Nvidia GTC 2022 v2.0 – RTX v3.0

Ada Lovelace emerges from history in Nvidia silicon.

• Nvidia has announced its 3^rd generation RTX architecture as well as a series of solid but not revolutionary updates to the platforms that it offers on top of its silicon but largely ignored the problems that it is facing in China as well as the impact of the crypto winter.
• The new architecture (Ada Lovelace) is based on a custom 4nm manufacturing process from TSMC and boasts a substantial gain in performance with surprisingly low power consumption.
• The first new product announced on Lovelace was the RTX 4090 graphics card aimed at gaming enthusiasts and boasts roughly 2-4x the performance of its predecessor the RTX 3080 Ti.
• Nvidia also announced a new system-on-chip for the vehicle that aims to be able to run the entire vehicle in one place.
• Currently, there are multiple siloed computers in vehicles that run one domain each, but the direction of travel is to integrate all of these together in one place.
• The problem is that all of these computers have different safety and redundancy requirements which means that merging them together is a complex and difficult process.
• I expect that this will be achieved by virtualisation and Thor has been designed with this in mind and can support the full range of safety and reliability requirements that exist in the vehicle for different functions in the vehicle.
• Elsewhere, Nvidia announced upgrades and extensions of Omniverse that expand the number of systems that can plug into Omniverse as well as more large corporates who are using it.
• The number of use cases for digital twins where reality is simulated in the Metaverse which is then used to plan, design or manage assets in the real world is rapidly growing and Nvidia has a big lead here.
• This is because it has designed its offering from the beginning as a vertical offering whereas many of its competitors have always been focused on horizontal models where they supply the silicon and a few drivers and not much more.
• Nvidia’s competitors are running hard to catch up but Nvidia’s 6-month cadence of updates and new releases will take some matching.
• For example, most companies, including Apple only need to make updates once a year whereas Nvidia manages to do it without repeating itself too much twice per year.
• While I like where Nvidia is going in the long term and the lead that it has built, I think that the short-term headwinds combined with the rising interest rates are going to cause some trouble.
• Nvidia has been banned from selling its leading-edge AI products to China and there is every sign that these restrictions are going to firstly, get more strict and secondly, spread into other technologies (see here).
• Furthermore, I suspect that the crypto winter is going to hit pricing and demand for Nvidia’s older products (3090 and below) meaning that Gaming has a couple of tough quarters to come (see here).
• Hence, I think that Nvidia may be forced to bring down expectations for FQ4 2023 when it speaks to the market in November.
• This is not a great look for a company trading on an FY 2023 EV / Sales of 11.2x especially when some of its peers do not have these headwinds and are trading on a fraction of the multiple.
• Nvidia’s superlative profitability certainly warrants a premium but in this market, and with this outlook, I think this will prove to be too high.
• Consequently, either the stock goes sideways and the valuation comes down as Nvidia returns to growth or it will continue to decline which is most likely should the Fed continue to tighten interest rates.
• I like Nvidia as a company and at some point, I will want to own it, but the valuation remains too high to really pique my interest.
• I continue to prefer Qualcomm, MediaTek or TSMC which are growing but offer a much cheaper valuation.