NVDA Guided Quick Dive
NVDA Guided Quick Dive
NVDA Guided Quick Dive
SEPTEMBER
2023
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Brett Caughran, 2008-2021
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My Career by the Numbers
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I had a solid if not spectacular career with many highs, and many lows
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Brett Caughran, 2008
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Brett Caughran, 2008
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Brett Caughran, 2012
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Fundamental Edge
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The Abilities You Will Need
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The Toolbox You Will Use
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1. Research preparation
2. Analyzing a business model
3. Buy-side model construction
4. Identifying key driver differentiation
5. A multi-faceted valuation framework
6. Return forecasting
7. What moves the stock
8. Your downside case
9. Idea generation
10. Earnings season
11. Short selling
12. Assessing management
13. Catalysts & getting in the flow
14. Wrapping up & thesis development
15. Pitch like a pro
16. Idea monitoring
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The Roadmaps You Can Follow
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Analyst Academy
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• Academy
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NVDA: Disclaimer
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NVDA: Disclaimer
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Risks of Investing:
o Investing in the stock market involves substantial risk and you should only invest money that you can afford to lose. You are
solely responsible for your own investment decisions, and Fundamental Edge and its presenters are not responsible for any
decisions you make regarding investments. Before making any investment decision, consult a financial advisor, tax
professional, or legal counsel to help you understand the risks associated with investing in the stock market. Past
performance is not indicative of future results, and there is no assurance that any investment strategy will be successful
No Guarantee of Accuracy:
o While we have made every attempt to ensure the accuracy and reliability of the information provided in this presentation, the
information is presented "as is," without any guarantee of completeness, accuracy, timeliness, or of the results obtained
from the use of this information.
Third-Party Sources:
o This presentation may include data, research, or insights from third-party sources. Inclusion of such information does not
imply an endorsement from Fundamental Edge, nor does it signify a guarantee of its accuracy.
Confidentiality:
o This presentation may not be recorded, copied, or disseminated without the express written consent of Fundamental Edge
By continuing to watch this presentation, you acknowledge that you understand and agree to these
terms
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Guided Quick Dive
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• If you joined this webinar looking for some genius insight on the stock, I
would encourage you to click off your Zoom now – you won’t find it
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But Particularly…
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• I’m speaking to 0-5 year buy-side analyst who finds him or herself in this
situation…
• It can be terrifying. It doesn’t have to be.
Hey go look at
NVDA and let me
know what you
think?
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NVDA: What I Knew about NVDA Sep 12 th
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• Didn’t know
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“Fill or Kill” with HHT
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NVDA: 12-Hour Quick Dive
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• Cycle times matter! The faster you do good work, the better
• Even solo, the faster you can cycle through ideas, the better
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NVDA: The Analyst Mindset
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1. Be skeptical
• “Is there euphoria baked in?”
• “Is best case already baked into the stock?”
2. Be open minded
• You are seeking truth
• Don’t jump to conclusions - play with bull & bear cas
3. Be data driven
• Marry narrative WITH numbers
• Your view should be grounded in numbers
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Before We Begin: The Messy Reality
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Messy Reality
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“Valuation is a Point of View”
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Expectations Gap Theory
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NVDA: How I Spent 12 Hours
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NVDA: How I Spent 12 Hours
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NVDA: Reading a 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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• Color on markets served and in introduction to key terms like GPU and
CUDA. Commentary on “full-stack” strategy & emphasis away from “just
chips”
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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• Competition: particularly noted the risk of CSP (cloud service providers) like
AWS/GOOGL in-sourcing. Something to understand more.
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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• Revenue recognition
• Ultimately, this is a “yellow tank-top” business model:
• I manufacture yellow tank-tops
• I hope to sell them at full price
• Lots of demand = full price sale, tight inventories, high GMs
• Less demand = discounting, over-inventoried, GM pressure
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NVDA: What I Learned Reading the 10-K
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NVDA: What I Learned Reading the 10-K
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• Class action for misleading statements around GPU crypto mining demand
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NVDA: What I Learned Reading the 10-K
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NVDA: Summary of 10-K Learnings
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NVDA: Reading an Investor Deck
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2. Insights on TAM
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NVDA: What I Learned Reading Investor Deck
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NVDA: What I Learned Reading Investor Deck
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NVDA: What I Learned Reading Investor Deck
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NVDA: What I Learned Reading Investor Deck
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NVDA: What I Learned Reading Investor Deck
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• The vision on AI
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NVDA: What I Learned Reading Investor Deck
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• TAM identification
• $450m identified from Gen AI ($300bn chips, $150bn software)
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NVDA: Summary of Investor Deck Learnings
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NVDA: Reading an Earnings Call Transcript
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3. Color on guidance
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NVDA: What I Learned Reading Earnings Calls
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• Drivers of demand
• CSPs like Amazon, Google, Meta, Microsoft & Oracle having an outsized
impact. Near term, this is a CSP demand story.
