1 Weird Advantage NVIDIA Has Over Magnificent 7

In spite of recent share price turbulence, NVIDIA has been on an astonishing run over the past 5 years with the stock gaining a remarkable 2,317%.

To give you a sense of the magnitude of the bull run, NVIDIA’s revenues were $10 billion in 2020, but have soared to $60.9 billion in the intervening years.

Profitability as measured by earnings before interest and taxes was $2.8 billion in 2020 but most recently shot up to $32.9 billion. It’s that massive spike in earnings that has investors exuberant.

And yet, for all its successes, there is one key metric that suggests NVIDIA shines brighter than all its Magnificent 7 peers, and bodes well for the future.

Key Points

• NVIDIA’s stock has surged 2,317% over five years, with revenue rising from $10 billion to $60.9 billion and EBIT from $2.8 billion to $32.9 billion, driving strong investor interest.
• NVIDIA achieves 72.7% gross margins while spending far less on R&D than peers, generating substantial profits with lower revenue.
• With a forecasted net income growth rate of 34.4% annually, well above competitors, NVIDIA’s valuation remains strong, making dips attractive buying opportunities.

NVIDIA vs Magnificent 7

A weird statistic that leaped out at us when reviewing the profit-and-loss statements of the Magnificent 7 companies is just how efficient NVIDIA is at producing such enormous profits.

Apple spends just shy of $30 billion on research and development annually. Remarkably Microsoft spent an almost identical amount; $29.5 billion last year flowed out the door to R&D.

What about Amazon? It spends a whopping $85.6 billion annually on research and development activities which is almost double Alphabet’s $45 billion, itself 50% more than Apple and Microsoft.

Yet how much does NVIDIA spend? Just $8.6 billion last fiscal year, about 70% less than its rivals. And still NVIDIA is producing a mountain of profits with enormous gross margins of 72.7%.

Now compare that margin with Apple’s at 44.1%, Alphabet’s at 56.9% or Amazon’s at 47% and you’ll see NVIDIA has to produce much less revenue than its Magnificent 7 rivals to enjoy similar profitability.

For now, it doesn’t generate nearly the same level of profits as its arch rivals so you might be wondering how it’s valued similarly?

Why Is NVIDIA Worth So Much?

The answer to that conundrum lies in the growth rates. Net income is set to grow at a rate of 34.4% annually according to forecasts over the next 5 years. Keep in mind that’s already starting from a massive base.

Compare the net income forecasts for the Mag 7 peers, and you’ll see they look nothing similar to NVIDIA’s.

Apple, for example, is set to grow net income at a pace of 10.3% annually while Microsoft has a 13.7% forecasted 5-year net income growth rate.

What does it all boil down to?

Is NVIDIA a Buy?

Dips in NVIDIA share price are almost inevitably buying opportunities now, assuming gross margins stay high and profitability grows at the pace forecasted, or even close to it.

Sure, NVIDIA was priced to perfection, but it has pulled back and each time it dips it appears to gather steam to power higher once more. Bet against it long-term at your peril.