Nvidia does it again

Nvidia was the earnings release that the market was waiting for with bated breath. However, it wasn’t just the earnings report that set the market alight, it was also the commentary that came with it. Nvidia posted a strong set of results. Earnings per share was $5.16 last quarter, vs expectations of $4.64, this is 486% higher than a year ago. Nvidia saw growth in most business lines. Overall revenues reached a record high and beat estimates at $22.1bn, which was higher than the $20.41bn expected by analysts. Data centre revenue, which has been driving Nvidia’s stunning run of results in recent quarters, also reached a new record high at $18.4bn, vs expectations of $17.21bn. Data centre revenue was higher by more than 30%. Interestingly, data centre sales to China fell sharply due to export restrictions imposed by the US government. However, Nvidia is offsetting the pipeline of sales that used to go to China to other customers. There is so much demand for GPUs right now, that a shortfall in Chinese sales is not impacting revenue growth for Nvidia.

Nvidia’s non data centre revenues

Gaming revenue, which has been suffering from an inventory glut, saw a 58% increase in the quarter to the end of January. Gaming revenue was $2.9bn, VS. an estimate of $2.72bn. There are some who argue that Nvidia’s gaming chips could be re-purposed as AI chips by Chinese customers, which may account for some of the stunning growth in Nvidia’s gaming division.

One weak spot in the earnings was automotive revenue – the chips for self-driving cars. This saw a 4.4% decline in revenue YoY, but even this beat estimates at $281mn, vs. expectations of $272.1mn. However, compared to the overall size of Nvidia’s other revenue streams, this is immaterial.

Nobody does it better: Nvidia’s enviable margins  

Nvidia’s share price surged in the after-market, and its share price was up more than 8% at one point on Wednesday night, eradicating the 7.8% loss incurred in the last 5 days. Investors love margins, and adjusted gross margin delivered the goods: gross margin was 76.7% vs. 66.1% YoY, beating the already high estimate of 75.4%. Nvidia’s chip making business, especially its GPU data centre business, is both huge and super profitable. There just aren’t that many companies that deliver profitability at this rate, and this is driving demand for this stock.

Forecasting a fortune

There are genuine concerns about how long Nvidia can keep delivering these monster results, however, Nvidia is forecasting even stronger revenues in the current quarter. It is expecting revenues of $24bn +/- 2% for the current quarter, which would be a 230% expansion YoY. Gross margins are expected to be between 76.3% and 77%. CEO Jensen Huang sounded more bullish than ever in this earnings release. He said that ‘Accelerated computing and generative AI have hit the tipping point.’ He also mentioned that ‘Demand is surging worldwide across companies, industries and nations. This is why Nvidia is generating massive margins and why it expects to continue to do so in the coming year.

The wave of money pouring into Nvidia is yet to crest

Nvidia also announced further tie ups with Google, Amazon web services, Amgen, the health tech company, and Cisco. It also expanded into Singapore and helped the US government with the National Artificial Intelligence Research Resource pilot programme. This is a mere taster of the demand for Nvidia’s GPU chips. The companies that it sells its chips to are the other behemoths of the tech world who have the money to continue to fuel Nvidia’s record revenue growth. The wave of money that is pouring into Nvidia keeps coming. A few weeks ago, the Nvidia CEO said that they were still supply constrained, which means Nvidia has pricing power, and this will also drive its bottom line in the coming months.

The caution that weighed on Nvidia’s share price earlier this week has now dissipated. That was driven by wariness around the hype surrounding Nvidia, and also concerns that last year’s strong growth would not be replicated this year. It turns out that investors don’t need to worry about the hype around Nvidia for now, and that it can beat last year’s earnings, at least it can be based on the visibility that we have for the first few months of 2024.

The most important stock in the world

Nvidia was called the most important stock in the world earlier this week, and it does seem to have restored confidence in overall markets with this earnings release. In post-market trading, S&P 500 futures are higher, and the index is back above 5,000. Nasdaq futures also point to a higher open on Thursday, eradicating a four-day losing streak for the US tech index.

Nvidia: The new macro lead indicator

Overall, Nvidia results were important, but the commentary and forward guidance was more important for the direction of the stock. These results put to bed fears about a future decline in revenue or a drop in market share as competitors catch up. That is a concern for another day. The fact that the Nvidia CEO can put his name to uber bullish comments about AI, saying that it is at a tipping point and has permeated many industries and regions, suggests that Nvidia has become an important gauge of the global macro economy. While it may not be as macro as the Fed, it is potentially the most important leading economic indicator. The world is rapidly moving towards a future powered by AI, and Nvidia is the chief hardware provider that is powering the AI revolution. This is expected to boost global productivity and revolutionize the labour market. This will require global central banks and governments to react.

Beware Nvidia mimicking a meme stock

Thus, while there will be competitors that will eat away at Nvidia’s market share down the line, today it is justified in being labelled the most important stock in the world. However, this does not mean that we don’t urge some caution. Nvidia’s share price has been extremely volatile in recent days, and it is trading like a meme stock. There was also a frenzy in Nvidia options trading in recent days, with half of the options having strike prices of $1,300, nearly double where the stock is trading currently. If this strike price is reached, it would value Nvidia at $3.2 trillion. This might seem like madness, but Nvidia’s recent share price history tells a different story. Nvidia’s share price is up by more than 220% in one year, which is fairly rare for the market overall, however, it is not that rare for Nvidia. The share price has gained more than 1500% in 5 years. Thus, while call options with a $1,300 strike seem crazy, they are not beyond the realm of possibility for Nvidia, as the stock appears to be in a super cycle. It is also worth noting that a share price rise may not push its P/E ratio too much higher, since earnings are also growing at a rapid clip. Nvidia’s stock price does not look extremely overvalued, even with its 37% rise YTD.