"No Reason for Retail Investors to Avoid Nvidia... Earnings Surge as AI Ecosystem Expands [Weekend Money]"

70% Sales Growth Projected for 2028... Valuation Seen as Low

Expansion Beyond GPU Sales to Cloud, Software, and Finance

The controversy surrounding the high valuation of Nvidia, the leading artificial intelligence (AI) semiconductor company, is subsiding. Although there has been a recent slowdown in cash flow and gross profit margin, analysts attribute this more to working capital burdens caused by increased supply and rising memory prices than to a decline in AI demand. Given the company’s now-lower valuation and long-term growth potential, some see this as an opportunity to increase portfolio allocation.

Kang Jae-gu, a research analyst at Hana Securities, stated, “While actual results and forward guidance have been rising, the share price has not fully reflected them. Although macroeconomic uncertainties are fueling market concerns, this represents an opportunity to increase the weight of Nvidia in portfolios, as its earnings remain robust.”

The most notable point is that Nvidia presented a 70% year-on-year sales growth target for fiscal year 2028. This does not mean demand is limited; rather, it reflects the supply capacity currently attainable. Nvidia explained that, based on customer demand alone, the business could nearly double in scale, but growth is limited by insufficient supply.

Kang pointed out that Nvidia has rarely provided a full-year guidance more than one year in advance in the past, so this long-term outlook signals high supply visibility.

The recent deterioration in cash flow observed in results also does not necessarily indicate weakening demand. Nvidia’s free cash flow for the second quarter of fiscal year 2027 was $21.3 billion, down more than half from $48.6 billion in the previous quarter. However, the main factors were working capital burdens such as expanded accounts receivable and inventory.

By the end of the quarter, accounts receivable had risen to $63.1 billion and inventory had increased to $31.6 billion. This was due to proactive inventory buildup ahead of the launch of the next-generation GPU ‘Vera Rubin’, as well as delayed cash collection resulting from extended payment periods for certain customers. Kang interpreted this as “an increase in working capital investment to respond to the high growth rate.”

The decline in gross profit margin is also largely attributed to increased component costs, such as higher memory prices. Nvidia projected its gross profit margin would fall to 74% in the third quarter and 71-72% in the fourth quarter of fiscal year 2027, but stabilize at 72-73% starting in 2028.

Market concerns over so-called ‘circular financing’ could actually serve as a means for Nvidia’s ecosystem expansion. The company supports NeoCloud and AI companies in building datacenters through equity investment, minimum sales guarantees, and selective credit enhancements. By sharing cloud revenue with certain customers or investing in AI companies, Nvidia may be able to secure recurring revenue even after GPU sales.

Analysts also say that the spread of custom AI semiconductors (ASIC) cannot fully replace Nvidia’s general-purpose GPUs. The reason is that while ASICs are optimized for specific services and therefore have limited application, Nvidia’s GPUs can be used across a variety of cloud environments and regional infrastructure.

Valuation pressure has also eased compared to the past. Nvidia’s 12-month forward price-to-earnings ratio (PER) stands at 23.2 times, below the five-year average of 41.6 times and the two-year average of 34.3 times. Its EV/EBIT ratio is also at 15.1 times, lower than the past average.

Kang said, “Nvidia’s goal is to expand the AI ecosystem, and it is broadening its reach beyond GPU sales to finance, cloud, software, and investments in AI companies. Considering its lower valuation and increasing earnings visibility, it is advisable to focus more on medium- to long-term growth than on short-term concerns.”

This content was produced with the assistance of AI translation services.