Marvell reported strong Q2 FY2025 results. The company beat the revenue consensus estimates by 1.5% and non-GAAP EPS estimates by 2.3%. Revenue grew 10% sequentially, and the guide for the next quarter beat estimates by 2.8%. The guide suggests the company returns to growth from FQ3.
AI led the way, with data center revenue growing 92% YoY. The consumer segment revenue recovered, more than doubling sequentially, and management believes that enterprise networking, carrier and auto and industrial end markets have bottomed in the second quarter. All the end markets are expected to grow in Q3.
Revenue
FQ2 revenue declined by (5.1%) YoY and grew by 10% sequentially to $1.27 billion, primarily due to solid growth in the data center end market led by AI. This compares to a (-12.2%) YoY decline in FQ1. Next quarter, management has guided for a revenue to accelerate to 2.2% YoY growth to $1.45 billion at the midpoint. This beat the consensus estimates by 2.8% and the positive price action further implies we will see analysts raise consensus.
Matt Murphy Chairman and CEO said in the earnings call, “For the third quarter, we are forecasting consolidated revenue to grow 14% sequentially at the midpoint of guidance. We expect this growth to be primarily driven by data center AI, and further augmented by the start of a recovery in our enterprise networking and carrier end markets.”
Margins
Margins are improving. The higher custom ASIC revenue will weigh on the gross margins. However, operating leverage and non-recurring engineering (NRE) cost benefits will help to improve the bottom line, particularly the management pointed to the next fiscal year.
The gross margin was in line with the guide at 46.2%, up from 38.9% in the same period last year and 45.5% in the previous quarter. Management has guided for 47.2% in the next quarter.
Adjusted gross margin is 61.9%, up from 60.3% last year and down from 62.4% in the previous quarter. The management guide for the next quarter is 61%, down sequentially primarily due to the lower margins for custom ASIC business.
The operating margin was (-7.9%), up from (-15.3%) last year and (-13.1%) in the previous quarter. The management guide for the next quarter is (-0.6%). Adjusted operating margin was 26.1%, down from 26.9% in the last year and up from 23.3% in the previous quarter. It beat the guide marginally by 0.5%. The guide for the next quarter is 28.9%. The improvement in margin is due to operating leverage and also non-recurring engineering (NRE) cost benefits.
Net loss was ($193.3 million) or (-15.2%) of revenue compared to a net loss of ($207.5 million) or (-15.5%) of revenue in the same period last year. Adjusted net income was $266.2 million or 20.9% compared to $290.2 million or 21.6% last year.
EPS
Adjusted EPS was $0.30, beating estimates by 2.3% compared to $0.33 in the same period last year. The management GAAP loss per share guide for the quarter is ($0.09) +/- $0.05 and adjusted EPS guide is $0.40 +/- $0.05, representing a YoY decline of (-2.4%).
Analysts expect adjusted EPS to accelerate to 5.2% growth in Q4 and 108.7% in Q1 FY2026.
Cash Flow and Balance Sheet
The cash flows have improved when we compared to last year. This is positive particularly since the company has high debt.
Operating cash flow was $306.4 million or 24.1% of revenue compared to $112.5 million or 8.4% of revenue in the same period last year and 28% in the previous quarter.
Free cash flow was $253 million or 19.9% of revenue compared to $1.2 million or 0.1% in the same period last year and 20% in the previous quarter. The cash flows were lower in the last year due to higher days sales outstanding of 82 days compared to 76 days in the recent quarter and also higher severance-related cash restructuring charges last year.
Cash was $808.7 million and debt of $4.13 billion compared to $847.7 million and $4.15 billion in the previous quarter.
Inventory was $818 million compared to $826 million in the previous quarter.
The company paid $52 million in dividends and repurchased shares worth $175 million. The company expects to increase share repurchases further in FQ3.
Key Segments
Data Center
Data Center end market grew by 92% YoY and 8% sequentially to $880.9 million led by strong AI revenue.
Matt Murphy said in the earnings call, “These above-guidance results were driven by strong demand for our electro-optics products, custom silicon beginning its anticipated ramp, as well as growth in our storage and switch revenue. Strong bookings continue for our market leading 800 gig PAM products and 400ZR data center interconnect, or DCI products, and we are looking forward to starting shipments of our next-generation 200 gig per lane, 1.6 terabit DSPs in the third quarter. As a result, we expect our electro-optics revenue will continue to grow every quarter this fiscal year on a sequential basis.”
The management also highlighted that custom silicon business is moving in the right direction and custom silicon customers are here to stay. “Our AI custom silicon programs are progressing very well with our first 2 chips now ramping into volume production. Development for new custom programs we have already won, including projects with the new Tier 1 AI customer we announced earlier this year, are also tracking well to key milestones.
Looking ahead to the third quarter of fiscal 2025 for our data center end market, we are forecasting revenue growth to accelerate into the high teens sequentially on a percentage basis. We expect the largest contributor to this growth will be our AI custom silicon programs as they begin to ramp meaningfully in the third quarter, further augmented by ongoing growth from our optics portfolio.
Although custom has a lower gross margin than our merchant products, it benefits from inherently lower operating expense levels, given NRE offsets from customers and the sharing of IP with our merchant business. As a result, as custom silicon becomes a larger part of our overall revenue, we see a path for operating expenses as a percentage of revenue decreasing below our current target operating model.”
Carrier Infrastructure
Carrier Infrastructure revenue declined by (-72%) YoY and up 6% sequentially to $75.9 million. Management expects aggregate revenue from carrier infrastructure revenue and enterprise networking to grow sequentially in the mid-single digits in the next quarter and further improve in the fourth quarter.
Enterprise Networking
Enterprise Networking revenue was down (-54%) YoY and (-1%) sequentially to $151 million. Management expects aggregate revenue from carrier infrastructure revenue and enterprise networking to grow sequentially in the mid-single digits in the next quarter and further improve in the fourth quarter. After several quarters of inventory correction, the company is seeing signs of growth in both Carrier Infrastructure and Enterprise Networking.
Consumer
Consumer end market was down (-47%) YoY and up 112% sequentially to $88.9 million following the gaming inventory correction. Management expects revenue to grow slightly on a sequential basis in the next quarter.
Automotive/Industrial
The automotive and industrial end markets revenue declined by (-31%) YoY and (-2%) sequentially to $76.2 million due to the broad inventory correction in the automotive end market. Management expects auto and industrial end market to grow sequentially in the mid-single digits in the next quarter.
Earnings Call:
No Update on AI Revenue:
The CEO had stated the following at the beginning of the call: “Given the strong start in the first half of the fiscal year from AI and our expectations for accelerated growth in the second half, we remain confident in our ability to significantly exceed the full year AI revenue target discussed earlier this year at our AI event” – yet, there was no update to the $1.5 billion floor provided for this year and the $2.5 billion floor for AI revenue provided for next year. Analysts poked quite a bit to get an update, but to no avail, with the CEO stating: “we're not calling those numbers out typically by quarter.”
Here is an example of what transpired in the Q&A, to where the CEO insisted the number was higher yet did not provide specifics:
Question Quinn Bolton (Analysts)
Matt, I'll ask a question, but if you don't answer it, maybe I'll follow up. You guys are talking about nice upside, the $1.5 billion and $2.5 billion target for AI. Is that something you think you're closer to $2 billion than $1.5 billion when all is said and done this year? I mean, can you give us any sort of quantification of the upside in AI revs? And if not, I'll follow up with a product question.
Answer Matthew Murphy (Executives)
Yes. I don't think we're — we're sort of fresh off the $1.5 billion update from a few months back when we had our AI day. But I think if you look at the — even like Q3, right, where overall revenue for the whole company is growing in mid-teens and then obviously guiding up data center much higher than that with AI driving it and then saying also Q4 is going to be extremely strong in data center and AI, you can probably draw a line of sight to it. But we're clearly, clearly exceeding the $1.5 billion. That's for sure. And then again, the [indiscernible] for next year is really good, because from an exit standpoint, we'll be at a very healthy level by the fourth quarter.
1.6T Transceivers Ramping in Q3:
The earnings report provided a surprise in terms of the 1.6T transceivers ramping in Q3. We covered this recently here (and a few other times in archived Marvell analysis on our site). Per our previous analysis: “Marvell offers 200-gig, 400-gig and 800-gig PAM-based electro-optics. The 800-gig is the primary interconnect for AI deployments. The company is qualifying a 1.6T solution with 200-gig per lane for the next leg up in AI acceleration. For the 1.6T solution, Nvidia will be a lead partner.”
Here is an update from the call which points toward next year being a big year for Marvell on electro-optics:
Question Christopher Rolland (Analysts)
Congrats on the results. I have an Inphi question primarily. And Matt, you talked about 1.6T. That's pretty exciting that, if I understood that correctly, you're going to be ramping in 3Q. Perhaps you can talk about the profile of this ramp, what it looks like in 3Q, 4Q and into '25. I think The Street's all over the place on this node. But if you could talk about that and maybe even the economics, what it means for you guys, that would be fantastic.
Answer Matthew Murphy (Executives)
Yes. Thanks, Chris. Yes, it's still early. We were first to market in this area, having introduced these products at OFC a year ago. It's great to see that they're going into production. We'll know a lot more when we start to see how our customers are planning to deploy it. But we are seeing initial shipments now. The way I would think about it though is 800 gig right now and into — and through next year is still going to be the workhorse high-volume platform. And even some of the newer launches that are coming, as an example, are going to still support 800 gig as well as 1.6T.
So it's really hard to call exactly. It's going to be an important transition. There's no question. The only question is the timing of which. And Chris, I think we'll be in a better position to comment on that probably as we get closer to the end of the year, we start looking at the setup for calendar '25 and what our customers are thinking. But either way, we're going to be well positioned for both of those opportunities for next year.
– End Quote
Conclusion:
Marvell is bottoming and we are looking for an entry. We can’t say right now if we will enter this quarter or enter closer to calendar year 2025. Although the rebound is a step in the right direction, the lack of an update on AI revenue leads us to the assumption there isn’t much of an update to report. Today there are stronger AI stories, whereas next year Marvell could rival some of the AI stories we own today.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
Dell reported a strong Q2 as AI server demand remained robust with shipments rising 82% QoQ to $3.1 billion, an AI server backlog of $3.8 billion and a five-quarter pipeline that is “several multiples of our backlog.” Dell’s revenue beat by nearly $1 billion as servers and networking revenue rose 80% to a new record at $7.7 billion. Dell said that Q2 saw “exceptional AI optimized server demand” as its order pipeline expanded again sequentially.
However, Q3’s guide came up short, as Dell forecast revenue between $24 to $25 billion, or a single-digit sequential decline. The very large pipeline refers to Dell waiting for Blackwell’s GPUs, which was discussed on the call. Therefore, the fiscal year will end higher than previously guided, making Q3 inconsequential.
ISG’s growth this quarter was driven by servers and networking, with revenue accelerating to 80% YoY and 40% QoQ to $7.67 billion, a record for the segment. This was a 3700 bp sequential acceleration in the YoY growth rate, from 42.5% in Q1 to 79.5% this quarter.
Another pertinent point discussed on the call was the surprising margin expansion in the ISG segment of 300 bps QoQ. Dell explained the expansions is party because enterprise server margins are higher than cloud service providers (CSPs).
Revenue
Q2 revenue was $25.03 billion, beating estimates by $910 million. Revenue growth was 9.1%, accelerating from 6.3% YoY growth in the previous quarter, with servers and networking revenue growth accelerating significantly this quarter.
For Q3, Dell guided for revenue between $24 billion to $25 billion, with the midpoint of $24.5 billion coming up just short of analysts' expectations for $24.6 billion. Despite the implied miss, the guide still points to revenue growth accelerating by 100 bp QoQ to 10.1%; analysts were expecting growth of 10.6% in Q3.
Despite the lighter Q3 guide, management boosted its full-year revenue outlook, now seeing revenue between $95.5 billion and $98.5 billion, or $97 billion at midpoint for YoY growth of 10%. Management’s prior guidance called for $93.5 billion to $97.5 billion, (midpoint of $95.5 billion for 8% growth), so this represented a healthy $1.5 billion raise on strong momentum in AI servers and networking.
Key Segments
Infrastructure Solutions Group (ISG):
Revenue in Dell’s Infrastructure Solutions Group (ISG) accelerated significantly in the quarter and easily topped management’s forecast for mid-20 percent growth this quarter. ISG revenue grew 38% YoY to $11.65 billion, accelerating 1600 bp sequentially from 22% YoY growth in Q1. Management guided for ISG growth to be in the low-30% range for Q3, pointing to a slight deceleration sequentially. For the full-year, ISG’s growth is expected to be approximately 30% driven primarily by AI and growth in traditional servers.
ISG’s growth this quarter was driven by servers and networking, with revenue accelerating to 80% YoY and 40% QoQ to $7.67 billion, a record for the segment. This was a 3700 bp sequential acceleration in the YoY growth rate, from 42.5% in Q1 to 79.5% this quarter.
AI servers were a primary driver in the quarter, with orders revenue of $3.2 billion, up 23% QoQ from $2.6 billion in Q1 as Tier 2 cloud service providers and enterprise customers increased. AI server shipments rose more than 82% QoQ, from $1.7 billion in Q1 to $3.1 billion in Q2. Growth also extended beyond AI to traditional servers, as traditional server demand rose YoY for the third consecutive quarter and rose QoQ for the fifth consecutive quarter.
Dell continues to see AI servers driving growth in Q3, adding that its “AI optimized server pipeline again expanded Q/Q across both Tier 2 cloud service providers and enterprise and has now grown to several multiples of our backlog.” For context, AI server backlog remained at $3.8 billion, flat QoQ.
