69.69 164.25 0.10% 1.98% 5.20% 3.88% -1.32% 4.60% https://pages.stern.nyu.edu/~adamodar/New_Home_Page/data.html 4-Jan-20 Aswath Damodaran, [email protected] Implied Equity Risk Premiums (by year) S&P 500 Comps Betas Information on Peers Levered Beta R² Capital Structure Tax Rate Unlevered Beta Ticker Company Country Index 3 years 3 years Market Cap (E), in $m Net Debt (D), in $m Gearing (D/E) CIT 3 years NasdaqGS:AMD Advanced Micro Devices, Inc. United States S&P 500 1.80 35% 286,689 (2,410) (0.8)% 27.0 % 1.81 NasdaqGS:INTC Intel Corporation United States S&P 500 1.22 33% 174,385 21,265 12.2 % 27.0 % 1.12 NasdaqGS:QCOM QUALCOMM Incorporated United States S&P 500 1.40 42% 190,011 3,112 1.6 % 27.0 % 1.39 NasdaqGS:AVGO Broadcom Inc. United States S&P 500 1.31 43% 611,406 59,343 9.7 % 27.0 % 1.22 NasdaqGS:TXN Texas Instruments Incorporated United States S&P 500 1.00 46% 155,134 2,908 1.9 % 27.0 % 0.98 NasdaqGS:NVDA NVIDIA Corporation United States S&P 500 2.01 47% 2,202,092 (13,740) (0.6)% 27.0 % 2.02 Mean 1.46 41% 603,286 11,746 4.0% 27.0% 1.42 Source: S&P Capital IQ
Appendix I - Cost of Debt Appendix J - Size Premium Nvidia's Cost of Debt In $m FY 2023 EBIT 32,972 Interest Expense 257 Interest Coverage Ratio 128.3 Estimated Bond Rating Aaa/AAA Estimated Default Spread 0.59% Risk Free Rate 4.33% Estimated Cost of Debt 4.92% Source: Damodaran Size Premium - Ibbotson Decile Min (m$) Max (m$) Size Premium 1 31,090 1,061,355 -0.28% 2 13,143 31,090 0.50% 3 6,619 13,143 0.73% 4 4,313 6,619 0.79% 5 2,689 4,313 1.10% 6 1,670 2,689 1.34% 7994 1,670 1.47% 8516 994 1.59% 9230 516 2.22% 10 0230 4.99% Analysis Mid-Cap (3-5) 2,689 13,143 0.80% Low-Cap (6-8) 516 2,689 1.42% Micro-Cap (9-10) 0 516 3.16% Decile -0.28% Source: International study by Roger Ibbotson (published by Duff Phelps in 2020) NVIDIA Corporation
80 LY Last Year M Million n/a Not applicable NAV Net Asset Value NOPAT Net Operating Profit After Tax Norm. Normative OEM Original Equipment Manufacturer P&L Profit & Loss PC Personal Computer PGR Perpetual Growth Rate PSU Performance Stock Unit R&D Research & Development ROA Return on Asset ROE Return on Equity ROTE Return on Tangible Equity ROIC Return on Invested Capital RSU Restricted Stock Unit SG&A Sales, General & Administrative SoC System on Chip Tot. Total TPU Tensor Processing Unit TX Texas VR Virtual Reality WACC Weighted Average Cost of Capital WC Working Capital WSE Wafer Scale Engine YoY Year over Year
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