Only 10 days left, Chips ‘n’ AI star Nvidia (NASDAQ:NVDA) is expected to release its latest financial results. Analysts are overjoyed by the news Nvidia could announce, predicting up to five-fold growth in quarterly earnings, from $0.58 per share a year ago to $3.16 per share today. And yet one analyst in particular broke away from the crowd and published a thought piece that is less concerned with the dollars and cents that Nvidia will release later this month for the third quarter of 2024 and more with the question of how Nvidia can do more with it Making money could be the future.
Wells Fargo’s Aaron Rakers, a 5-star analyst ranked in the top 1% of Wall Street equity professionals, titles his report with the acronym-laden title “NVDA: DGX Cloud + AI Enterprise (Software) Monetization = $30/Sh+ Value.” Creation Ahead?” , pondered Nvidia’s ability to monetize its software to fuel the “next phase” of its growth story. And in particular, he wondered aloud whether Nvidia might be able to build a pure-play software business in the next few years that could generate $4 billion to $5 billion in annual revenue and thereby generate $2 billion to $3 billion in operating profit.
If he’s right in his predictions, that would mean a 50% to 60% operating profit margin from this new business segment – both on top of and well beyond the already robust 33% that Nvidia generates from computer chip sales.
As Raker notes, software is a relatively new business for chipmaker Nvidia, and this “next phase” in the company’s growth story is currently in “very early stages” – but he expects the potential to be “increasingly visible” and becomes visible in a very short time.
As the title of the report suggests, Raker assumes that the new software will be (1) AI enterprise software as well as software for operating cloud-based AI supercomputing services, (2) Omniverse enterprise software (i.e. virtual reality), and also (3) will include. NVIDIA DRIVE software for electric and autonomous vehicles, particularly Mercedes-Benz and Jaguar Land Rover electric vehicles. According to Raker, the tipping point at which these three revenue streams become visible (and material) to investors could come as early as 2025. But as early as 2023, we could see software revenues exceed the impressive $1 billion and grow rapidly thereafter.
Investors will likely get a glimpse of this development when Nvidia announces its third-quarter results and guidance for the remainder of fiscal 2024 on November 21. When the “$1 billion” number pops up while Nvidia shifts the discussion to software, that’s a pretty big indication that Raker is on to something here.
It’s worth noting that Raker bases this recommendation on estimates of future Nvidia earnings that are actually conservative compared to Wall Street consensus estimates – 3% below estimates for fiscal 2024 earnings (at $10.95 per share) and 20% below estimates for fiscal 2025 earnings ($17.50 per share). If he’s broadly right about these numbers, but misunderstood about the contribution that software sales will make to Nvidia’s profits, then it will turn out that everyone else on Wall Street is, in fact, completely wrong .
Meanwhile, Raker rates Nvidia stock as Overweight (i.e. Buy) with a price target of $600, implying a 24% upside from current levels. (See Raker’s track record)
Almost no one disagrees with this view of Wall Street. The stock’s Strong Buy consensus rating is based on 37 Buys and a single Hold. The forecast assumes a one-year gain of ~34% assuming the average target is $645.65. (See NVDA stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is for informational purposes only. It is very important to do your own analysis before investing.
Originally posted 2023-11-11 19:16:23.