ISG’s adjusted operating margin also expanded 300 bp QoQ to 11% in Q2, easing some concerns about AI servers weighing on segment margins. Management maintained its full year view for 11% to 14% adjusted operating margins for ISG, suggesting more upside to margins in the back half of the year. Dell also expects operating margin to improve in Q3 as a result of improved ISG profitability.
Client Solutions Group (CSG):
Turning to Dell’s Client Solutions Group (CSG), growth was muted, declining (4%) YoY but rising 4% QoQ to $12.41 billion. Commercial revenue was flat YoY at $10.55 billion, while Consumer revenue declined (22%) YoY to $1.86 billion. Management said they saw “modest Commercial PC demand growth in the quarter.”
Dell is expecting growth in CSG in the second half of the year, with growth more concentrated in Q4. Q3 is expected to see flat to low single-digit growth, with management believing the “coming PC refresh cycle and the longer-term impacts of AI will create tailwinds for the PC market.” For the full-year, CSG is expected to also be “flat to low single digits for the year.”
CSG’s adjusted operating margin was 6.2%, increasing only 10 bp sequentially and contracting 130 bp YoY. Full-year operating margin is expected to be 5% to 7%, implying there will be little change as the year progresses.
Margins
Overall, Dell’s margins down the line remained resilient despite gross margin contracting, as Dell faces some competitive pressure and headwinds from increased AI server mix.
GAAP gross margin was 21.4%, contracting 40 bp QoQ and 230 bp YoY as AI server mix rose and due to a more competitive pricing environment. Adjusted gross margin was 21.8%, contracting by the same amounts QoQ and YoY.
Management guided for gross margin to decline 180 bp for the fiscal year due to “inflationary input costs, the competitive environment and a higher mix of AI optimized servers. We will continue to drive efficiencies in the business and expect operating expense to be down low single digits for the year.”
GAAP operating margin was 5.4%, improving by 30 bp QoQ and 130 bp YoY. Adjusted operating margin was 8.1%, increased 150 bp QoQ but decreasing 50 bp YoY.
GAAP net margin was 3.4%, down 90 bp QoQ but up 130 bp YoY. Adjusted net margin was 5.5%, up 140 bp QoQ but down 10 bp YoY.
Dell topped EPS expectations as adjusted margins improved quite significantly down the line in Q2.
GAAP EPS of $1.17 beat expectations for $1.01.
Adjusted EPS of $1.89 beat expectations for $1.71.
For Q3, Dell sees adjusted EPS of $2.00, +/- $0.10, short of the consensus estimate for $2.18.
For the full-year, Dell sees adjusted EPS of $7.80, +/- $0.25, slightly higher than the $7.72 estimate and indicative of a stronger Q4.
Cash Flows and Debt
Cash flows declined significantly YoY, but perked up sequentially.
Operating cash flow was $1.34 billion in Q2, down (58%) YoY but up more than 28% QoQ. OCF margin was 5.4%, improving from 4.7% last quarter but down substantially from 14.0% in the year ago quarter.
Adjusted cash flow was $1.28 billion in Q2, once again down (58%) YoY but up more than 106% QoQ. Adjusted FCF margin was 5.1%, up from 2.8% last quarter but down sharply from 13.3% in the year ago quarter.
Cash and equivalents totaled $5.85 billion, as Dell repaid approximately $1 billion in debt during the quarter along with $712 million in shares repurchased and $316 million in dividends paid.
Debt totaled $24.5 billion. The company stated their core leverage ratio was 1.4x.
Inventory rose more than 24% QoQ to $5.95 billion, with the QoQ increase likely driven again by AI servers as was the case in Q1.
Earnings Call:
ISG Margins 300 Bps Expansion:
Questions on how Dell was capable of expanding ISG margins were abundant, as analysts were clearly impressed. In addition to the Q&A excerpt below, buried a bit into the call, Dell’s CEO also stated the enterprise servers come with higher margins than cloud service providers (CSPs) later in the call: “And I think we've said each of the last several calls and we'll say this call again, the margin selling to enterprises are better than the margins selling to our largest customers.”
Question Amit Daryanani (Analysts)
I guess my question is really around ISG margins to really step up from 8% in Q1 to 11% in this quarter despite the [80%] sequential growth in [indiscernible]. So can you just talk about what's enabling this kind of margin expansion because really a lot of peers on the AI server side are struggling with trying to — are struggling with the margins, I feel right now.
So I'd love to understand kind of what's enabling this margin expansion? And then critically, as we think about this 11% to 14% target for the full year, what are the key inputs of building blocks together in the back half of the year?
Yvonne McGill (Executives)
Thanks, Amit. I will get started on that one. So we were very pleased with the operating income rate we saw in the second quarter of 11%, up 300 basis points quarter-over-quarter. That was really driven by improvement across the entire portfolio. I mean first, revenue was up quarter-over-quarter, 26%, which helped drive scale within the P&L. And as expected, the headwinds we saw in Q1 did not persist into Q2.
In storage, we had scale. We're price disciplined. We mixed more towards our own Dell IP storage offerings, which was very helpful and saw strength in North America enterprise.
In the traditional server space, the demand environment continued to improve, although we're still seeing some competitive pressures. And in AI servers, we had strong shipments with improved profitability and growing enterprise customers in that portfolio mix. I'd say, we do expect ISG operating income to finish FY '25 within our long-term framework that 11% to 14% and — and do expect as we move through the second half of the year that we'll continue to see that as we mix more towards our storage portfolio as we do each year.
-End Quote
Preparing to Ship for Blackwell
An analyst asked why Q3 would be down sequentially in the guide yet servers would end the year above previous guidance, to which the CFO answered: “I would say if we have the GPUs and the customers are ready, we're fully motivated and ready to ship more AI servers in the third quarter, but that is what's embedded in our guidance.”
Later, Blackwell was asked about more directly to which the CEO stated: “So when I think of the backlog limbs, I think at an opportunity of deliveries for customers next quarter and then in Q4 and then clearly into next year, and that implies Blackwell. We have sold our most advanced architecture aligned to Blackwell to a number of customers. We have sold H100 and H200s and availability. More importantly, customer availability to take the product, which is what Yvonne is reflecting in our guidance. She didn't make a demand statement. She made a shipment statement.
So demand with that 5-quarter pipeline that I described that is now multiples of our backlog is converting the backlog or converting that into orders as quickly as we can. That opportunity is in all sorts of architectures, the vast majority with NVIDIA, H100, H200 and Blackwell as well as a couple of other opportunities around AMD and Intel. But the vast majority is NVIDIA.”
-End Quote
The readthrough is that any lull from Q3 will be made up for in Q4, which obviously implies Blackwell.
CEO Remains Bullish on AI PCs
Q4 is also expected to be strong on CSG. Per the CFO opening remarks: “We expect growth in the second half of the year, particularly in the fourth quarter. The coming PC refresh cycle and the longer-term impact of AI will create tailwinds for the PC market.”
During the call, the CEO stated: “I know all of you have done your supply-based exit would indicate the same thing that refresh is heading towards end of '24, into '25. And what's important about that is as the refresh takes longer to start, history suggests it steps back faster because the Windows 10 end-of-life date is not moving. So we have a Windows 10 end-of-life date. We have an aging installed base of machines bought during the COVID era, all mounting to be refreshed with exciting new products built around AI and more AI applications are coming.”
Conclusion:
Dell looks to have some room in its valuation, and the report justifies us seeing if the roughly 25% upside in valuation will materialize. I do foresee the market going through a period of doubt on Blackwell before it arrives in volume. We have a strategy for this, which is to trim at key levels and buyback at lower levels. Regardless, Dell is one we want to own and be steadfast about as the signals are fairly clear it’s shaping up to be a major Nvidia supply partner on Tier 2 cloud service providers and enterprise AI.
Given the rumors that had transpired about Blackwell’s delays, it was widely expected that Nvidia’s management would provide some transparency in Q2 as to the status of Blackwell. We had tracked a few key data points in the supply chain, such as TSM’s HPC growth and Super Micro’s liquid cooling growth. Direct liquid cooling doesn’t lie as it’s intricately linked to the Blackwell launch, implying that Blackwell would indeed ship by Q4 – and Nvidia just confirmed that:
“Blackwell production ramp is scheduled to begin in the fourth quarter and continue into fiscal 2026. In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”
Nvidia also guided for Q3 revenue of $32.5 billion, once again above consensus estimates, though it was only $700 million higher at the midpoint; despite this being one of the ‘smaller’ beats, it’s a testament to the strength of Nvidia’s demand to guide for $2.5 billion sequential growth primarily based on Hopper demand with no contribution from Blackwell.
Revenue and EPS
Revenue of $30.04 billion increased 122% YoY and 15% QoQ, with management pointing out that “customers continue to accelerate their Hopper architecture purchases while gearing up to adopt Blackwell.” This marked a $1.3 billion beat to the consensus estimate for $28.75 billion. It also was a deceleration from 262% YoY growth in Q1, as Nvidia is now facing tougher comps against the vertical ramp of Hopper last year.
For Q3, Nvidia guided for revenue of $32.5 billion, +/- 2%, ahead of the consensus estimate for $31.77 billion. This represents growth of 79.4% YoY at midpoint, compared to the estimate for 75.3% growth next quarter.
GAAP EPS of $0.67 beat estimates by $0.03, and represented YoY growth of 168% and QoQ growth of 12%.
Adjusted EPS of $0.68 beat estimates by $0.04, and represented YoY growth of 152% and QoQ growth of 11%.
Key Segments
Data center revenue surpassed a $100 billion annualized run rate this quarter, up from $90 billion annualized, as Nvidia reported $26.27 billion in data center revenue, up 152% YoY and 16% QoQ. Nvidia said that “Hopper demand is strong, and shipments are expected to increase in the second half of fiscal 2025,” while Blackwell is on track to ramp in Q4 with “several” billions in revenue expected that quarter.
Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.
In the segment, compute revenue was $22.6 billion, up 162% YoY, while networking revenue was $3.67 billion, up 114% YoY. In networking, Nvidia noted that InfiniBand and Ethernet drove growth in the quarter, and the 16% QoQ growth included “a doubling of Ethernet for AI revenue.”
Nvidia’s Q3 revenue guide implies data center revenue slightly above $28 billion to $28.5 billion, which we had modeled in our pre-earnings analysis earlier this week.
Gaming revenue increased 16% YoY and 9% QoQ to $2.88 billion, driven by increased sales of GeForce RTX 40 Series chips.
Automotive revenue increased 37% YoY and 5% QoQ to $346 million, driven by AI cockpit and self-driving solutions.
Pro-viz revenue increased 20% YoY and 6% QoQ to $454 million.
OEM and other revenue increased 33% YoY and 13% QoQ to $88 million.
Margins
Margins remained strong in Q2, with Nvidia reporting gross and operating margins at the high end and above its guided ranges. However, management guided for Q3 margins to contract slightly QoQ, suggesting that Q1 was the peak for both gross and operating margins with some pressure ahead as Blackwell gears up to launch in Q4.
GAAP gross margin was 75.1% in Q2, ahead of management’s guide for 74.8%. Adjusted gross margin was 75.7%, ahead of guidance for 75.5%.
Per the CFO: “As our Data Center mix continues to shift to new products, we expect this trend to continue into the fourth quarter of fiscal 2025.” It’s likely she is referring to the higher cost of memory components, which we outlined in the pre-earnings analysis.
GAAP operating margin was 62.1%, ahead of the implied guide for 60.5%, indicative of the operating leverage power that Nvidia still commands in mid-launch cycle for Hopper with the H200s shipping now. Adjusted operating margin was 66.4%, ahead of the implied guide of 65.5%.
Per the CFO: “Sequentially, GAAP and non-GAAP operating expenses were up 12%, primarily reflecting higher compensation-related costs.”
GAAP net margin was 55.3% down from 57.1% last quarter. This represents profits of $16.6 billion, up over $2 billion. This was a very large beat compared to the $14.3 billion guided.
The chart below shows Nvidia’s margins, with the slight sequential contraction this quarter and next quarter visible. It’s no small feat to maintain GAAP operating margin >60% for four consecutive quarters while simultaneously undergoing the semiconductor industry’s most advanced and most rapid product release cycle. However, with management guiding for full-year gross margins to be in the mid-70% range, we’ll be keeping a close eye on how margins trend in Q3 heading into Q4 as Blackwell ramps.
Cash Flows
For the first time since Hopper stole the show in early 2023 with red-hot growth, Nvidia’s cash flows declined sequentially, with cash flow margins also shrinking. Nvidia said the sequential declines were caused by higher cash taxes paid.
Operating cash flow was $14.49 billion, up more than 128% YoY but down (5.6%) QoQ. This was the first quarter with a sequential decline in OCF since Q3 FY23.
Operating cash flow margin was 48.2%, down from 58.9% last quarter but up from 47.0% in the year ago quarter.
Free cash flow was $13.48 billion, up 123% YoY but down nearly (10%) QoQ.
Free cash flow margin was 44.9%, down from 57.3% last quarter and nearly flat with 44.8% in the year ago quarter.
Nvidia had $34.8 billion in cash, equivalents and marketable securities on hand, and debt totaled $8.46 billion.
Nvidia used cash of $7.4 billion toward shareholder returns, with $246 million in dividends paid and $7.2 billion in shares repurchased in Q2. Nvidia’s board also approved an additional $50 billion to its share repurchase authorization.
