Spock Looks at NVIDIA (NVDA)

A logical view of the business model, the accounting, and the past

Perhaps no company better embodies the hype and excitement surrounding the artificial intelligence (AI) wave than chipmaker NVIDIA (NVDA). Originally known for its graphics chips that enabled a new wave of video game realism, its GPU-based networking solutions are now used by data centers to power the type of computing architecture necessary to deploy AI applications. The company has seen its stock price explode in tandem with the market’s excitement for the future of AI. As Herb Greenberg noted in his recent piece The Humanoid Factor, NVDA comprises almost 9% of the value of the Global X Robotics & Artificial Intelligence ETF (BOTZ). The company has been quick to promote its role in the future of AI deployment, with its leather-clad CEO sharing the stage with a cohort of humanoid robots at its latest annual meeting.

We are NOT going to comment on the market for AI-based technology or try to predict the sales growth that could come from data centers adding more NVDA technology. Nor are we going to predict the company is a screaming short idea that is about to implode. However, when this much hype drives a mature stock up this quickly, we believe it is time for investors to take a deep breath and carefully examine the business model and the accounting to understand what is driving EPS growth as well as what has derailed it in the past. This is important because while NVDA is not going to disappear, several times it has seen up to 90% of its market value vanish in a very short time after years of huge returns gave way to reality. And in most cases, the new period of reality lasted for several years.

Also, for some managers, this may be a stock they cannot afford to be out of completely, but there are times to consider lightening the position or using some options to hedge some of the exposure.

In this report, we will assess the quality of the company’s accounting as well as examine some of the risks associated with its operational business model. We will explore some of the company’s past blowups to see how these risks accelerated the downturn as well as identify some signs in the numbers that were giving investors an early warning of the coming profit declines.  

Now, let’s get Behind the Numbers…