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NVDA: What I Learned Reading Earnings Calls
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NVDA: Summary of Earnings Call Learnings
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25.0% $80
22.5% $72
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NVDA: What I Learned Reading Earnings Calls
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• More TAM color. $1tn is a 4-year number ($250bn per year). Piecing that
together with 45% capture rate target implies $112.5bn to NVDA
• (I learned later current capture rate of this $1tn is closer to MSD)
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NVDA: What I Learned Reading Earnings Calls
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NVDA: Summary of Earnings Call Learnings
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NVDA: Reading a Conference Transcript
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• Supply ramp
• Sustainability of demand
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NVDA: What I Learned Reading Conference Tx
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NVDA: What I Learned Reading Conference Tx
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NVDA: What I Learned Reading Conference Tx
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NVDA: What I Learned Reading Conference Tx
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NVDA: What I Learned Reading Conference Tx
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NVDA: Summary of Conference Transcripts
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NVDA: Reading Sell-Side Research
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NVDA: What I Learned Reading Sell-Side Research
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• “Confident in supply”
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NVDA: What I Learned Reading Sell-Side Research
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NVDA: What I Learned Reading Sell-Side Research
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20 Equisights Buy
21 Piper Sandler Companies Buy
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Modeling Process
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• Why do we model?
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A Confession
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• Then cleaned it up
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Model as History Lesson
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$12,000
$10,000
$9,040
$8,000
$6,804
$6,000
$4,408
$3,616 $3,736
$4,000
$2,220
$2,000
$1,124
$648 $793 $759
$496
$199
$0
($99)
($2,000)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
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Observations From the NVDA Model
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• But passes others with flying colors: org rev growth, ROIC & FCF margin
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M2S (“Model to Stock”) Linkage Analysis
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70.0x C2014 C2015 C2016
NVDA NTM P/E
C2017 % growth
Revenue $4,682 $5,010 $6,910 $9,714 107.5%
% yoy 13.3% 7.0% 37.9% 40.6%
Operating Profit $759 $1,124 $2,220 $3,616 376.4%
60.0x % margin 16.2% 22.4% 32.1% 37.2%
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NVDA: Identify the Linkage
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70.0x
C2017 C2018 C2019
NVDA NTM P/E
Revenue $9,714 $11,716 $10,918
% yoy 40.6% 20.6% (6.8%)
Operating Profit $3,616 $4,408 $3,736
60.0x
% margin 37.2% 37.6% 34.2%
peak trough
Avg P/E 43.0x 34.2x 29.5x
50.0x peak trough
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NVDA: Identify the Linkage
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70.0x
C2019 C2020 C2021
NVDA NTM P/E
Revenue $10,918 $16,675 $26,914
% yoy (6.8%) 52.7% 61.4%
Operating Profit $3,736 $6,804 $12,691
60.0x % margin 34.2% 40.8% 47.2%
trough peak
Avg P/E 29.5x 42.3x 48.6x
50.0x trough peak
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NVDA: Identify the Linkage
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36.2x 9/20/16
$26,974
$9,040
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0.2%
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trough
C2022
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48.6x
$26,914
$12,691
61.4%
47.2%
C2021
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peak
peak
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% margin
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Revenue
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% yoy
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NVDA: Find the Linkage
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• It’s clearly a cyclical business and *shouldn’t* trade like this, but
human psychology can’t help itself more often than not
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Secular vs. Cyclical
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o Cyclical trend: A cyclical industry is a type of industry that is sensitive to the business cycle, such that
revenues generally are higher in periods of economic prosperity and expansion and are lower in periods
of economic downturn and contraction.
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Secular vs. Cyclical
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Temporary Tailwind Shorts
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Model SUM Page
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NVDA: How I Spent 12 Hours
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Thesis Development Process
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• Modifying a SOTP lens, I will try to ascribe value to the various pieces of
the company. This is finger in the air. In NVDA’s case, I want to value:
• 1) The non-data center biz, 2) data center / gen AI, and 3) China (just in case)
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• I also want to prepare for any issues around China prohibition concerns.