Earnings Call
Blackwell Shipping on Schedule
Our firm extrapolated supply chain data to conclude that Blackwell is in production at TSM and SMCI last week in the analysis: Nvidia Stock: Blackwell Suppliers Shrug Off Delay. This was not an easy analysis to write as it meant going up against The Information, a highly regarded publication. Yet, I felt confident that I know Nvidia stock better than a reporter, so hey — why not throw my hat in the ring. From my vantage point, since I cover the universe so closely, it was becoming clear the “breaking news” was an exaggerated claim that was inaccurate and ultimately hurt a lot of investors.
The CFO printed commentary stated: “We shipped customer samples of our Blackwell architecture in the second quarter. We executed a change to the Blackwell GPU mask to improve production yield. Blackwell production ramp is scheduled to begin in the fourth quarter and continue into fiscal 2026. In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”
During a question on Hopper, Jensen Huang confirmed Q1 will be when Blackwell is operable in data centers: “And although Blackwell will start shipping out in billions of dollars at the end of this year, the standing up of the capacity is still probably weeks and a month or so away.”
The most direct Q&A snippet regarding Blackwell’s timing was the following:
Question Vivek Arya (Analysts)
Jensen, you mentioned in the prepared comments that there's a change in the Blackwell GPU mask. I'm curious, are there any other incremental changes in back-end packaging or anything else? And I think related, you suggested that you could ship several billion dollars of Blackwell in Q4 despite the change in the design. Is it because all these issues will be solved by then? Just help us size what is the overall impact of any changes in Blackwell timing, what that means to your kind of revenue profile and how are customers reacting to it.
Answer Jensen Huang (Executives)
Yes. Thanks, Vivek. The change to the mask is complete. There were no functional changes necessary. And so we're sampling functional samples of Blackwell, Grace Blackwell, and a variety of system configurations as we speak. There are something like 100 different types of Blackwell-based systems that are built that were shown at Computex, and we're enabling our ecosystem to start sampling those. The functionality of Blackwell is as it is, and we expect to start production in Q4.
-End Quote
This was also a nice statement from Huang that we should memorialize in this earnings writeup – perhaps unrelated to the delay, but certainly a statement to capture for our Members: “Yes, next year is going to be a great year. We expect to grow our Data Center business quite significantly next year. Blackwell is going to be a complete game changer for the industry. And Blackwell is going to carry into the following year”
Direct Liquid Cooling (DLC)
DLC stocks have been hit hard lately, primarily Dell and most certainly Super Micro following the short report and the delayed filing of the 10-K. However, SMCI’s earnings report was quite clear DLC is ramping which is why we’ve persevered in our positions. An analyst asked about DLC and the potential for supply chain issues with the thermal management side. Jensen Huang’s answer in agreement with what we saw from SMCI’s report.
Note: the analyst in the Q&A points out the purchase commitments and supply obligations being bullish, we reported on this under Key Segments – this is an important takeaway from this earnings report that shows Blackwell is ramping nicely. This is what he is referring to — “Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.”Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.”
Question Timothy Arcuri (Analysts)
I had a question on the shape of the revenue growth, both near and longer term. I know Colette, you did increase OpEx for the year. And if I look at the increase in your purchase commitments and your supply obligations, that's also quite bullish.
On the other hand, there are some school who've thought that not that many customers really seem ready for liquid cooling, and I do recognize that some of these racks can be air cooled. But Jensen, is that something to consider sort of on the shape of how Blackwell is going to ramp? And then I guess when you look beyond next year, which is obviously going to be a great year and you look into '26, do you worry about any other gating factors like, say, the power supply chain or, at some point, models start to get smaller? I'm just wondering if you can speak to that.
Answer Jensen Huang (Executives)
[…] The Grace Blackwell is liquid cooled. However, the number of data centers that want to go to liquid cooled is quite significant. And the reason for that is because we can, in a liquid-cooled data center, in any power-limited data center, whatever size of data center you choose, you could install and deploy anywhere from 3 to 5x the AI throughput compared to the past. And so liquid cooling is cheaper. Our TCO is better, and liquid cooling allows you to have the benefit of this capability we call NVLink, which allows us to expand it to 72 Grace Blackwell packages, which has essentially 144 GPUs.
And so imagine 144 GPUs connected in NVLink. And we're increasingly showing you the benefits of that. And the next click is obviously very low latency, very high throughput large language model inference, and the large NVLink domain is going to be a game changer for that. And so I think people are very comfortable deploying both. And so almost every CSP we're working with are deploying some of both. And so I'm pretty confident that we'll ramp it up just fine.”
-End Quote
My note: having a hard time closing our weaker DLC positions based on what we know is coming. My main regret is not keeping some dry powder to buy at these lower levels.
Margins:
Discussion on margins felt a bit forced as Nvidia’s margins continue to beat the rest of the Mag 7. Consider that Nvidia’s GAAP operating margin this quarter was 62.1%:
Where the market is a tad concerned is gross margins, which peaked at 78.4% and will exit the year in the mid-70% range. We prepped our Members for this in the pre-earnings writeup. The CFO stated: “Your second piece is in terms of our gross margin. We provided gross margin for our Q3. We provided our gross margin on a non-GAAP at about 75%. We'll work with all the different transitions that we're going through, but we do believe we can do that 75% in Q3. We provided that we're still on track for the full year also in the mid-70s or approximately the 75%. So we're going to see some slight difference possibly in Q4, again with our transitions and the different cost structures that we have on our new product introductions.”
Conclusion:
Our pre-earnings writeup expressed concerns about the valuation going into the print. I think the selling after hours reflects the valuation.
Earnings reports are truly 50/50 – nobody can tell you what the market will do following a report. For example, we had high confidence Nvidia would beat, but there’s much more to consider than a beat.
What’s important is to have a strategy, and we do. Our strategy is to trim this position depending on how the price reacts at key levels. Our goal is to then re-allocate what we trim at lower levels. You will get trade alerts to this effect when we think the timing is right.
Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
Given the rumors that had transpired about Blackwell’s delays, it was widely expected that Nvidia’s management would provide some transparency in Q2 as to the status of Blackwell. We had tracked a few key data points in the supply chain, such as TSM’s HPC growth and Super Micro’s liquid cooling growth. Direct liquid cooling doesn’t lie as it’s intricately linked to the Blackwell launch, implying that Blackwell would indeed ship by Q4 – and Nvidia just confirmed that:
“Blackwell production ramp is scheduled to begin in the fourth quarter and continue into fiscal 2026. In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”
Nvidia also guided for Q3 revenue of $32.5 billion, once again above consensus estimates, though it was only $700 million higher at the midpoint; despite this being one of the ‘smaller’ beats, it’s a testament to the strength of Nvidia’s demand to guide for $2.5 billion sequential growth primarily based on Hopper demand with no contribution from Blackwell.
Revenue and EPS
Revenue of $30.04 billion increased 122% YoY and 15% QoQ, with management pointing out that “customers continue to accelerate their Hopper architecture purchases while gearing up to adopt Blackwell.” This marked a $1.3 billion beat to the consensus estimate for $28.75 billion. It also was a deceleration from 262% YoY growth in Q1, as Nvidia is now facing tougher comps against the vertical ramp of Hopper last year.
For Q3, Nvidia guided for revenue of $32.5 billion, +/- 2%, ahead of the consensus estimate for $31.77 billion. This represents growth of 79.4% YoY at midpoint, compared to the estimate for 75.3% growth next quarter.
GAAP EPS of $0.67 beat estimates by $0.06, and represented YoY growth of 168% and QoQ growth of 12%.
Adjusted EPS of $0.68 beat estimates by $0.04, and represented YoY growth of 152% and QoQ growth of 11%.
Key Segments
Data center revenue surpassed a $100 billion annualized run rate this quarter, up from $90 billion annualized, as Nvidia reported $26.27 billion in data center revenue, up 152% YoY and 16% QoQ. Nvidia said that “Hopper demand is strong, and shipments are expected to increase in the second half of fiscal 2025,” while Blackwell is on track to ramp in Q4 with “several” billions in revenue expected that quarter.
Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.
In the segment, compute revenue was $22.6 billion, up 162% YoY, while networking revenue was $3.67 billion, up 114% YoY. In networking, Nvidia noted that InfiniBand and Ethernet drove growth in the quarter, and the 16% QoQ growth included “a doubling of Ethernet for AI revenue.”
Nvidia’s Q3 revenue guide implies data center revenue slightly above $28 billion to $28.5 billion, which we had modeled in our pre-earnings analysis earlier this week.
Gaming revenue increased 16% YoY and 9% QoQ to $2.88 billion, driven by increased sales of GeForce RTX 40 Series chips.
Automotive revenue increased 37% YoY and 5% QoQ to $346 million, driven by AI cockpit and self-driving solutions.
Pro-viz revenue increased 20% YoY and 6% QoQ to $454 million.
OEM and other revenue increased 33% YoY and 13% QoQ to $88 million.
Margins
Margins remained strong in Q2, with Nvidia reporting gross and operating margins at the high end and above its guided ranges. However, management guided for Q3 margins to contract slightly QoQ, suggesting that Q1 was the peak for both gross and operating margins with some pressure ahead as Blackwell gears up to launch in Q4.
GAAP gross margin was 75.1% in Q2, ahead of management’s guide for 74.8%. Adjusted gross margin was 75.7%, ahead of guidance for 75.5%.
Per the CFO: “As our Data Center mix continues to shift to new products, we expect this trend to continue into the fourth quarter of fiscal 2025.” It’s likely she is referring to the higher cost of memory components, which we outlined in the pre-earnings analysis.
GAAP operating margin was 62.1%, ahead of the implied guide for 60.5%, indicative of the operating leverage power that Nvidia still commands in mid-launch cycle for Hopper with the H200s shipping now. Adjusted operating margin was 66.4%, ahead of the implied guide of 65.5%.
Per the CFO: “Sequentially, GAAP and non-GAAP operating expenses were up 12%, primarily reflecting higher compensation-related costs.”
GAAP net margin was 55.3% down from 57.1% last quarter. This represents profits of $16.6 billion, up over $2 billion. This was a very large beat compared to the $14.3 billion guided.
The chart below shows Nvidia’s margins, with the slight sequential contraction this quarter and next quarter visible. It’s no small feat to maintain GAAP operating margin >60% for four consecutive quarters while simultaneously undergoing the semiconductor industry’s most advanced and most rapid product release cycle. However, with management guiding for full-year gross margins to be in the mid-70% range, we’ll be keeping a close eye on how margins trend in Q3 heading into Q4 as Blackwell ramps.
Cash Flows
For the first time since Hopper stole the show in early 2023 with red-hot growth, Nvidia’s cash flows declined sequentially, with cash flow margins also shrinking. Nvidia said the sequential declines were caused by higher cash taxes paid.
Operating cash flow was $14.49 billion, up more than 128% YoY but down (5.6%) QoQ. This was the first quarter with a sequential decline in OCF since Q3 FY23.
Operating cash flow margin was 48.2%, down from 58.9% last quarter but up from 47.0% in the year ago quarter.
Free cash flow was $13.48 billion, up 123% YoY but down nearly (10%) QoQ.
Free cash flow margin was 44.9%, down from 57.3% last quarter and nearly flat with 44.8% in the year ago quarter.
Nvidia had $34.8 billion in cash, equivalents and marketable securities on hand, and debt totaled $8.46 billion.
Nvidia used cash of $7.4 billion toward shareholder returns, with $246 million in dividends paid and $7.2 billion in shares repurchased in Q2. Nvidia’s board also approved an additional $50 billion to its share repurchase authorization.
Earnings Call
Blackwell Shipping on Schedule
Our firm extrapolated supply chain data to conclude that Blackwell is in production at TSM and SMCI last week in the analysis: Nvidia Stock: Blackwell Suppliers Shrug Off Delay. This was not an easy analysis to write as it meant going up against The Information, a highly regarded publication. Yet, I felt confident that I know Nvidia stock better than a reporter, so hey — why not throw my hat in the ring. From my vantage point, since I cover the universe so closely, it was becoming clear the “breaking news” was an exaggerated claim that was inaccurate and ultimately hurt a lot of investors.
The CFO printed commentary stated: “We shipped customer samples of our Blackwell architecture in the second quarter. We executed a change to the Blackwell GPU mask to improve production yield. Blackwell production ramp is scheduled to begin in the fourth quarter and continue into fiscal 2026. In the fourth quarter, we expect to ship several billion dollars in Blackwell revenue.”
During a question on Hopper, Jensen Huang confirmed Q1 will be when Blackwell is operable in data centers: “And although Blackwell will start shipping out in billions of dollars at the end of this year, the standing up of the capacity is still probably weeks and a month or so away.”
The most direct Q&A snippet regarding Blackwell’s timing was the following:
Question Vivek Arya (Analysts)
Jensen, you mentioned in the prepared comments that there's a change in the Blackwell GPU mask. I'm curious, are there any other incremental changes in back-end packaging or anything else? And I think related, you suggested that you could ship several billion dollars of Blackwell in Q4 despite the change in the design. Is it because all these issues will be solved by then? Just help us size what is the overall impact of any changes in Blackwell timing, what that means to your kind of revenue profile and how are customers reacting to it.
Answer Jensen Huang (Executives)
Yes. Thanks, Vivek. The change to the mask is complete. There were no functional changes necessary. And so we're sampling functional samples of Blackwell, Grace Blackwell, and a variety of system configurations as we speak. There are something like 100 different types of Blackwell-based systems that are built that were shown at Computex, and we're enabling our ecosystem to start sampling those. The functionality of Blackwell is as it is, and we expect to start production in Q4.
