Nvidia’s rise over the past few years has been nothing if not meteoric. The multinational technology company was placed 50th in the list of US businesses in 2020, but, today, sits just one place behind Warren Buffett’s Berkshire Hathaway as the seventh largest company in the United States.
If that’s not astonishing enough, Nvidia (NVDA) also recently surpassed Meta (FB) in the ranks of America’s most valuable companies, as Facebook suffered the biggest single-day loss of equity in stock market history.
But what caused this monumental switch in fortunes – and what does it tell us about the prospects for the two companies further down the line?
Nvidia Can’t Stop Making Money
NVDA’s latest financial results dropped in February, with the company reporting record revenue in some of its most important segments. The firm announced its highest ever overall quarterly sales of $7.64 billion, while its fiscal full-year revenues also came in at a record $26.91 billion.
These numbers were up 53% and 61% respectively year-on-year, demonstrating what research analysts Rosenblatt Securities claimed to be “sustained accelerated broad based demand” for the company’s products.
What should be especially pleasing for investors is the growth in Nvidia’s data center segment, which, again having witnessed record growth, is now one of the firm’s biggest cash generating enterprises. Its Q4 revenues of $3.26 billion were up 71% year-on-year and 11% sequentially, with fiscal-year revenue growing 58% to a never-before-seen $10.61 billion.
The division has grown from an almost insignificant afterthought to one that’s coming close to rivaling its gaming segment in respect of revenue magnitude.
Much of this growth was helped along by strong demand for NVIDIA AI products, such as its flagship A100 Tensor Core GPU and the Triton Inference Server Software.
Indeed, inference-related revenue more than tripled year-on-year because of widespread adoption of the Triton brand, while public cloud revenue doubled as more and more data centers used its HGX-1 Hyperscale GPU.
And it wasn’t just the data center business that delivered in the fourth quarter period either. Nvidia’s gaming sector revenue grew 37% to another record $3.42 billion in sales. Desktop and laptop revenue were spurred by demand for the GeForce RTX 30-Series GPUs, with the NVIDIA RTC ecosystem also expanding to add 30+ more games and apps in the fourth quarter.
Source: Unsplash
Facebook’s Woes
It has to be said that, while Nvidia’s performance of late has been amazing, one of the main reasons why the chip manufacturer overtook Facebook in the valuation stakes was due to the latter’s present and ongoing difficulties.
For instance, Meta’s earnings bombshell at the beginning of last month led to a precipitous 27% one day loss, with the company continuing to fall ever since. In fact, the firm currently trades at less than 50% of its previous 12-month high, with a market capitalization of just $536 billion. News that Facebook’s Daily Active Users (DAUs) had fallen for the first time in its 18-year history was severely punished by shareholders, who seemingly exited the stock in droves.
What’s of interest is whether the reaction from investors was entirely merited. Yes, Meta missed its fourth quarter EPS target by $0.16 to come in at $3.67, but the business exceeded its revenue prediction by $230 million, hitting $33.67 billion for an increase of 20% year-on-year.
Indeed, much of what FB reported during Q4 was actually pretty good, with the company’s founder and CEO, Mark Zuckerberg, describing the period as “a solid quarter” – and it’s easy to see why. Ad impressions across Meta’s Family of Apps increased 13%, while the average price per ad increased by 6% for the quarter and 24% for the year as well.
And despite the shock that DAUs were down for the full year 2021, they were actually up 5% for December, at 1.93 billion. Daily active people (DAP) also grew 8% year-on-year to 2.82 billion, as did monthly active people (MAP), which increased 9% to 3.59 billion.
Will Nvidia Stay Out In Front?
It’s obviously important to consider whether the relative valuation of the two companies remains stable over time, or if it’s more likely Nvidia pulls away from Meta, or, alternatively, FB closes the gap.
The problem here for Facebook is that the company faces some fairly strong headwinds in the near future. For instance, on the impressions front, Meta expects difficulties in maintaining customer attention, especially on its higher paying video surfaces like Feed and Stories, which monetize at higher rates than other options such as Reels.
Furthermore, pricing is also likely going to be negatively affected by macroeconomic trends – i.e. supply chain disruption and cost inflation – which will dampen advertiser budgets and lead to lower revenue levels. In addition, Apple’s iOS changes were not yet in full force during the fourth quarter, but are anticipated to have a deleterious effect when they do eventually come online.
Capital expenditures are also expected to be significantly higher for Meta in 2020, with management guiding a figure in the range of $29-34 billion, in comparison with the $19.24 billion it incurred in 2021. The $20 billion share repurchase scheme that FB initiated in the quarter – which was expected to lift investor sentiment and raise its stock value – was seemingly wasted given the subsequent share price fall after earnings were released.
Not only that, but the money spent on the buybacks could have gone towards more productive endeavors, like investing in the Metaverse concept which the company is hoping will save its skin in the coming years. All in all, the $20 billion appears to have been squandered with little in the way of upside.
Conversely, Nvidia’s prospects for the future look especially bright. The pandemic heralded a shift to a more digital-based way of life, and NVDA can only benefit from this. Its EPS closed out the year with 103% growth, and its EBITDA margin right now is a massive 42%.
Despite the discrepancy between outlooks, Meta’s depressed price actually makes the company fairly cheap at the moment – which could represent a good buying opportunity for potentially interested investors. FB has a forward P/E ratio of just 15x – slightly less than that of the sector median – while NVDA has a somewhat bloated earnings multiple of 39x, twice the average of its Information Technology industry rivals.
If the calamity of its fourth quarter earnings subsides, Facebook could make a comeback that, for all the right reasons, surprises the market once again.
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