A complete loss of China would be $65-80 hit to the stock
25.0% $80
22.5% $72
20.0% $64
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Capex Cycle Demand Forecasting
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Capex Cycle Demand Forecasting
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• There is good news & bad news about capital cycles for stock picking
• Good news: a big capital cycle will drive “tremendous” revenue growth
• Bad news: % yoy growth inflections and NOT absolute $ revenue tends
to drive the NEXT move in equities. A rapidly ramping capex cycle can
lead to a relatively short period of elevated % yoy growth, and with
no/minimal recurring elements can lead to an extended “growth
hangover”
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Capex Cycle Demand Forecasting
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Capex Cycle Demand Forecasting
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Capex Cycle Demand Forecasting
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Total Rev
$550 $165 $165 $165 $165
$450 $140 $140 $140 $140
$350 $115 $115 $115 $115
$250 $90 $90 $90 $90
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Capex Cycle Demand Forecasting
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Illustrative Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Baseline Revenue $100 $110 $121 $133 $146 $161 $177 $195 $214 $236 $259
Capital Cycle Revenue $0 $250 $300 $200 $150 $100 $0 $0 $0 $0 $0
Replacement Cycle $0 $0 $0 $0 $0 $0 $0 $0 $250 $300 $200
Total Revenue $100 $360 $421 $333 $296 $261 $177 $195 $464 $536 $459
% yoy 260.0% 16.9% (20.9%) (11.0%) (11.9%) (32.1%) 10.0% 138.3% 15.4% (14.3%)
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Market Implied Earnings Power w/ Reverse P/E
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• “Focus on TAM, earnings, growth & corresponding P/E 5-7 year out”
• “Public investors are not always as imaginative as private investors”
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7-Year Model
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Data Center Revenue $2,932 $2,983 $6,696 $10,613 $15,005 $43,460 $69,536 $93,873 $107,954 $97,159 $82,585 $78,456
Gaming Revenue $6,246 $5,518 $7,759 $12,462 $9,067 $9,493 $10,917 $12,554 $14,438 $16,603 $19,094 $21,958
Professional Visualization Revenue $1,130 $1,212 $1,053 $2,111 $1,544 $1,249 $1,499 $1,799 $2,158 $2,482 $2,855 $3,283
Automotive Revenue $641 $700 $536 $566 $903 $1,557 $1,869 $2,242 $2,691 $3,095 $3,559 $4,093
OEM & Other Revenue $767 $505 $631 $1,162 $455 $324 $372 $428 $492 $566 $651 $748
TOTAL REVENUE $11,716 $10,918 $16,675 $26,914 $26,974 $56,083 $84,192 $110,897 $127,733 $119,905 $108,743 $108,537
% yoy (6.8%) 52.7% 61.4% 0.2% 107.9% 50.1% 31.7% 15.2% (6.1%) (9.3%) (0.2%)
$ yoy ($798) $5,757 $10,239 $60 $29,109 $28,110 $26,704 $16,837 ($7,829) ($11,162) ($206)
Adjusted Gross Profit $7,233 $6,822 $10,948 $17,968 $15,965 $40,793 $62,081 $82,049 $94,506 $88,635 $80,263 $80,109
% margin 61.7% 62.5% 65.7% 66.8% 59.2% 72.7% 73.7% 74.0% 74.0% 73.9% 73.8% 73.8%
bps yoy n.a. 75 317 111 (757) 1,355 100 25 0 (7) (11) (0)
% yoy n.a. (5.7%) 60.5% 64.1% (11.1%) 155.5% 52.2% 32.2% 15.2% (6.2%) (9.4%) (0.2%)
Incremental Margin n.a. 51.5% 71.7% 68.6% n.a. 85.3% 75.7% 74.8% 74.0% 75.0% 75.0% 75.0%
Research & Development ($2,038) ($2,286) ($3,057) ($3,951) ($5,406) ($6,543) ($8,840) ($12,199) ($14,051) ($13,190) ($11,962) ($11,939)
% of sales 17.4% 20.9% 18.3% 14.7% 20.0% 11.7% 10.5% 11.0% 11.0% 11.0% 11.0% 11.0%
bps yoy n.a. 354 (261) (365) 536 (837) (117) 50 0 0 0 0
% yoy n.a. 12.2% 33.7% 29.2% 36.8% 21.0% 35.1% 38.0% 15.2% (6.1%) (9.3%) (0.2%)
Selling, General & Administrative ($787) ($800) ($1,087) ($1,326) ($1,519) ($1,682) ($1,935) ($2,225) ($2,559) ($2,402) ($2,178) ($2,174)
% of sales 6.7% 7.3% 6.5% 4.9% 5.6% 3.0% 2.3% 2.0% 2.0% 2.0% 2.0% 2.0%
bps yoy n.a. 61 (81) (159) 70 (263) (70) (29) (0) 0 0 0
% yoy n.a. 1.7% 35.9% 22.0% 14.6% 10.8% 15.0% 15.0% 15.0% (6.1%) (9.3%) (0.2%)
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7-Year Model
Pg. │ 112
Adjusted Operating Expenses ($2,825) ($3,086) ($4,144) ($5,277) ($6,925) ($8,226) ($10,775) ($14,424) ($16,609) ($15,591) ($14,140) ($14,113)
Adjusted Operating Profit $4,408 $3,736 $6,804 $12,691 $9,040 $32,567 $51,306 $67,626 $77,897 $73,043 $66,123 $65,996