-End Quote
This was also a nice statement from Huang that we should memorialize in this earnings writeup – perhaps unrelated to the delay, but certainly a statement to capture for our Members: “Yes, next year is going to be a great year. We expect to grow our Data Center business quite significantly next year. Blackwell is going to be a complete game changer for the industry. And Blackwell is going to carry into the following year”
Direct Liquid Cooling (DLC)
DLC stocks have been hit hard lately, primarily Dell and most certainly Super Micro following the short report and the delayed filing of the 10-K. However, SMCI’s earnings report was quite clear DLC is ramping which is why we’ve persevered in our positions. An analyst asked about DLC and the potential for supply chain issues with the thermal management side. Jensen Huang’s answer in agreement with what we saw from SMCI’s report.
Note: the analyst in the Q&A points out the purchase commitments and supply obligations being bullish, we reported on this under Key Segments – this is an important takeaway from this earnings report that shows Blackwell is ramping nicely. This is what he is referring to — “Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.”Notably, purchase commitments and obligations for inventory and capacity rose nearly 48% QoQ to $27.8 billion, including “new commitments for Blackwell capacity and components,” another signal that Nvidia is prepared to ramp in full-force come Q4.”
Question Timothy Arcuri (Analysts)
I had a question on the shape of the revenue growth, both near and longer term. I know Colette, you did increase OpEx for the year. And if I look at the increase in your purchase commitments and your supply obligations, that's also quite bullish.
On the other hand, there are some school who've thought that not that many customers really seem ready for liquid cooling, and I do recognize that some of these racks can be air cooled. But Jensen, is that something to consider sort of on the shape of how Blackwell is going to ramp? And then I guess when you look beyond next year, which is obviously going to be a great year and you look into '26, do you worry about any other gating factors like, say, the power supply chain or, at some point, models start to get smaller? I'm just wondering if you can speak to that.
Answer Jensen Huang (Executives)
[…] The Grace Blackwell is liquid cooled. However, the number of data centers that want to go to liquid cooled is quite significant. And the reason for that is because we can, in a liquid-cooled data center, in any power-limited data center, whatever size of data center you choose, you could install and deploy anywhere from 3 to 5x the AI throughput compared to the past. And so liquid cooling is cheaper. Our TCO is better, and liquid cooling allows you to have the benefit of this capability we call NVLink, which allows us to expand it to 72 Grace Blackwell packages, which has essentially 144 GPUs.
And so imagine 144 GPUs connected in NVLink. And we're increasingly showing you the benefits of that. And the next click is obviously very low latency, very high throughput large language model inference, and the large NVLink domain is going to be a game changer for that. And so I think people are very comfortable deploying both. And so almost every CSP we're working with are deploying some of both. And so I'm pretty confident that we'll ramp it up just fine.”
-End Quote
My note: having a hard time closing our weaker DLC positions based on what we know is coming. My main regret is not keeping some dry powder to buy at these lower levels.
Margins:
Discussion on margins felt a bit forced as Nvidia’s margins continue to beat the rest of the Mag 7. Consider that Nvidia’s GAAP operating margin this quarter was 62.1%:
Where the market is a tad concerned is gross margins, which peaked at 78.4% and will exit the year in the mid-70% range. We prepped our Members for this in the pre-earnings writeup. The CFO stated: “Your second piece is in terms of our gross margin. We provided gross margin for our Q3. We provided our gross margin on a non-GAAP at about 75%. We'll work with all the different transitions that we're going through, but we do believe we can do that 75% in Q3. We provided that we're still on track for the full year also in the mid-70s or approximately the 75%. So we're going to see some slight difference possibly in Q4, again with our transitions and the different cost structures that we have on our new product introductions.”
Conclusion:
Our pre-earnings writeup expressed concerns about the valuation going into the print. I think the selling after hours reflects the valuation.
Earnings reports are truly 50/50 – nobody can tell you what the market will do following a report. For example, we had high confidence Nvidia would beat, but there’s much more to consider than a beat.
What’s important is to have a strategy, and we do. Our strategy is to trim this position depending on how the price reacts at key levels. Our goal is to then re-allocate what we trim at lower levels. You will get trade alerts to this effect when we think the timing is right.
We recently discussed an emerging ad-tech AI leader in our Advanced Market Signals Tier. Our proprietary custom-built screeners identified the stock. The company witnessed a strong acceleration in growth and margins due to its AI-powered advertising engine. To read the article, upgrade here.
Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.
Dell will release its Q2 FY2025 results on August 29th. The management revenue guide is $23.5 billion to $24.5 billion, representing YoY growth of 4.7% at the midpoint. The company also raised the FY2025 revenue guidance from $91 billion to $95 billion to a new range of $93.5 billion to $97.5 billion due to strong AI server demand.
Margins will be a key area of focus in the upcoming earnings and was the primary reason for the post-Q1 sell-off. Recently, Super Micro also witnessed a sell-off due to lower margins. Dell’s margins are under pressure due to inflationary cost increases, competition, and a higher mix of AI-optimized servers. The company forecasted adjusted gross margins to decline by 150 basis points for FY2025.
This report hinges on progress on AI PCs and the market will also want to see growth in AI servers, which reported 113% QoQ last quarter.
Revenue
Q1 revenue grew by 6.3% YoY to $22.24 billion. This is an acceleration from a (-10.9%) decline in Q4. Next quarter is expected to slightly taper off to growth of 5.2% YoY for $24.12 billion in revenue, and then accelerate again to 10.6% growth in Q3.
The Q1 revenue growth was helped by strong demand for AI servers and a return of growth in the commercial PC business.
Analysts expect FY2025 revenue to grow 9.1% YoY to $96.49 billion. This compares to an acceleration from a (-13.6%) decline in FY2024.
Analysts expect FY2026 revenue to grow 7.9% YoY to $104.15 billion.
Key Operating Segments
Revenue rebounded in the Infrastructure Solutions Group after four quarters of negative growth. Revenue grew by 22% YoY to $9.2 billion, primarily helped by strong server and networking revenue growth of 42% YoY to $5.5 billion. Storage revenue was flat YoY to $3.8 billion. Management has guided ISG revenue to grow by mid-twenties percent in Q2 and the combined ISG and CSG revenue to grow by 8% at the midpoint.
Infrastructure Solutions Group’s adjusted operating margin was 8%, down from 9.7% in the same period last year and 15.3% in the previous quarter. Margins were lower due to the increasing AI server revenue and seasonal low revenue for the storage segment. Management expects margins to improve, guiding the adjusted operating margin within the long-term target of 11 to 14% for FY2025.
Client Solutions Group’s revenue was flat at $12 billion. Commercial revenue grew by 3% YoY to $10.2 billion and consumer revenue declined by (-15%) YoY to $1.8 billion. Commercial PC demand stabilized, and management is optimistic about the PC refresh cycle and the long-term benefits of AI on the PC market.
CSG’s adjusted operating margin was 6.1%, down from 7% last year and 6.2% in the previous quarter due to competitive pricing. Management expects to be within the long-term target of 5 to 7% for FY2025.
Management expects ISG revenue to grow more than 20%, driven by strong AI demand, and CSG revenue to grow in the low single digits for FY2025. ISG and CSG combined are expected to grow 11% at the midpoint.
Margins
Margins are under pressure due to competition and a higher proportion of AI-optimized server revenue mix. The lower proportion of storage revenue seasonally also negatively impacted margins. As the year progresses, margins are expected to improve with a higher proportion of storage revenue and higher margin services revenue, offset by inflationary cost increase. The company is focused on reducing costs and has recently reduced the sales team.
Q1 gross margin was 21.6%, down from 24% in the same period last year and 23.8% in the previous quarter. Adjusted gross margin was 22.2%, down from 24.7% in the same period last year and 24.5% in the previous quarter. The lower gross margin was due to the competitive pricing environment and higher AI-optimized server revenue mix.
Management has guided adjusted gross margins to decline by about 150 basis points for FY2025 from 24.3% for FY2024 due to inflationary cost increases, competition, and a higher mix of AI-optimized servers. Previously, the guide given during Q4 results showed a decline of about 100 basis points.
The operating margin was 4.1%, down from 5.1% in the same period last year and 6.7% in the previous quarter. The adjusted operating margin was 6.6%, down from 7.6% last year and 9.6% in the previous quarter. The drop in operating margin was due to lower gross margin and was partially offset by lower operating expenses due to cost cuts.
Net income was $955 million or 4.3% of revenue compared to $578 million or 2.8% of revenue last year. The higher net income was due to the one-time tax benefit in the recent quarter.
Adjusted net income was $923 million or 4.1% of revenue compared to $963 million or 4.5% of revenue last year.
EPS
The company missed the adjusted EPS estimates by 1.9% due to a competitive pricing environment, a lower proportion of storage revenue, and a higher mix of AI-optimized server revenue mix.
GAAP EPS grew by 67.1% YoY to $1.32, helped by a one-time tax benefit. Adjusted EPS declined by (-3.1%) YoY to $1.27 and missed estimates by 1.9%.
Management Q2 adjusted EPS guide is $1.65, +/- $0.10. Analysts expect adjusted EPS to decline by (-2.8%) YoY to $1.69 and then accelerate to 15% growth to $2.16 in Q3.
Management FY2025 adjusted EPS guide is raised from $7.50 to $7.65, +/- $0.25. Analysts expect FY2025 adjusted EPS to grow 8.1% YoY to $7.71 and 20.9% growth in FY2026 to $9.32.
Cash Flow and Balance Sheet
The trailing twelve months adjusted free cash flow was $5.5 billion, which is higher than the five-year average of $4.8 billion. We would like to see the cash flow improve, particularly since the company has high debt.
Operating cash flow was $1.04 billion or 4.7% of revenue compared to $1.78 billion or 8.5% of revenue in the same period last year.
Adjusted free cash flow was $623 million or 2.8% of revenue compared to $687 million or 3.3% of revenue in the same period last year.
The company returned $1.1 billion to the shareholders through $722 million in share repurchases and $336 million in dividends.
The company had cash and investments of $7.1 billion and debt of $25.48 billion, compared to $8.68 billion and $26 billion in the previous quarter. The core leverage ratio has been maintained within the company’s target of 1.5x.
During Q1, the company issued $1.0 billion of 5.4% senior notes due 2034. It used the proceeds to prepay a portion of the outstanding 6.02% senior notes due 2026, thereby increasing the maturity and decreasing the interest expenses.
Inventory was $4.8 billion compared to $3.6 billion in the previous quarter due to higher inventory related to the AI server business.
Other Key Points to Watch
AI-Optimized Server and Backlog
The company’s AI-server optimized orders increased to $2.6 billion and AI shipment grew strongly increasing 113% sequentially to $1.7 billion. AI-server backlog increased to $3.8 billion from $2.9 billion in the previous quarter. However, was lower than the consensus estimates of $4 billion to $5 billion.
Jeff Clarke, COO and Vice Chairman, said in the earnings call, “In ISG, our AI-optimized servers orders increased to $2.6 billion, with shipments up more than 100% sequentially to $1.7 billion. We have now shipped more than $3 billion of AI servers over the last three quarters. Our AI server backlog is $3.8 billion, growing sequentially by approximately $900 million. Our AI optimized server pipeline grew quarter-over-quarter again and remains a multiple of our backlog.”
Storage revenue
Storage demand stabilized as revenue was flat in Q1 and accelerated from a (-10%) decline in the previous quarter. Storage revenue is expected to recover from the seasonal low quarters and benefit from the strong AI server demand. Management previously mentioned that storage recovery typically lags servers by a couple of quarters and also previously mentioned that “for every $1 of AI server, there's $2 of services, storage and other higher-margin things that come.”
AI PCs
Management remained optimistic about the coming PC refresh cycle. Jeff Clake said in the earnings call, “The PC installed base continues to age, Windows 10 will reach end of life later next year and the industry is making significant advancements in AI-enabled architectures and applications. We will continue to focus on commercial PCs, high-end of consumer, and gaming, driving a strong attach motion, a strategy that has served us well across various economic cycles.”
Earlier in May this year, the company announced new AI PCs during the Dell Technologies World.
Valuation
Dell is trading at a P/E ratio of 22.3 and a forward P/E ratio of 14.3, higher than the 5-year average P/E ratio of 12.5. Similarly, it trades at a P/S ratio of 0.9 and a forward P/S ratio of 0.8, above its average of 0.43. The P/S ratio peaked at 1.47 prior to the announcement of Q1 results and bottomed out at 0.72 on August 07th.
Conclusion
Dell is a beneficiary of AI servers, the new upgrade cycle coming for PCs, and AI PCs. Another catalyst is that the company might be included in the S&P 500 Index. Commercial PC and storage demand stabilized in Q1. At the same, margins are to be monitored in the upcoming quarter.
Many AI semis have stretched valuations. Dell does not have a stretched valuation yet went quite low on the last drawdown in sympathy with AI peers. Our goal is to de-risk the position at higher levels.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
Marvell is a stock we watch closely and a stock we ultimately want to own due to its abundant AI potential, yet the company’s AI potential is buried by other segments in a steep, cyclical trough. Looking ahead, next year has the makings of a solid comeback for this often-overlooked AI stock, with revenue growth set to return as early as Q3 before accelerating strongly in fiscal 2026 (CY2025).
Marvell reports fiscal Q2 earnings on August 29, with AI revenue at the forefront after management hinted at exceeding its previously set $1.5 billion AI revenue floor. This will be the key metric to watch alongside data center revenue, which is Marvell’s only end market segment with both YoY and QoQ growth at the moment. We see potential for ASICs to become a meaningful part of data center build-outs, with Big Tech touting performance and cost advantages from custom silicon hosted in the cloud, and we’re closely tracking both Broadcom as the leader and Marvell as the runner-up in the space.
