Equity Research
Rating: BUY | 12-M Price Target: $330 | Upside: +44% | Current Price: $230
Rating and Price Target
Buy rating with a price target of $330. NVIDIA is the company that provides most of the compute that powers AI. Revenues are continuing to grow at a rapid pace. We think that there will be continued spend on AI for many years. With blackwell in ramp and vera rubin beginning to ship. There is a question of if they can continue to grow revenue and margins well above average for a semi company. Downside catalysts to watch. Customers reducing spend, concentration of customers, hyperscalers building out custom silicon, export controls to china and AMD competition.
Akrabi Group View: Risk/reward favorable. Data center will be the largest contributor to EPS. We assume AI will continue to expand beyond just training models to inferencing.
Company Overview:
NVIDIA began as a video game gpu company. They now offer complete AI "Factories". These consist of GPUs (AI Chips), CPU's, Network and Software. Data center is their main focus. In Q2 FY2027 data center was responsible for $89.0 Billion of the $96.2 billion reported by NVIDIA. They call the rest Edge computing. This consists of gaming, workstations, vehicles and robotics.
NVIDIA has an advantage because all of their products integrate together. They offer network solutions with NVLink and Infiniband to tie all these chips together. And have software CUDA that developers have become accustomed to using. It is harder for competitors to replicate the entire system and surrounding products.
Akrabi Group View: Bullish with high conviction. Transitioning from selling chips to selling full systems increases switching costs and allows for higher pricing. Assumption is customers continue to prefer this.
Recent Financial Performance
Numbers are reported unless otherwise stated.
First Quarter 2027 Fiscal Year ending in April of 2026 had revenues of 81.6 Billion up 85% YoY. Gross Margin of 74.9%. Data center was 75.2B.
Second Quarter 2027 Fiscal Year ending in July of 2026 had revenues of 96.2 Billion up 106% YoY. Gross Margin of 75.0%. Operating Margin of 66.2%. Net Income of 59.7B. EPS of $2.46 GAAP and $2.22 Non-GAAP.
They have guided for Third Quarter 2027 to be at 108B +/- 2%. Gross margin will be guided to be 74.0%.
NVIDIA came in above their guided number for Q2 of 91B by around 5B. Their Opex increased 55% YoY which is good since revenue grew at a higher rate than their opex. Keep in mind they had some investment gains that helped inflate there net income. So look at operating income for a more fair picture.
One thing to note is their balance sheet has grown significantly. As of Q2 FY 2027 they have receivable's of 63.1B and inventory of 31.6B. Supply agreements have also increased to 279B from 119B last quarter.
These numbers below are our projected numbers from Akrabi Group. Not guidance from the company. We believe they will have revenues of around 385B for FY 2027. 455B for FY 2028 and 525B for FY 2029. With a slow decline in gross margins to the low 73%s.
Our View: That there will continue to be a need for there product and this won't be a one time surge in buying. Our stance is bullish based off companies public information. We do believe gross margin will decrease over time but this is a lower confidence number.
Growth Drivers and Strategic Bets
Spending by MSFT, AMZN, GOOGL, META and ORCL on AI data centers will be the primary driver. Product cycle from Hopper to Blackwell to Rubin is also a key driver. Customers are always looking for better perf/watt so there is always going to be demand for these chips.
We believe inference will be the next large opportunity. There is only one training run but there will be many runs for inference when using AI applications. This could lead to recurring revenue. Networking should grow as well. We expect networking to be $14.8B in Q1 of FY2027 +199% (as reported). We think enterprise, sovereign AI and robotics/self driving will play a bigger role in the next 3-5 year time frame.
Competitors are AMD, INTC, AVGO, MRVL. These companies build out ASICs for other companies. GOOGL, AMZN, MSFT, META are building out there own ASICs. Chinese competitors are another competitor. NVIDIA is currently leaving China out of its estimates.
Our view: Cloud spend and the Rubin ramp are our #1 and #2 catalyst over the next 12-24 months. Positive view on the stock. We see Enterprise/Physical AI as more of a tail risk and have less conviction here.
Capital Allocation and Balance Sheet
Since NVIDIA outsources their manufacturing they don't have to spend much on facilities. In the first half of FY2027 they generated $69.9B in Free Cash Flow (as reported). R&D was $7.1B for Q2 FY2027. They returned approximately $26B to shareholders via buybacks/dividends last quarter. They have approximately $99B remaining in share repurchase. Dividend is $0.25/share.
They currently have about $56.6B in cash/debt securities vs $33.4B in debt (as reported). So they are net cash.
We believe their fabless model is a pro. Supply chain commitment of $279B is a con if there is a dip in demand. Neutral/Positive.
Competitive Position
Its operating margin of 66.2% is high compared to other semiconductor and mega cap tech companies. Currently trading at a forward multiple of 25x (double check market data). Closest comparison to custom chips would be Broadcom and Marvell. Some of its largest customers can be seen as competitors i.e. Microsoft, Alphabet, Amazon, Meta. Private Companies such as OpenAI and Anthropic don't have public info on finances but are key purchasers of compute.
Our View: NVIDIA should command a premium to the average semiconductor company due to high margins and market dominance. It may be hard to argue it should trade at a premium to mega cap tech since it has customer concentration. We would view this stock positively.