% margin 37.6% 34.2% 40.8% 47.2% 33.5% 58.1% 60.9% 61.0% 61.0% 60.9% 60.8% 60.8%
bps yoy n.a. (341) 658 635 (1,364) 2,456 287 4 0 (7) (11) (0)
% yoy n.a. (15.2%) 82.1% 86.5% (28.8%) 260.3% 57.5% 31.8% 15.2% (6.2%) (9.5%) (0.2%)
Interest Income $267 $200 $200 $200 $200 $200 $200 $200
Interest Expense ($263) ($200) ($200) ($200) ($200) ($200) ($200) ($200)
Other Income ($47) $0 $0 $0 $0 $0 $0 $0
Below the Line ($43) $0 $0 $0 $0 $0 $0 $0
Pre-Tax Income $8,997 $32,567 $51,306 $67,626 $77,897 $73,043 $66,123 $65,996
Tax Expense ($1,260) ($4,559) ($7,183) ($9,468) ($10,906) ($10,226) ($9,257) ($9,239)
% rate 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0% 14.0%
ADJUSTED NET INCOME $7,737 $28,008 $44,123 $58,158 $66,991 $62,817 $56,866 $56,756
Diluted Shares 2,497 2,471 2,509 2,536 2,507 2,507 2,507 2,507 2,507 2,507 2,507 2,507
% yoy n.a. (1.0%) 1.5% 1.1% (1.1%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
YOY change (26) 38 27 (29) 0 0 0 0 0 0 0
DILUTED EPS $3.09 $11.17 $17.60 $23.20 $26.72 $25.05 $22.68 $22.64
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7-Year Model
Pg. │ 113
Pg. │ 114
Pg. │ 115
ramp, there still seems to be Gross Profit $58,800 $60,638 $62,475 $64,313 $66,150 $67,988
% margin 73.5% 73.5% 73.5% 73.5% 73.5% 73.5%
potential for material upside
Operating Expenses ($10,000) ($10,000) ($10,000) ($10,000) ($10,000) ($10,000)
to both revenue & EPS
Operating Profit $48,800 $50,638 $52,475 $54,313 $56,150 $57,988
numbers % margin 61.0% 61.4% 61.7% 62.1% 62.4% 62.7%
• In the more aggressive Pre-Tax Income $48,900 $50,738 $52,575 $54,413 $56,250 $58,088
scenarios, on a P/E basis, Tax Expense ($7,091) ($7,864) ($7,098) ($7,346) ($7,594) ($7,842)
NVDA looks “cheap” at low % rate 14.5% 15.5% 13.5% 13.5% 13.5% 13.5%
20x P/E Net Income $41,810 $42,873 $45,477 $47,067 $48,656 $50,246
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“Monkey Math” Revision Potential
Pg. │ 116
│116
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“Monkey Math” Revision Potential
Pg. │ 117
Q3 EPS PT
Consensus $3.31
Pg. │ 118
• Stock set-up
• Key driver & narrative identification
• Bull vs. Bear tension
• Probability tree
• Risk/reward
• Revision & earnings
• Catalyst path & trading plan
• Key debates with initial take
• Fill or kill, with next steps proposed
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NVDA: Set-Up
Pg. │ 119
│119
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NVDA: Set-Up
Pg. │ 120
│120
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Pg. │ 121
│121
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7/3/23
4/3/23
1/3/23
10/3/22
7/3/22
4/3/22
1/3/22
10/3/21
7/3/21
4/3/21
1/3/21
10/3/20
7/3/20
4/3/20
1/3/20
10/3/19
7/3/19
NVDA Stock Price
4/3/19
1/3/19
10/3/18
7/3/18
4/3/18
1/3/18
10/3/17
7/3/17
4/3/17
1/3/17
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1/3/16
10/3/15
7/3/15
4/3/15
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10/3/14
7/3/14
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1/3/14
$80
$60
$40
$20
$0
$520
$500
$480
$460
$440
$420
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Pg. │ 122
│122
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6/20/23
3/20/23
12/20/22
9/20/22
6/20/22
3/20/22
12/20/21
9/20/21
6/20/21
3/20/21
12/20/20
9/20/20
6/20/20
3/20/20
12/20/19
9/20/19
6/20/19
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NVDA NTM P/E
12/20/18
9/20/18
6/20/18
3/20/18
12/20/17
9/20/17
6/20/17
3/20/17
NVDA: NTM P/E Valuation
12/20/16
9/20/16
6/20/16
• []
12/20/13
9/20/13
70.0x
50.0x
40.0x
30.0x
20.0x
60.0x
10.0x
ETIK to KD
Pg. │ 123
Differentiation
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Key Driver & Narrative Identification
Pg. │ 124
• Demand sustainability
• CSPs, training build
• Supply ramp
• Inventory over-build
• Geopolitical & AI regulatory risks
│124
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Bull / Bear Tension
Pg. │ 125
• Bull Case
• Selling picks & shovels in a gold rush
• “iPhone moment”
• Appears “cheap” at 30x P/E, 20x next year
• Impenetrable ecosystem
• Mgmt says very strong visibility into next year – leads to beats & upward
revisions
• Bear Case
• Are we seeing a sugar rush of foundational model training demand from CSPs
that has a short burn dynamic?