Revenue
Marvell guided for $1.25 billion in revenue in the quarter, for a YoY decline of (6.5%) and QoQ growth of 7.8%. This is a notable acceleration from (12.2%) YoY in fiscal Q1, where Marvell reported $1.16 billion in revenue.
This acceleration is expected to persist through the second half of fiscal 2025, with consensus estimates for Q3 pointing to $1.41 billion, for a YoY decline of just (0.8%), a 570 bp acceleration from Q2, and QoQ growth of 12.8%. Q4 is currently estimated at $1.59 billion, for YoY growth of 11.5% and QoQ growth of 12.8%.
However, the real growth story lies in fiscal 2026, with Q1 through Q3 all currently estimated to record >30% YoY growth.
For fiscal 2025, Marvell is expected to report $5.4 billion in revenue, or a (2%) YoY decline. Revenue growth is expected to sharply accelerate to 32.2% YoY to $7.14 billion in fiscal 2026.
Key Metrics
As is the case with other AI semiconductors, Marvell’s data center segment drove Q1’s growth, nearly doubling YoY and the only end market segment with both YoY and QoQ growth. For a refresher on Marvell’s key products, refer to our prior analysis “Marvell: Tons of AI Potential Obscured by Underperforming Segments.”
Data center is Marvell’s strongest segment, with $816.4 million in revenue in Q1, up 87% YoY and up 7% QoQ. This came on the heels of another historic data center quarter of $765.3 million, up 54% YoY and up 38% QoQ. Management guided for mid-single-digit sequential growth in the segment as ASICs continues to ramp, implying revenue of ~$865 million in Q2 at ~6% QoQ growth. Electro-optics and interconnects were primary growth drivers in Q1, with initial custom silicon shipments starting, so we’re expecting to see more ASICs in the mix this quarter.
Outside of the data center, Marvell’s other segments are showing deep YoY declines.
Carrier infrastructure revenue declined (75%) YoY and (58%) QoQ to $72 million in Q1, with Q2 guided to be near flat sequentially, with management saying the recovery will be harder to predict.
Enterprise networking declined (58%) YoY and (42%) QoQ to $153 million in Q1, with Q2 similarly expected to be near flat sequentially, before recovering in the second half of this fiscal year.
Consumer revenue declined (70%) YoY and (71%) QoQ to $42 million in Q1, dragged down from softness in the gaming market. However, management believes the gaming inventory correction has cleared, with the segment expected to double on a sequential basis in Q2.
Automotive revenue declined just (13%) YoY and (6%) QoQ to $78 million, and once more is expected to be flat sequentially, with growth resuming in the second half of the fiscal year.
Margins
Margins are a bit lower historically as volume production of ASICs ramp this year, with management “expecting a very substantial ramp in the second half of this year, followed by a full year of high volume production in fiscal 2026.” This will weigh on gross margins in the near term, but will help to drive stronger operating margins, primarily due to non-recurring engineering costs.
Marvell guided for GAAP gross margin to be 46.2%, a 70 bp QoQ improvement from 45.5% in Q1 and a 730 bp YoY improvement. Adjusted gross margin was guided to be 62%, down 40 bp QoQ from 62.4% in Q1 but up 170 bp YoY.
Management provided some context on the path of gross margins, saying that the sequential decrease in adjusted gross margin stems from a shift in product mix as consumer revenue rebounds and ASICs ramp. Management added that the “substantial” ramp in H2 in ASICs “is likely to be dilutive to our current gross margins, but to be accretive to operating margin and earnings.”
GAAP operating margin for Q2 was guided at (8.8%), an improvement from (13.1%) last quarter and (15.3%) last year. While it is a step in the right direction, Marvell still has a lot of ground to cover to return to GAAP operating profitability. Adjusted operating margin is expected to be 25.6% in Q2, up 230 bp sequentially.
EPS
Though Marvell did not provide any guidance on net margins for Q2, we can infer from management’s EPS guides that net margin is likely to marginally improve sequentially.
GAAP EPS is guided to be ($0.20), +/- $0.05 for Q2, compared to ($0.25) in Q1, a slight improvement at midpoint, though the lower end of the range comes in line with Q1’s result.
Adjusted EPS is guided to be $0.29, +/- $0.05, compared to $0.24 in Q1, again a slight improvement at midpoint with the low end of the range being flat to Q1. This reflects a YoY decline of (11.1%), before improving to (7.5%) in Q3 and returning to bottom-line growth of 5.1% in Q4.
For FY2025, Marvell is projected to report $1.40 in adjusted EPS, for a YoY decline of (7.2%).
The real growth story for Marvell’s bottom line arises in FY2026, once ASICs reaches full volume production, as noted previously by management to be accretive to both operating margin and EPS. Q1 FY26 is currently estimated to see Marvell report nearly 108% YoY growth in adjusted EPS to $0.50.
On a full year basis, FY2026’s adjusted EPS growth is currently estimated at 71.9% YoY to $2.41, reflecting the significant operating leverage opportunity that lies ahead from ramping ASICs to full volume production.
Cash Flows and Debt
Cash flows have remained strong for Marvell despite the end market weakness in a majority of its segments aside from AI; however, debt is one concern as debt-to-EBITDA ratios are high.
Operating cash flow in Q1 was $324.5 million for a margin of 28%, while free cash flow was $232.5 million, for a margin of 20%. This is lower than usual due to annual employee cash bonuses.
Inventory was $826 million in Q1, decreasing $38 million QoQ and $200 million YoY. Days sales outstanding decreased 8 days to 69 days.
Cash and equivalents totaled $847.7 million at the end of Q1, down from $950.5 million at the end of the prior quarter, primarily due to the employee bonuses.
Debt totaled $4.15 billion. Marvell’s gross debt-to-EBITDA ratio at the end of Q1 was 2.27x and net debt-to-EBITDA was 1.8x.
What to Expect for AI Revenue
Marvell’s AI revenue will be closely watched in Q2, given that other AI semiconductors in AMD and Broadcom both recently raised AI revenue outlooks for this year. Marvell had guided for $1.5 billion in AI revenue exiting the fiscal year, setting a floor for next year at $2.5 billion.
Marvell had given clues that ASICs AI revenue is trending around $500 million per quarter in Q1, and offered more color on the full year outlook:
CEO Matt Murphy: “If you look at our Q2, most of the growth in the data center segment is coming from custom. So that's a positive. And then, the whole thing inflects meaningfully in the second half and I'd say from a full year perspective, the way to think about it, maybe some additional color would be, we talked about a floor of $1.5 billion for AI revenue for Marvell for this fiscal year with about two-third in electro-optics and a third in custom. And we see now both of those exceeding that number.”most of the growth in the data center segment is coming from custom. So that's a positive. And then, the whole thing inflects meaningfully in the second half and I'd say from a full year perspective, the way to think about it, maybe some additional color would be, we talked about a floor of $1.5 billion for AI revenue for Marvell for this fiscal year with about two-third in electro-optics and a third in custom. And we see now both of those exceeding that number.”
On the topic of AI revenue growth in fiscal 2026 (calendar 2025), management said:
“Our programs continue to kind of upsize in terms of the magnitude we're looking at. I'd just say we didn't give the breakout exactly for next year, but we did talk about incremental $1 billion is the floor for next year from this year, so going from $1.5 billion to $2.5 billion.we did talk about incremental $1 billion is the floor for next year from this year, so going from $1.5 billion to $2.5 billion.
And a lot of that is going to be due to the custom programs hitting their first full year of volume. So we're not calling out the exact split for next year, but maybe that will help you triangulate in the middle in terms of where we are today, where we're trying to drive the business and then also where we see the overall AI business for next year. “And a lot of that is going to be due to the custom programs hitting their first full year of volume. So we're not calling out the exact split for next year, but maybe that will help you triangulate in the middle in terms of where we are today, where we're trying to drive the business and then also where we see the overall AI business for next year. “
At the moment, analysts are already looking above that guided range. For example, JP Morgan believes Marvell’s AI revenues will easily surpass management’s $1.5 billion floor and rise to $1.6 to $1.8 billion in calendar 2024, before soaring more than 70% YoY in 2025 to $2.8 billion to $3.0 billion, as ASICs programs ramp at Amazon and later Microsoft.
Valuation
Marvell is currently trading above historical norms on top-line and bottom-line valuations, but it’s likely the market is pricing Marvell at this premium on expectations that custom silicon will ramp and accelerate ahead of schedule, and drive margin improvement and stronger bottom line growth.
Marvell is currently trading just above 11x sales, on both a TTM and forward basis, given the low growth environment for the current fiscal year. This is approximately a 30% premium to Marvell’s 3-year average forward revenue multiple of 8.6x; however, this 11x revenue multiple has been Marvell’s average for 2024.
On the bottom-line, Marvell trades near the higher end of its range over the past three years, given that margins down the line have struggled and not yet recovered. Marvell trades at nearly 50x forward adjusted EPS, much higher than its 3-year average of 34x. Marvell is expected to grow into this multiple in FY26 on the back of strong adjusted EPS growth as ASICs ramp.
Conclusion
On one hand, Marvell’s rebound and growth story might be too early, and there will be a couple of less-spectacular earnings reports until we get to the rebound in 2025. On the other hand, Marvell may start to move quicker than current consensus is forecasting as it’s participating in a few explosive trends, namely ASICs and data center optics.
How the market perceives Marvell’s non-AI segments until a material recovery arises is anyone’s guess. In a risk-on environment, these segments will be dismissed and the number of times a management team mentions the words “AI” on an earnings call is all that matters. In a risk-off environment, Marvell’s unfortunate exposure to telecom and gaming will mute upside. As it stands, we remain cautiously optimistic on Marvell.
We will cover the report for our premium members briefly BMO on Friday.
Damien Robbins, Equity Analyst at the I/O Fund, contributed to this article.
Nvidia is slated to beat this quarter and raise again next quarter. Capacity is increasing for Hopper and demand remains elevated.
Analysts are expecting demand for Hopper to absorb any minimal impact pushing Blackwell to Q1 will cause. It’s likely the B100s are canceled, which is the release that was expected this year. We wrote about why this could ultimately be bullish, if we assume the GB200s are oversubscribed. We believe the Blackwell delay will ultimately be immaterial to FY2026 revenue, and the point of last week’s analysis is there’s a much bigger picture to focus on.
With that said, I’m not loving Nvidia’s valuation. Nvidia is trading at its highest levels since the AI accelerator boom was priced in. We’ve seen some blow-the-doors off quarters during the period reflected below — which pushes back on the idea a beat/raise justifies this valuation. The big spikes downward are fiscal year adjustments, meaning if an investor feels compelled to buy at a high valuation, it’s better to do so in Dec/Jan than August.
Here’s a bottom-line valuation that reflects 50 forward PE being a psychological hurdle since Jan 1, 2023, the period where we saw AI-driven beats/raises.
Where things get complicated is the FY2026 revenue estimates are simply too low. They are at $165B and the I/O Fund believes we will see $210B (or more) this time next year. That should create about 27% room. However, FY2026 is a ways off, as it begins nearly seven months from now in February. Therefore, Q4 offers a better risk/reward setup where we’d enter based on our understanding of the 27% upside that next fiscal year will bring.
Notably, to be balanced, this earnings report marks the moment when profits are expected to plateau (as opposed to skyrocket) and margins will slightly contract for the first time since Nvidia’s big AI moment.
I want to be crystal clear that I foresee Nvidia being the strongest mega cap stock for the next decade. Trading in this case sometimes does not work as emotions run high when stocks selloff, and some investors struggle to buy back when the market is in a state of fear (versus greed).
However, the I/O Fund is an actively managed portfolio, and so our style is distinct. The facts below point toward us trimming our position and attempting to buy again lower. Keyword is “attempt.” Knox’s webinar this week is quite timely, being the first trading day after Nvidia reports. You can expect him to spend considerable time on this chart to inform our Members of our plan. He also briefly described the general outline here for Essentials.
Revenue and Financials:
Revenue for the July quarter is expected to be $28.7 billion for growth of 112.6%. Management provided guidance of $28 billion for YoY growth of 107.3% at the midpoint. Q3 is expected to be $31.7 billion for growth of 74.8%.
Pictured Above: Nvidia reported peak growth in Q4 & Q1 and revenue will decline moving forward. Our firm covered this previously here.this previously here.
FY2025 Revenue growth is expected to be $121.3 billion for growth of 99.03%. Next year, growth is expected to be 38.7% for revenue of $168.2 billion.
We discussed earlier this year that Nvidia was hitting peak growth. Blackwell’s GB200 are the predominant catalyst for next year, along with an ongoing, rapid product release cycle.
Key Segments:
The data center revenue reported revenue of $22.5 billion, up 427% YoY and up 23% QoQ. Analysts are expecting between $105B and $107B in annual data center revenue.
This is what a rough idea looks like (back of the napkin math)
Q1 at $22.5B (reported)
Q2 at $25.5B – adding $3B
Q3 at $28.0B – adding $2.5B
Q4 at $30.0B – adding $2.0B
The chances Nvidia beats are high, for example: “Jefferies expects another "strong beat in July and strong guidance into October" from Nvidia with beats of about $1B for both results and guide.
Citi has also stated: “The firm sees $1B of upside to Street sales estimates but below the $2B beat in the last four quarters based on supply chain comments and Blackwell delay concerns. Citi expects Street estimates to go higher for the next two quarters post the earnings print and for Blackwell comments to reassure investors on a strong 2025 outlook for Nvidia.”
