Just 10 days from now chips ‘n’ AI star Nvidia (NASDAQ:NVDA) is scheduled to report its latest batch of financial results. Analysts are gushing over the news Nvidia may report, expecting as much as 5x growth in quarterly earnings, from $0.58 a share a year ago to $3.16 a share today. And yet, one analyst in particular diverged from the pack to release a think piece less obsessed with the dollars and cents Nvidia will report for its Q3 2024 later this month and more concerned with how Nvidia could make even more money in the future.
Wells Fargo’s Aaron Rakers, a 5-star analyst, rated his report as acronym-heavy “NVDA: DGX Cloud + AI Enterprise (Software) Monetization = $30/Sh+ Value Creation Ahead?” , mused about Nvidia’s ability to monetize its software to drive the “next phase” of its growth story. And specifically, he wondered aloud whether, over the next few years, Nvidia might be able to build a software-only business that could generate $4-5 billion in annual revenue — and earn $2-3 billion in operating profit from it.
If he’s right in his predictions, this would mean anywhere from 50% to 60% operating profit margins from this new business segment—both on top of and far better than the already robust 33% operating margin Nvidia gets from selling computer chips.
As Raker notes, software is a relatively new business for chipmaker Nvidia, and this “next phase” of the company’s growth story is currently “in very early innings” — but he expects the potential to become “increasingly visible” and in a very short time . .
As the report’s title suggests, Raker believes the new software will include (1) AI Enterprise Software as well as software to run cloud-based AI supercomputing services, (2) Omniverse Enterprise software (ie virtual reality) and also (3) NVIDIA DRIVE software used in electric and autonomous vehicles, especially electric cars from Mercedes-Benz and Jaguar Land Rover. According to Raker, the inflection point where these three revenue streams become visible (and tangible) to investors could arrive as early as 2025. But as early as 2023, we could see software revenue top a pretty substantial $1 billion, and scale rapidly thereafter.
Investors will likely gain insight into this development when Nvidia reports its Q3 earnings on Nov. 21, along with guidance for the remainder of fiscal 2024. If the “$1 billion” figure pops up when Nvidia turns the discussion to software, would be a pretty big clue that Raker is onto something here.
It’s worth pointing out that Raker is basing this recommendation on estimates of future Nvidia earnings that are actually conservative relative to Wall Street consensus estimates — 3% below fiscal 2024 earnings estimates (at $10.95 per share) and 20% below fiscal 2025 earnings estimates ($17.50 per share). If he’s generally right about these numbers, but wrong about the contribution that software sales will make to Nvidia’s profits — then everyone else on Wall Street will be found to look very wrong.
Meanwhile, Raker rates Nvidia stock an Overweight (ie, Buy) with a price target of $600, implying a 24% upside from current levels. (See Raker’s track record)
Almost no one argues with that view on Wall Street. The stock’s Strong Buy consensus rating is based on 37 Buys and a single Hold. The forecast calls for a one-year gain of ~34%, considering the average target is $645.65. (See NVDA share forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.