RPT-BREAKINGVIEWS-Tireless Nvidia growth exhausts even its valuation

By Robert Cyran

NEW YORK, May 28 (Reuters Breakingviews) - Nvidia’s NVDA.O unflagging pace has exhausted even ardent supporters. The chipmaker on Wednesday unveiled yet another quarter of astonishing revenue growth, its $44 billion exceeding the figure from a year earlier by 69%. It would have been even higher if not for the Trump administration’s restrictions on exporting semiconductors to China. And yet the breakneck expansion suffers a relative valuation discount.

Technology titans, including Amazon.com AMZN.O and Alphabet GOOGL.O, have increased their revenue, and been rewarded by investors, for making big investments to build out cloud computing infrastructure to train and run artificial intelligence. The top line in Microsoft’s MSFT.O Azure unit, for example, accelerated 33% last quarter. Along with Meta Platforms META.O, the foursome is on track to spend more than $300 billion on capital expenditure this year alone, or 13 times more than a decade ago. They’ll keep doing so as long as the feedback loop persists.

Much of the spending goes to Nvidia. The company’s quarterly revenue has ballooned six-fold in two years and its net income is up nine times. This trend and the driving force behind it have been remarkably steady, and there’s good reason to suspect benefits will keep accruing to the $3.3 trillion company led by Jensen Huang.

What has changed is the enthusiasm from fund managers. Before the latest results were announced, Nvidia shares were valued at 28 times projected earnings for the next year, according to estimates collected by LSEG, about a third below its five-year average. It’s also rather low for the biggest supplier in the biggest investment boom in history.

There are reasons for skepticism beyond U.S. export controls, which Huang warned would eat away $8 billion of revenue in the second quarter. Insatiable demand has pushed the company’s gross margin to eye-watering levels. They were over 60% in the quarter and would have exceeded 70% without the China restrictions. If technological advances curb AI-model training needs, or they run more efficiently on bespoke chips, sales of Nvidia’s gear could collapse quickly. Rivals also might start to erode its market dominance.

Most of these fears are largely theoretical, however. The reality is that Nvidia is on a tear, its second after capitalizing earlier on video games. Considering some of the wildly speculative valuation multiples that impute irrational growth prospects on other stocks like Tesla TSLA.O, the one on Nvidia simply does not compute.

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CONTEXT NEWS

Nvidia said on May 28 that revenue for its second quarter would be about $45 billion, plus or minus 2%, after factoring in the loss of roughly $8 billion because of U.S. export controls.

For the first quarter ending April 27, the chipmaker reported $44.1 billion of revenue, an increase of 69% from the same period a year earlier, and a 26% gain in net income, to $18.8 billion.

The U.S. government on April 9 told Nvidia it was tightening limits on chip exports to China, which led to a $4.5 billion charge in the quarter to account for excess inventory and purchase obligations.