Margins:
You can read more about the importance of HBM3e and its integration into the H200s here.more about the importance of HBM3e and its integration into the H200s here.
This quarter, the H200s shipped with HBM3e memory, which are higher priced memory components that require a re-configuring of the pricing for Nvidia’s GPUs, and subsequently may also be affecting margins.
Back in February, Next Platform did a thought exercise to predict HBM3 represented $8,800 of the GPU price and HBM3e will represent $16,500 of the street price (Nvidia will pay a lower amount) if the H200s are priced at $41,000. Nvidia will push some of the costs onto the buyers, yet there is bound to be questions in the call to determine how these higher priced components are affecting margins. As of now, we are seeing some reports the H200s cost $39,900.
Notably, this quarter Nvidia is showing signs of plateauing on profit growth. We’ve seen historic quarter-over-quarter growth where Nvidia adds about $3 billion QoQ in profits. Yet, management is guiding for roughly flat QoQ growth, and in the case of net income, a nominal decline. This is a different discussion than YoY growth, which is quite high on profits, at well over 100%.
Gross margin last quarter was 78.4% and management has guided for a decline to 74.8%. The adjusted gross margin of 75.5% will also be lower than last quarter’s at 78.9% for adjusted gross profit of $21.14B. Last year, the adjusted gross margin was 71.2% for a 430 bps expansion YoY.
Management guided for GAAP operating margin to be 60.5% compared to 64.9% last quarter. The adjusted operating margin is expected to be 65.5% for adjusted operating income of $18.3 billion. The adjusted operating margin last year was 57.57% for a 293 bps expansion YoY.
Pictured above: Nvidia expected to report a decline in margins with last quarter marking the peak
Management guided for GAAP net margin of 51.1% for net profit of $14.3 billion. This will be lower than last quarter at 57.1% for net income of $14.8 billion. Yet, is up from 45.8% last year.
Nvidia is expected to report EPS of $0.64 for YoY growth of 137.8%. The company reported adjusted EPS of $0.61 last quarter for growth of 461.5%. Q3 is expected to report EPS of $0.71 for YoY growth of 76.8%.
FY2025 EPS is expected to be $2.75 representing growth of 111.8%. FY 2026 is expected to be $3.83 representing growth of 39.4%.
Cash:
Last quarter, the company report operating cash flow of $15.3 billion for a margin of 58.9%. The free cash flow margin of 57.3% resulted in FCF of $14.9 billion. The company has $31.4 billion on the balance sheet with debt of $9.71 billion.
The company utilized cash of $7.8 billion towards shareholder returns with $7.7 billion in stock repurchases and $98 million in cash dividends. The shares started trading on a 10-for-1 stock split basis on June 10th.
Conclusion:
Our process is to not become complacent around valuations. We closed heavyweight Microsoft on these concerns and closed best-of-breed CrowdStrike on valuation concerns.
We will notnot be closing Nvidia by any meansany means, but we do think a position that is 20%+ allocation and trading at a high valuation may have a mid-single digit to high-single digit trim in its allocation in order. Blackwell is coming, but it’s not here yet — we’ve got time.
Please note: Our style is (and should be) distinct from your style. We are not financial advisors and what is best for the I/O Fund may not be best for you. Per our terms and conditions, please consult your financial advisor before making any decisions.our terms and conditions, please consult your financial advisor before making any decisions.
Nvidia is slated to beat this quarter and raise again next quarter. Capacity is increasing for Hopper and demand remains elevated.
Analysts are expecting demand for Hopper to absorb any minimal impact pushing Blackwell to Q1 will cause. It’s likely the B100s are canceled, which is the release that was expected this year. We wrote about why this could ultimately be bullish, if we assume the GB200s are oversubscribed. We believe the Blackwell delay will ultimately be immaterial to FY2026 revenue, and the point of last week’s analysis is there’s a much bigger picture to focus on.
With that said, I’m not loving Nvidia’s valuation. Nvidia is trading at its highest levels since the AI accelerator boom was priced in. We’ve seen some blow-the-doors off quarters during the period reflected below — which pushes back on the idea a beat/raise justifies this valuation. The big spikes downward are fiscal year adjustments, meaning if an investor feels compelled to buy at a high valuation, it’s better to do so in Dec/Jan than August.
Here’s a bottom-line valuation that reflects 50 forward PE being a psychological hurdle since Jan 1, 2023, the period where we saw AI-driven beats/raises.
Where things get complicated is the FY2026 revenue estimates are simply too low. They are at $165B and the I/O Fund believes we will see $210B (or more) this time next year. That should create about 27% room. However, FY2026 is a ways off, as it begins nearly seven months from now in February. Therefore, Q4 offers a better risk/reward setup where we’d enter based on our understanding of the 27% upside that next fiscal year will bring.
Notably, to be balanced, this earnings report marks the moment when profits are expected to plateau (as opposed to skyrocket) and margins will slightly contract for the first time since Nvidia’s big AI moment.
I want to be crystal clear that I foresee Nvidia being the strongest mega cap stock for the next decade. Trading in this case sometimes does not work as emotions run high when stocks selloff, and some investors struggle to buy back when the market is in a state of fear (versus greed).
However, the I/O Fund is an actively managed portfolio, and so our style is distinct. The facts below point toward us trimming our position and attempting to buy again lower. Keyword is “attempt.” Knox’s Advanced Market Signals webinar this week is quite timely, being the first trading day after Nvidia reports. You can expect him to spend considerable time on this chart to inform our Members of our plan. He also briefly described the general outline here.
Revenue and Financials:
Revenue for the July quarter is expected to be $28.7 billion for growth of 112.6%. Management provided guidance of $28 billion for YoY growth of 107.3% at the midpoint. Q3 is expected to be $31.7 billion for growth of 74.8%.
Pictured Above: Nvidia reported peak growth in Q4 & Q1 and revenue will decline moving forward. Our firm covered this previously here.this previously here.
FY2025 Revenue growth is expected to be $121.3 billion for growth of 99.03%. Next year, growth is expected to be 38.7% for revenue of $168.2 billion.
We discussed earlier this year that Nvidia was hitting peak growth. Blackwell’s GB200 are the predominant catalyst for next year, along with an ongoing, rapid product release cycle.
Key Segments:
The data center revenue reported revenue of $22.5 billion, up 427% YoY and up 23% QoQ. Analysts are expecting between $105B and $107B in annual data center revenue.
This is what a rough idea looks like (back of the napkin math)
Q1 at $22.5B (reported)
Q2 at $25.5B – adding $3B
Q3 at $28.0B – adding $2.5B
Q4 at $30.0B – adding $2.0B
The chances Nvidia beats are high, for example: “Jefferies expects another "strong beat in July and strong guidance into October" from Nvidia with beats of about $1B for both results and guide.
Citi has also stated: “The firm sees $1B of upside to Street sales estimates but below the $2B beat in the last four quarters based on supply chain comments and Blackwell delay concerns. Citi expects Street estimates to go higher for the next two quarters post the earnings print and for Blackwell comments to reassure investors on a strong 2025 outlook for Nvidia.”
Margins:
You can read more about the importance of HBM3e and its integration into the H200s here.more about the importance of HBM3e and its integration into the H200s here.
This quarter, the H200s shipped with HBM3e memory, which are higher priced memory components that require a re-configuring of the pricing for Nvidia’s GPUs, and subsequently may also be affecting margins.
Back in February, Next Platform did a thought exercise to predict HBM3 represented $8,800 of the GPU price and HBM3e will represent $16,500 of the street price (Nvidia will pay a lower amount) if the H200s are priced at $41,000. Nvidia will push some of the costs onto the buyers, yet there is bound to be questions in the call to determine how these higher priced components are affecting margins. As of now, we are seeing some reports the H200s cost $39,900.
Notably, this quarter Nvidia is showing signs of plateauing on profit growth. We’ve seen historic quarter-over-quarter growth where Nvidia adds about $3 billion QoQ in profits. Yet, management is guiding for roughly flat QoQ growth, and in the case of net income, a nominal decline. This is a different discussion than YoY growth, which is quite high on profits, at well over 100%.
Gross margin last quarter was 78.4% and management has guided for a decline to 74.8%. The adjusted gross margin of 75.5% will also be lower than last quarter’s at 78.9% for adjusted gross profit of $21.14B. Last year, the adjusted gross margin was 71.2% for a 430 bps expansion YoY.
Management guided for GAAP operating margin to be 60.5% compared to 64.9% last quarter. The adjusted operating margin is expected to be 65.5% for adjusted operating income of $18.3 billion. The adjusted operating margin last year was 57.57% for a 293 bps expansion YoY.
Pictured above: Nvidia expected to report a decline in margins with last quarter marking the peak
Management guided for GAAP net margin of 51.1% for net profit of $14.3 billion. This will be lower than last quarter at 57.1% for net income of $14.8 billion. Yet, is up from 45.8% last year.
Nvidia is expected to report EPS of $0.64 for YoY growth of 137.8%. The company reported adjusted EPS of $0.61 last quarter for growth of 461.5%. Q3 is expected to report EPS of $0.71 for YoY growth of 76.8%.
FY2025 EPS is expected to be $2.75 representing growth of 111.8%. FY 2026 is expected to be $3.83 representing growth of 39.4%.
Cash:
Last quarter, the company report operating cash flow of $15.3 billion for a margin of 58.9%. The free cash flow margin of 57.3% resulted in FCF of $14.9 billion. The company has $31.4 billion on the balance sheet with debt of $9.71 billion.
The company utilized cash of $7.8 billion towards shareholder returns with $7.7 billion in stock repurchases and $98 million in cash dividends. The shares started trading on a 10-for-1 stock split basis on June 10th.
Conclusion:
Our process is to not become complacent around valuations. We closed heavyweight Microsoft on these concerns and closed best-of-breed CrowdStrike on valuation concerns.
We will notnot be closing Nvidia by any meansany means, but we do think a position that is 20%+ allocation and trading at a high valuation may have a mid-single digit to high-single digit trim in its allocation in order. Blackwell is coming, but it’s not here yet — we’ve got time.
Please note: Our style is (and should be) distinct from your style. We are not financial advisors and what is best for the I/O Fund may not be best for you. Per our terms and conditions, please consult your financial advisor before making any decisions.our terms and conditions, please consult your financial advisor before making any decisions.
We recently discussed an emerging ad-tech AI leader in our Advanced Market Signals Tier. Our proprietary custom-built screeners identified the stock. The company witnessed a strong acceleration in growth and margins due to its AI-powered advertising engine. To read the article, upgrade here.here.
We warned our readers about the coming volatility in Nvidia. We sold ¼ of our position at $129 in June, as a result. However, we also stated that the drop is likely only a 4th wave in an ongoing 5 wave uptrend. So, we sent out several buy alerts for NVDA between $118 – $105 in July – August. We are now over 25% higher from our last buy alert and may reduce risk again due to valuation concerns as well as NVDA being in a risky technical spot.
As long as NVDA holds over $118, we can see a continued push into the low $130s. However, below $118, and we should see volatility return. If this does happen, $103 is the line in the sand. If we can hold this and turn higher, we will be targeting between $155 – $176 into October. Below $103 and we will set up a new buy plan to get more NVDA below $100.
Broadcom (AVGO)
AVGO had a lower drawdown than most AI stocks, which shows its strength. The pattern, as you can see, is clearly a 3 wave move down from the recent high. This tends to suggest a correction within a larger uptrend. As long as we hold over $142, I’m expecting a push to the low $200s next.
Bitcoin (BTCUSD)
Bitcoin appears to have completed a correction within a larger uptrend. As long as we can hold over $56,000, I’m expecting us to push into the low $80,000 range next. This is where we will begin taking gains after nearly 2 years of buying at key corrections.
We recently discussed an emerging ad-tech AI leader in our Advanced Market Signals Tier. Our proprietary custom-built screeners identified this stock. The company witnessed a strong acceleration in growth and margins due to its AI-powered advertising engine. To read the article, upgrade here.here.
This article was originally published on Forbes on Aug 22, 2024,11:24pm EDTForbesForbes on Aug 22, 2024,11:24pm EDT
Bulletproof Nvidia showed an unusual bout of weakness this past month following a report from The Information that Nvidia’s new AI chips are delayed. The report asserts that Nvidia’s upcoming artificial intelligence chips will be “delayed by three months or more due to design flaws,” resulting in a final flush of selling where the stock was down (-15%) in 7 days.
According to the report that was based on two anonymous sources, “if the upcoming AI chips, known as the B100, B200 and GB200, are delayed three months or more, it may prevent some customers from operating large clusters of the chips in their data centers in the first quarter of 2025, as they had planned.” This statement sent the market into a panic as it implies all three Blackwell SKUs will be delayed into the June quarter given the statement a three-month delay may prevent large clusters of Blackwell from not being operable in the first quarter.
It's strange then, to say the least, that according to two of Nvidia’s closest supply partners, there is evidence the GB200s will initially ship in Q4, and are expected to see an increase of production volume in Q1.
The third supplier provides a read-through that the fab producing the chips is not seeing any material impact. This is important as the The Information also asserts the machines fabricating Blackwell GPUs are sitting idle. Per the report: “it is highly unusual to uncover significant design flaws right before mass production. Chip designers typically work with chip makers like TSMC to conduct multiple production test runs and simulations to ensure the viability of the product and a smooth manufacturing process before taking large orders from customers. It’s also uncommon for TSMC, the world’s largest chipmaker, to halt its production lines and go back to the drawing board with a high-profile product that’s so close to mass production, according to two TSMC employees. TSMC has freed up machine capacity in anticipation of the mass production of GB200s but will have to let its machinery sit idle until the snags are fixed.”
