Nvidia Well Positioned to Benefit From ChatGPT and Other AI Technologies

Nvidia Stock at a Glance

• Current Morningstar Fair Value Estimate: $200
• Nvidia Stock Star Rating: 3 stars
• Economic Moat Rating: Wide
• Moat Trend Rating: Positive

Nvidia Earnings Update

Wide-moat Nvidia (NVDA) reported fiscal 2023 fourth-quarter sales consistent with management’s guidance, with gaming slightly ahead of our expectations and data center a bit weaker. We foresee healthy growth for the data center segment, thanks to the firm’s newest H100 data center graphics processing unit. The H100 is 9 times faster than its predecessor in artificial intelligence training and up to 30 times faster in AI inferencing for transformer-based large language models like Open AI’s ChatGPT (generative pretrained transformer). We believe AI models like ChatGPT use thousands of GPUs to be trained, with competition among Microsoft, Google, and others supporting our forecast for Nvidia’s data center segment to grow at a 19% CAGR over the next five years.

Meaningful Growth for Nvidia Seen from AI

Despite our positive outlook, we maintain our $200 fair value estimate, as we think our estimates already incorporate meaningful growth driven by the proliferation of AI. The shares are up 45% year to date and 85% since mid-October lows, as we believe the market has already rewarded Nvidia for its exposure to the likes of ChatGPT.

Fourth-quarter sales declined 21% year over year and grew 2% sequentially to $6.1 billion. Gaming sales fell 46% year over year to $1.8 billion as the firm navigated the crash in cryptocurrency mining demand and elevated channel inventories. Although management said the channel inventory correction for gaming GPUs is largely in the rearview mirror, we don’t see quarterly gaming GPU sales reverting to the normalized level of $2.5 billion (per management) for at least a few more quarters, if not longer. Data center sales grew 11% year over year to $3.6 billion but fell 6% sequentially due to a slight pause in cloud spending and weaker sales in China. Gross margin rose nearly 10 percentage points sequentially to 63.3% due to a lack of inventory write-offs.

Fiscal 2023 sales were relatively flat year over year at $27 billion, with strength in data center offset by lower gaming sales.