Dampened by factors such as graphics card destocking, cryptocurrency collapse, and rising policy interest rates, Nvidia’s share price has fallen by 47% YTD, underperforming the PHLX Semiconductor Index (SOX) (down 30% YTD). At the current point in time, we reckon that the most pessimistic moment of market expectations is passing: 1) High-frequency data show that the retail price of Nvidia’s graphics cards, or graphics processing units (GPU), has stopped falling and stabilized since Oct. Based on the performance during the downcycle in 2018/2019 as well as the Company’s aggressive destocking at present, we judge that GPU inventories across channels are likely to return to normal around 4Q22. In the medium term, we expect the Nvidia’s game revenue to maintain a 15% CAGR. 2) North American cloud computing giants have a better outlook for their 2023E capex than market expectations, and artificial intelligence (AI) will continue to be a key area of investment. In the meantime, Nvidia has officially confirmed that it has launched an A800 GPU product to the Chinese market, and the single-card computing power parameters are close to that of A100, which is likely to significantly narrow the losses caused by the US export ban. We expect Nvidia’s data center business revenue to post a 30% CAGR in the medium term. 3) The autonomous driving and software businesses are making larger revenue contributions and may also contribute positively to Nvidia’s future growth, competitive position and valuation rationale in the longer run. As a platform-based manufacturer in the global AI field, Nvidia enjoys desirable industry growth prospects and boasts comprehensive competitiveness backed by its product portfolios, software ecosystem and rapid technology iteration. We remain optimistic about the Company’s medium- and long-term earnings visibility and growth prospects.Why the report: Nvidia’s stock price has fallen by more than 45% YTD, and the market is concerned about: 1) When Nvidia’s game graphics card destocking will end; 2) How much the impact of the cryptocurrency collapse will affect Nvidia; 3) At what level the growth rate of the data center market size can be maintained next year and the impact of the US export ban on Nvidia’s earnings. This is what this report focuses on.Graphics card business: Short-term risks are controllable, and the medium-/long-term uptrend is obvious. 1) We believe that destocking may end in FY4Q23. Through tracking high-frequency data, we found that the revenue of Taiwan’s reference graphics card manufacturers (ASRock, Gigabyte, MSI) and Nvidia’s gaming graphics card business revenue are very correlated. We found that: ① The monthly sales of three printed circuit board (PCB) manufacturers in Taiwan continued to improve upward MoM; ② The retail price of the Nvidia 30 series graphics card on eBay also stabilized and rebounded in Oct. At the same time, the Company revealed at its FY3Q23 earnings call that it expected the destocking of game graphics card business to return to normal levels in FY4Q23. In summary, based on sales data and earnings guidance, we believe that the most difficult time for the graphics card business to destock has passed. 2) The impact of cryptocurrency is relatively controllable: Based on the annual average computing power of the entire ETH network in 2021/2022 and the Company’s product parameters and retail prices, we expect that the ETH merger will likely lead to a final number of about 4mn-5mn graphics cards flow to the secondary market, and the impact on the inventories across channels is likely to be within one month, which is relatively controllable. 3) The new product RTX40 series presents outstanding performance. Nvidia’s new generation of 40 series high-end graphics cards has been launched, and the product parameters have been greatly improved in AI, deep learning super sampling (DLSS), etc. The products have been basically sold out in the US, showing the acceptance of downstream consumers to a certain extent. 4) Medium- and long-term growth analysis: We believe that with the further increase of the Company’s product performance and the growth of the number of high-end gamers in the world, the Company’s high-end product shipment and average selling price (ASP) will likely see improvement in the future. We estimate that the CAGR of the Company’s game graphics card business is likely to remain at around 15%. Data center: Performance in 2023 may be better than market expectations. 1) We expect the Company’s data center business to grow by about 25%-30% in FY2024. From the perspective of downstream demand, North American cloud vendors continue to maintain a large capex, and we expect a growth rate of about 10% in 2023. Considering the increase in the proportion of AI itself, we expect that the corresponding graphics processing unit (GPU) growth rate of Nvidia will remain between 25%-30%. From the perspective of product cycle, the Company’s newly released H100 began to ship in Oct 22, and the performance and parameters have been greatly improved compared with those of A100. Considering the demand for downstream replacement driven by the new product cycle, its data center business is likely to be further propped up. 2) The high-end GPU ban has limited impact: On Aug 31, Nvidia announced that it was banned by the US government from exporting high-end GPU chip products (mainly including A100, H100, DGX and future chips with same performance) to China & Russia. However, benefiting from the increase in shipments of other alternative products, the impact was relatively limited on the business revenue in China in FY3Q23. At the same time, in early Nov 2022, the Company released a new product A800, mainly for the Chinese market. Considering the replacement of other products and the launch of the new product A800, we believe that the impact of this restriction on the overall performance of the Company’s data center business in the next one year or two is relatively limited. Emerging business: Smart car and software are gradually entered the harvest period. 1) Smart car business: from scale to revenue since 2H22. At the 2022 GTC, the Company revealed that the automotive business had backlog orders of US$11bn (+37% YoY). In the future, the increase in the penetration rate of high-level smart cars is likely to drive the increase in autonomous driving chip shipments. We are optimistic about the its medium- and long-term presence in the field of autonomous driving chips. The above orders are likely to be converted into revenue since 2H22. 2) Software business: Promote the Company’s migration from product to platform. At present, Nvidia’s product mix in the software field covers from the lowest level of drivers, to the top layer of industry applications, algorithm libraries, etc. In the future, with the commercialization of software such as Omniverse and AI Enterprise, the Company is likely to become a platform company. Potential risks: Impeded free circulation of products in the global market due to the intensified international trade frictions; less-than-expected demand from the corporate and individual users due to the macroeconomic downturn; brain drain; slower-than-expected progress of key technologies; intensified market competition, coupled with better-than-expected progress of cloud computing giants’ self-developed chips; disappointing progress of autonomous driving, software and other new business. Investment recommendation: We believe that the graphics card destocking is approaching to an end, while the launch of new products will likely bring about a rapid recovery in the game business. The data center market in 2023 may largely outperform the current market pessimistic expectations, and the contribution of autonomous driving and software business to the Company’s earnings are also beginning to emerge. Considering that the Company’s gross profit margin (GPM) was lower than the market expectations in FY3Q23 and R&D expenses rose sharply, and the FY4Q23 earnings guidance was lower than expectations, we adjusted the Company’s FY2023E/24E/25E revenue forecast to US$27.0bn/31.9bn/37.9bn (from original forecast of US$27.9bn/34.3bn/41.0bn, respectively), and non-GAAP net profit forecast to US$8.3bn/11.0bn/14.4bn (from original forecast of US$10.4bn/13.5bn/16.5bn), corresponding to 48x/36x/28x non-GAAP PE at the current price, and we continue to be optimistic about the Company’s short-term, medium-to-long-term allocation value.【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。
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