The quote above implies the issues were entirely unforeseen, which might not be the case. My firm covers Nvidia’s management team statements quite closely since I first covered the AI thesis in 2018, and management has been quite clear that CoWoS-L packaging for Blackwell will require more time for testing than previous generations. I’ve dug up some of this commentary for you below.
Nvidia is delivering the history’s most aggressive product road map on new fab processes. This is a “move fast, break things” problem, which contrasted to strictly a design flaw, does not mean the architecture inherently has issues. Rather to contrast, the progression of this generation is testing the upper limits of manufacturing complexities. Blackwell with CoWoS-L packaging seeks to increase yields by circumventing a silicon monolithic interposer, and instead, will use an interposer with higher yields to help package the processing and memory components seamlessly together. The result will be to break ground on unprecedented performance gains for memory-intensive tasks.
These nuances matter for tech investors. Around this time, on August 2nd, my firm took the opportunity to buy our last Nvidia tranche at $105.73 in an effort to catch what we believe will be about 25% – 50% upside before price tops out.
We also look more closely at supply chain commentary, as there is one supply chain partner in particular that has reported a mysteriously high level of growth in a segment that is tied to Blackwell. We covered this for our premium members the evening of the supplier’s earnings report on August 6th when Nvidia stock was bottoming at $105.
As a reminder, we don’t make earnings calls, as many factors can affect stock price. Instead, we present quality research so that investors are fully informed to make their own decisions. From there, we take this a step further and publish every single trade we make on our research site. In finance, full transparency is rare, yet through never-ending tenacity, my firm has offered up to 3900% gains on Nvidia alone.
We continue this long-standing dedication to our readers in the analysis below.
Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick hereClick here
TSMC Reports 23.6% MoM Growth in July, Highest in 2024
TSMC releases monthly numbers which would reflect quickly if a highly anticipated release was causing idle machines. Instead, July monthly revenue showed a sharp acceleration from a decline in May and June to a MoM growth of 23.6% to NT$256.95 billion.
Source: I/O Fund
On a MoM/YoY basis, July reported the second largest growth this year:
Source: I/O Fund
TSMC’s MoM growth can be lumpy, yet July month’s 38.3% YoY growth points to a positive start to the September quarter. The company guided for revenue of $22.4 billion to $23.2 billion, representing YoY growth of 31.9% at the midpoint.
Source: I/O Fund
The analyst consensus estimates are trending higher, which typically, you’d see a decline in the analyst estimates on the news of a material delay. Analysts expect Q3 revenue to grow 38.1% YoY to $23.32 billion from the earlier 32.5% growth expected in mid-June and 32.1% growth expected in mid-May.
Note: The analyst estimates below differ slightly from reported figures in the company IR due to the currency conversion. However, we use the estimates below to understand the expected growth rate trend.
Source: Seeking Alpha
TSMC offered positive commentary on its business and raised the outlook when it reported its Q2 report last month. The company’s revenue grew by 32.8% YoY to $20.82 billion and beat the midpoint guide of 27.6% growth, helped by strong AI demand.
On a QoQ basis, the chipmaker’s high-performance computing (HPC) revenues rose 28% QoQ to $10.8 billion and accounted for 52% of Q2 revenue, up from 46% of revenue in Q1. HPC is above the 50% mark for the first time.
Source: I/O Fund
C.C. Wei, Chairman and CEO of the company, said in the Q2 earnings call, “Our business in the second quarter was supported by strong demand for our industry-leading 3-nanometer and 5-nanometer technologies, particularly offset by continuous smartphone seasonality.” There was a similar trend in Q1 as revenues were impacted by smartphone seasonality and offset by HPC revenue.
Wei also said that “over the past three months, we have observed strong AI and high-end smartphone related demand from our customers, as compared to three months ago, leading to increasing overall capacity utilization rate for our leading-edge 3-nanometer and 5-nanometer process technologies in the second half of 2024. Thus, we continue to expect 2024 to be a strong growth year for TSMC.”
They raised the full-year guidance to “slightly above mid-20s percent in US dollar terms” from the earlier “increase by low to mid-20% in U.S. dollar terms.” He further added, “we have such high forecasted demand from AI related business.” Given TSMC has many high-profile customers, the HPC segment alongside the CEO commentary help to differentiate the impact is coming from AI, rather than being mobile-related.
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TSMC’s Advanced Packaging
TSMC has limited CoWoS-L capacity to produce Blackwell chips. This is a problem all investors should get comfortable with as we head into 2025.
TSMC’s chip-on-wafer-on-substrate (CoWoS) architecture refers to the 3D stacking of memory and processors modules layer by layer to create chiplets. The architecture leverages through-silicon vias (TSVs) and micro-bumps for shorter interconnect length and reduced power consumption compared to 2D packaging.
There are three types of CoWoS architectures, which replaced multi-chip modules by scaling up the interposer area to fit multiple dies. Current CoWoS interposers are up to TSMC’s 3.3X reticle limit, with the goal of building interposers that can reach 8X the reticle limit by 2027. At the North American Technology Symposium earlier this year, TSMC stated they will reach 5.5X reticle limit by 2025 for more than a 3.5X increase in compute power.
As transistor density increases, advanced packaging solutions help to alleviate bottlenecks by increasing interconnect density, which results in higher signal speed and processing power.
CoWoS-S: this is the most popular CoWoS architecture for GPUs already deployed, including Nvidia’s H100s, H200s and AMD’s MI300s. It uses silicon as the interposer material and is lower cost than CoWoS-R.
CoWoS-R: connects chips with redistribution layers (RDL) wiring as the interposer material, offers InFO technology as an upgrade for HBM memory and SoC integration.
InFO technology reduces the size of components in more powerful devices. By being Fan-Out (FO) instead of Fan-In, TSMC’s process can integrate multiple dies on top of each other with a common I/O connecting layer.
CoWoS-L: combines multiple Si interconnects (LSI) for a reconstituted interposer (RI) that replaces the monolithic silicon interposer in CoWoS-S. By taking the benefits of CoWoS-S, CoWoS-L offers strong system performance while avoiding the yield loss from one Si interposer.
Nvidia designs offer pure ingenuity, for example, the A100s offered sparsity and the H100s offered a transformer engine. We covered the importance of the Transformer Engine for our premium site six months prior to Hopper shipping, which led to entries as low as $10.85 when factoring in the stock split. Ultimately, Nvidia’s design ingenuity combined with TSMC’s process improvements defy Moore’s Law.
Due to TSMC’s CoWoS-L requiring more complexity and precision, it was already expected the validation and testing process would be time consuming. We had stated in the analysis Nvidia Q1 Earnings Preview: Blackwell and The $200B Data Center that “the advanced CoWoS packaging that is needed to combine logic system-on-chip (SoC) with high bandwidth will take longer, and thus, it’s expected that Blackwell will be able to fully ship by Q4 this year or Q1 next year. How management guides for this will be up to them, but commentary should be fairly informative by Q3 time frame.”
Per another source, Trend Force last April: “Although NVIDIA plans to launch products such as the GB200 and B100 in the second half of this year, upstream wafer packaging will need to adopt more complex and high-precision CoWoS-L technology, making the validation and testing process time-consuming. Additionally, more time will be required to optimize the B-series for AI server systems in aspects such as network communication and cooling performance.It is anticipated that the GB200 and B100 products will not see significant production volumes until 4Q24 or 1Q25.”
From the horse’s mouth, Nvidia’s own management team, it was stated during the GTC Financial Analyst Day in March that the very first systems will ship in Q4, but to expect constraints. In a roundabout way, the CEO tells investors what to expect should this happen, which is that customers will continue to build with H100s, H200s and any other supply they can get their hands on.
Atif Malik, Citigroup:
Hi. I am Atif Malik from Citigroup. I have a question for Colette. Colette in your slides, you talked about availability for the Blackwell platform later this year. Can you be more specific? Is that the October quarter or the January quarter? And then on the supply chain, readiness for the new products is the packaging, particularly on the B200 CoWoS-L and how you are getting your supply chain ready for the new products?
Colette Kress:
Yeah, so let me let me start with your second part of the question, talking about the supply-chain readiness. That's something that we've been working well over a year getting ready for these new products coming to market. We feel so privileged to have the partners that work with us in developing out our supply chain. We've continued to work on resiliency and redundancy. But also, you're right, moving into new areas, new areas of CoWoS, new areas of memory, and just a sheer volume of components and complexity of what we're building. So that's well on its way and will be here for when we are ready to launch our products. So there is also a part of our supply chain as we talked earlier today, talking about the partners that will help us with the liquid cooling and the additional partners that will be ready in terms of building out the full of the data center. So this work is a very important part to ease the planning and the processing to put in all of our Blackwell different configurations. Going back to your first part of the question, which is when do we think we're going to come to market? Later this year, late this year, you will start to see our products come to market. Many of our customers that we have already spoken with talked about the designs, talked about the specs, have provided us their demand desires. And that has been very helpful for us to begin our supply chain work, to begin our volumes and what we're going to do. It's very true though that on the onset of the very first one coming to market, there might be constraints until we can meet some of the demand that's put in front of us. Hope that answers the question.
Jensen Huang:
Yeah, That's right. And just remember that Hopper and Blackwell, they're used for people's operations and people need to operate today. And the demand is so great for Hoppers. They — most of our customers have known about Blackwell now for some time, just so you know. Okay, so they've known about Blackwell. They've known about the schedule. They've known about the capabilities for some time. As soon as possible, we try to let people know so they can plan their data centers and notice the Hopper demand doesn't change. And the reason for that is they have an operations they have to serve. They have customers today and they have to run the business today, not next year.
—End Quote
Recently, Nvidia’s VP Ian Buck stated at BofA Financial Conf in June 2024; “So we stated recently in our earnings that Blackwell has now entered into production builds. We started our production.
The samples are now going — will go out this quarter, and we're ramping for production outs later this year. And then everything — that always looks like a hockey stick, you start small and you go pretty quick to the right. And the challenge, of course, is with every new technology transition comes — the value is so high, there's always a mix of a challenge of supply and demand. We experienced that certainly with Hopper. And there'll be similar kinds of supply/demand constraints in the on-ramp of Blackwell certainly at the end of this year and going into next year.”
Taking this full circle, let’s go back to what TSMC said in the most recent earnings call about CoWoS capacity:
Management stated in the earnings call Q&A that the supply is expected to continue to be tight next year, and they are working with OSAT (Outsourced Semiconductor Assembly and Test) partners to increase production capacity.
Gokul Hariharan:
“How do you think about supply demand balance for AI accelerator and CoWoS advanced packaging capacity? And I think in your symposium you talked about 60% CAGR, component growth for CoWoS capacity in the next four, five years. So, could you talk a little bit about how much capacity for CoWoS would you be planning to build next year as well?”
C. C. Wei:
“Gokul, I also try to reach the supply and demand balance, but I cannot today. The demand is so high, I have to work very hard to meet my customers' demand. We continue to increase, I hope sometime in 2025 or 2026 I can reach the balance. You're talking about the CAGR or those kind of increase of the CoWoS capacity. Now it's out of my mind. We continue to increase whatever, wherever, whenever I can. Okay. The supply continues to be very tight, all the way through probably 2025 and I hope it can be eased in 2026. That's today's situation.”
Gokul Hariharan:
“Any thoughts on next year capacity? Are you going to double your capacity again next year for CoWoS?”
C. C. Wei:
“The last time I said that, this year I doubled it, right? More than double. Okay. So next year, if I say double, probably I will answer your question again next year and say more than double. We are working very hard, as I said. Wherever we can, whenever we can.”
—End Quote
My notes: There were many opportunities for TSMC to report a material impact from idle machines – quarterly numbers ending in June, July monthly numbers, commentary during the earnings call from the CEO that establishes the opposite, which is that capacity is primarily the issue (rather than a dire flaw that is halting production) and the company is working hard to increase this capacity.
Earlier this month, TrendForce citing Money DJ’s report, estimated that CoWoS capacity is in short supply at 35,000 to 40,000 wafers this year. With outsourced capacity, 2025 production could be over 65,000 wafers per month.
According to the report, TSMC will assign the orders of the initial stage of CoWoS packaging, Chip on Wafer (CoW) to OSAT partner SPIL. This is the first time the company is outsourcing this process since the demand is high and previously WoS (Wafer-on-Subtrate) process was outsourced while keeping the higher margin CoW process in-house.
According to DigiTimes, the company is expected to have CoWoS production of 60,000 wafers per month in 2025 and a further increase to 70,000 to 80,000 in 2026 after the company recently acquired Innolux Fab. The 2025 production capacity would suggest a 300% increase from 15,000 at the end of 2023.
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Super Micro: The Near-Perfect Proxy for Nvidia
Super Micro stock surged alongside Nvidia over the past year and a half with returns of 659% compared to Nvidia’s returns of 787.8%. Supermicro is a leading partner on building AI systems with Hopper GPUs by leveraging air cooled and liquid thermal designs for AI accelerators to grow upwards of 5X faster than the industry average for subsystems and server systems.
The Hopper generation is primarily air cooled. However, the percentage of air-cooled systems shipped versus liquid cooled systems will change (dramatically) with Blackwell.
In June, we wrote an analysis on AI Power Consumption: Rapidly Becoming Mission Critical which stated that as the industry progresses towards a million-GPU scale, this puts more emphasis on future generations of AI accelerators to focus on power consumption and efficiency while delivering increasing levels of compute. Data centers are expected to adopt liquid cooling technologies to meet the cooling requirements to house these increasingly large GPU clusters.