• Bad business - violent cyclical, inevitable that shortage will lead to glut
• Stock is probably already discounting a strong case Gen AI ramp ($350bn)
• Actually, quite expense on true normalized earnings
• Some shots on goal for risk case: CSP in-sourcing, China/Taiwan, AI regulation
│125
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Risk / Reward
Pg. │ 126
Pg. │ 127
│127
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NVDA: Shape of Returns
Pg. │ 128
Pg. │ 129
Pg. │ 130
• If we take mgmt.'s word for their order book and they can ramp supply,
we are staring down more quarters of 5-10%+ revenue beats and even
bigger EPS beats
• On the higher range of beats, the stock looks pretty cheap on Calendar
2024 EPS (low 20x P/E)
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Summary Thoughts
Pg. │ 131
│131
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Summary Thoughts
Pg. │ 132
│132
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NVDA: How I Would Spend the Next 30 Hours
Pg. │ 133
Pg. │ 134
• Academy
│134
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Academy Logistics
Pg. │ 135
• Hybrid approach
│135
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How to Sign Up
Pg. │ 136
• www.fundamentedge.com
│136
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FE Academy Curriculum
Pg. │ 137
│137
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Academy Template Library
Pg. │ 138
│138
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Life of a Buy-Side Analyst
Pg. │ 139
• Reminder: the business model only works with 5%+ idea level expected
alpha generation
│139
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A Typical Buy-Side Investment Process
Pg. │ 140
1. Initial analysis & opportunity assessment: to understand what is baked into the stock and
whether there is an opportunity to generate a differential view (“the alpha load”)
2. Business analysis & model constriction: to understand the business deeply, using a bespoke
financial model to understand how the business operates financially, then use the model as
a backbone to value the stock and assess business momentum & potential earnings
revisions.
3. Key driver assessment & deep dive process: to understand the 3 key drivers, then executing
a deep-dive research process to identify areas of differentiation on those key drivers.
4. Case construction & risk/reward assessment: work to understand what is baked into the
stock, then develop my own bull/base/bear cases and determine how attractive the
risk/reward is on the stock
5. Thesis development & communication: layer in qualitative & quantitative work into a
structured thesis to pitch up to my PM (or LP)
6. Idea monitoring & catalyst assessment: develop an ongoing research plan relating to
catalysts & earnings, then monitor ongoing newsflow to assess whether the idea is on track
with my initial thesis.
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In Summary
Pg. │ 141
│141
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Process & Judgment
Pg. │ 142
o Process is more linear and scientific. Process tools can easily be taught.
o Judgment is trickier. Some frameworks may help, but experience is key.
│142
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The Ecology of the Buy-Side
Pg. │ 143
• Common question I get: “Brett, is the Academy only for pod analysts?”
• I’m not here to teach you a style of investing. Depending on your seat, your emphasis will shift
• Long only:
• Understanding the business & industry deeply with a long-term lens
• Underwriting management to steer the ship
• Focusing on long term growth in FCF/share – quality & duration of growth is key
• Multi-manager
• Catalyst driven investing – goal is to generate steady, consistent P&L generation
• Earnings cycle is key
• Alpha isolation process with flexibility around idea expression
Pg. │ 144
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Q&A
Pg. │ 145
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CONTACT INFORMATION
| 146
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