Specifically, it’s the Blackwell architecture that kicks off the need for liquid cooling. Most servers today are air-cooled yet AI necessitates a shift to liquid cooling as the H100 GPUs are already at 700W of power and Blackwell GPUs will see a 40% increase to 1,000W or higher. The B200 doubles the transistor count compared to the H100 and provides 20 petaflops of AI performance compared to the H100s 4 petaflops. The resulting 3X leap in training performance and 15X leap in inference performance is shifting the focus to liquid cooling as 1,000 watts is too hot to be air cooled.
The B200 systems and chipsets will be the first release to be primarily liquid cooled, according to Dell, who competes with Super Micro on building AI servers. Note that per the statement from Dell in March, the B200s are due in early 2025.
Tom’s Hardware has also stated that direct liquid cooling will start with Blackwell: “Even Nvidia's high-end H100 and H200 graphics cards work well enough under air cooling, so the impetus to switch to liquid hasn't been that great. However, as Nvidia's upcoming Blackwell GPUs are said by Dell to consume up to 1,000 watts, liquid cooling may be required.”
VP Ian Buck of BofA GTC Conference in June of 2024 also stated: “The opportunity here is to help [customers] get the maximum performance through a fixed megawatt data center and at the best possible cost and optimized for cost. By doing 72 GPUs in a single rack, we need to move to liquid cooling. We want to make sure we had the higher density, higher power rack, but the benefit is that we can do all 72 in one NVLink domain.”
Super Micro is a proxy for Nvidia as its growth has been in lock-step with the AI GPU juggernaut since the launch of the H100 nearly two years ago. Most importantly, we have a key metric from Super Micro that is specifically tied to Nvidia’s Blackwell launch, which is the ramp of liquid cooling.
Liquid cooling has been around for 30 years, yet the H100s and H200s launched with air cooled systems. Today, Super Micro builds HGX AI supercomputers with racks that support 64 H100s, H200s or B200s with direct liquid cooling (DLC), saving up to 40% of energy costs. Although H100s and H200s have the option for DLC, the CFO of Super Micro has stated that as GPUs and CPUs run over 1,000 watts, the benefits of liquid cooling are “going to start to become painfully obvious.”
Per the CEO in last month’s earnings call, it was the months of June and July specifically when DLC started to ramp: “I mean as you know liquid cooling have been in the market for 30 years and market share compared with overall datacenter size always small, less than 1% or close to 1%, I would have to say. But just June and July two months alone, we shipped more than 1,000 racks to the market. And if you calculate 1,000 racks, AI rack is about more than 15% on a global datacenter new deployment.”
Next quarter will mark the highest quarter growth in Supermicro’s history with guidance for 206.6%, an acceleration from the previous quarter’s growth of 144%. This is 590 bps higher than Super Micro’s previous record quarter for 200.7% growth.
Source: I/O Fund
Direct Liquid Cooling is Surging
Considering that Blackwell is a clear catalyst for direct liquid cooling, it is odd to say the leastthat Supermicro reported on August 6th that demand for direct liquid cooling is surging, a mere four days after The Information’s dire report.
According to Super Micro’s earnings report, the company’s direct liquid cooling capacity grew 50% month-over-month from 1,000 racks per month to 1,500 racks per month. By year end, the company will grow to 3,000 racks per month, resulting in 200% growth in six months.
This represents an increase from Super Micro’s original estimate the company would end the year with 1,500 racks. The CFO stated: “But even we were surprised by the acceleration that we saw in the liquid-cooled rack market.”
SuperMicro offers liquid cooled H200 HGX systems, yet the H200s run up to 700W; not the 1000W that necessitates DLC. I have yet to see where the H200 was expected to drive overnight demand for DLC, rather, it’s been expected for some time that Blackwell would be the catalyst for the DLC market.
To put the sudden surge in context, Super Micro stated: “I believe for June and July in last next two months we may ship at least 70% to 80% of liquid cooling compared with all the liquid cooling in the world. So for liquid cooling, we have at least 70% to 80% market share” – the readthrough is the DLC market skyrocketed very suddenly in the last two months.
Supermicro’s report is communicating that servers that require direct liquid cooling are soaring (suddenly) as of June and July from 1% of all new servers shipped to 15% at 1,000 racks. Management is also communicating that it’s expected to continue to soar to 3,000 racks by the end of this year, reaching up to 30% of servers shipped.
Yet if Blackwell is materially delayed, how can liquid cooling be skyrocketing?
A Few Theories I’m Working With:
Theory #1: The Delay Was Accounted For:
Per the GTC commentary from management, the very first GB200 systems will ship in Q4 and will ramp from there, with the understanding Blackwell will be capacity constrained. Financial analysts knew CoWoS-L could present delays, and the April press release from Trend Force clearly describes this, stating CoWoS-L is “making the validation and testing process time-consuming.”
Nvidia reiterated that Q4 is when the first systems would ship after The Information’s report with an Nvidia spokesperson stating to The Verge: “Nvidia expects production of the [B200] chip “to ramp in 2H,” according to a statement that Nvidia spokesperson John Rizzo shared with The Verge. “Beyond that, we don’t comment on rumors.”
The delay may have already been accounted for, as discussed, it’s a new packaging process and a more complex chip, with many statements on record it would require additional testing. This would help explain why TSMC and Super Micro are raising/beating estimates driven by their AI segment as it implies their guidance was aligned with the delay.
Theory #2: The GB200s NVL36 and NVL72s are Hogging CoWoS-L Capacity
My firm has been reporting on X for months that GB200 demand is surging. For example, UBS said that it believes “demand momentum for $NVDA Blackwell rack-scale systems remains exceedingly robust” and that the “order pipeline for (Nvidia's) NVL72/36 systems is materially larger than just two months ago.”
According to reports from Wccftech: “Team Green is expected to ship 60,000 to 70,000 units of NVIDIA's GB200 AI servers, and given that one server is reported to cost around $2 million to $3 million per unit, this means that Team Green will bag in around a whopping $210 billion from just Blackwell servers along, that too in a year.”
The weight of that report cannot be overstated as it implies 26% upside to 2025’s estimates based on one SKU alone. In fact, this one SKU is expected to drive 9% more revenue than analysts currently have estimated two years out for FY2027.
Source: Seeking Alpha
Theoretically, if the GB200 systems are seeing enough demand to exceed FY2027 estimates (per the preliminary data), Nvidia would be wise to cancel the B100s and B200s built on CoWoS-L capacity entirely, and switch these SKUs back to CoWoS-S. There’s a write-up on new SKUs based on CoWoS-S capacity and air-cooling from Semi Analysis here.
Here’s why the GB200 can drive this kind of revenue so quickly:
Nvidia’s GB200, featuring one Grace CPU and two B200 GPUs, is estimated to sell for ~$60,000 to $70,000.
In the NVL36 configuration, featuring 18 GB200s (18 Grace CPUs and 36 B200s), each GB200 would be selling for $100,000 at the current estimated ASP of $1.8 million.
In the NVL72 configuration, featuring 36 GB200s (36 Grace CPUs and 72 B200s), each GB200 would be selling for ~$83,333 at the current estimated ASP of $3 million.
In this case, Nvidia would theoretically prioritize the GB200 NVL36 and NVL72 as the price points are quite high. The two NVL36 and NVL72 rack configurations carry a ~27% to ~54% higher selling price per GB200, making it understandable why Nvidia would focus on the racks given production constraints from CoWoS capacity.
Ultimately, reconfiguring lower priced SKUs will not matter to Wall Street if it’s based on outsized demand for GB200s. This theory hinges on Super Micro’s report, as it’s the sudden surge in direct liquid cooling sales that is truly mysterious. From my vantage point today, it feels nearly impossible that Super Micro could report this level of surge in direct liquid cooling from 1% of systems in May, to 15% of systems today, to 30% of systems by the end of the year and for there to be a material, unforeseen delay in every Blackwell SKU.
If the B100s and B200s are pushed out in favor of the GB200NVLs, then next year will be game-on for Nvidia investors as these systems sell at a high multiple. Keep an eye out for where bad news now (some GPUs are canceled) eventually becomes good news over the next four quarters (in favor of systems priced 36X to 72X higher).
Foxconn Earnings Call Commentary:
Briefly, I’d like to mention Foxconn has recently stated in an earnings call: "We are on track to develop and prepare the manufacturing of the new [Nvidia] AI server to start shipping in small volumes in the last quarter of 2024, and increase the production volume in the first quarter of next year.”
The company also indirectly debunked The Information’s assertion that “it is highly unusual to uncover significant design flaws right before mass production” with Foxconn stating the opposite "It is normal to dynamically adjust [shipment schedules] when the specs and technologies of a new product are largely upgraded. Whether the shipping schedule changes or not, Foxconn will be the first supplier to ship the first batch of GB200," Wu said.
Note Foxconn specifically calls out shipping the GB200, rather than the B100, which was due to ship first. Hopefully, by now it’s clear to our readers should the B100 be bumped, this could have a bullish readthrough if Nvidia re-allocates CoWoS-L capacity to the higher priced GB200 systems.
The H200 is a Force of Its Own
To further the conversation on why a delay in the B100s and B200s can be absorbed, it’s worth taking a moment to discuss the H200.
The H200 is shipping now and is a force of its own with 141 GB of HBM3e memory, up from 80 GB of HBM3 memory in the H100. The GH200 superchip is also equipped with HBM3e and is shipping this quarter.
By significantly boosting memory per GPU – up ~75% from 80 GB of HBM3 in the H100s – the H200 allows Nvidia’s customers to address memory-constrained workloads, such as workloads requiring the largest LLMs, which were built and trained on the H100s. This will fill the gap between shipments of the H100 and Blackwell by easing one critical bottleneck to AI training – memory bandwidth.
The question that I’ve seen raised time and again by investors is why is Nvidia’s GPU demand is this durable in a typically cyclical industry? The answer lies within the H200 and Blackwell. As VP Ian Buck explained at BofA’s GTC Conference in June, “From the end of '22 to today, I think we've improved Hopper's inference performance by 3x. So we're continuously making the infrastructure more efficient, faster and more usable. And that gives the customers who have to now buy at a faster clip, confidence that the infrastructure that they've invested in is going to continue to return on value and does so.”
More importantly, Buck emphasized that hyperscalers “can retire their old legacy systems that maybe they've just left, not upgraded. They can accelerate the decommission of the older CPU infrastructure.” Essentially, Nvidia’s customers can free up megawatts of power and hundreds of racks (and save millions with performance and efficiency gains providing lower TCOs) by decommissioning prior generations of GPUs or CPU-based servers, and this goes for the H200 and Blackwell. Customers can retire older GPU generations such as Volta and Ampere and refit it with H200s, while waiting for Blackwell chips to build new infrastructure, allowing them to benefit from the memory upgrades while in mid-cycle for the Blackwell upgrade.
On the HBM3 side, Micron, SK Hynix and Samsung are intertwined in a deep competition for supply, with SK Hynix serving as the primary supplier for the H100 and Micron being the first to announce itself as the supplier for the H200. Micron has said it is sold out of HBM3e supply through 2025, with preparations and discussions already being made for HBM4 and HBM4e in 2026 and beyond. SK Hynix also revealed earlier in May this year that it was nearly entirely sold out of HBM through 2025. On the other hand, Samsung has reportedly struggled for some time to validate its HBM3e chips with Nvidia due to power consumption and heat issues.
We’re still seeing no signs of slowing for H100 and H200 demand, with DigiTimes reporting last week that H100 and H200 production volumes have been “increasing monthly.” There are also signs in the broader DRAM market that point to HBM demand remaining robust, another signal pointing to lasting Hopper demand. DRAM revenue in the June quarter surged nearly 25% QoQ to $22.9 billion, driven primarily by HBM demand and rising prices due to “aggressive procurement strategies” from buyers.
Conclusion:
As of now, there’s a disconnect between next fiscal year’s revenue estimates of $167 billion and the $210 billion in GB200s alone expected to ship next year. Perhaps analysts are waiting for signals the supply chain can produce these outsized orders. So far, so good with the signals we see from TSMC and SMCI’s most recent earnings reports. Foxconn commentary helps, as well.
Where Nvidia investors run a risk is the valuation of 25X forward PS and 45X PE Ratio as it’s the highest the stock has traded since the market has priced in the AI accelerator boom. My firm believes in an active approach to managing risk. For example, if you had bought the 2022 top in Nvidia, you’d currently be up over 275%. If you bought the October 2022 low, you’d be up over 1100%. It is unlikely many bought the top and bottom in any stock (we actually did buy Nvidia at the very low on October 18th, 2022, but it’s rare). Yet, being cognizant of the larger trend and pattern in play has allowed us to increase our return while decreasing the risk with Nvidia.
Point being, we actively seek to buy quality companies at lower prices. Let the market (with help from the media) doubt the AI juggernaut in its first inning, let them drag the price down, and then our plan is to pounce … because Blackwell is on its way, the GB200s are going to crush expectations in FY2026, we are getting the green light from suppliers the delay is immaterial at this time, demand/big tech capex remains high, and let’s be real, nothing can stop what’s coming.
Please note: The I/O Fund conducts research and draws conclusions for the company’s portfolio. We then share that information with our readers and offer real-time trade notifications. This is not a guarantee of a stock’s performance and it is not financial advice. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis. Beth Kindig and the I/O Fund own shares in NVDA at the time of writing and may own stocks pictured in the charts.
