Shopify Stock Is A Black Friday Beneficiary That Faces Key Test In Q4

Posted on December 9, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Dec 5, 2024,06:10pm ESTForbes on Dec 5, 2024,06:10pm EST

Black Friday and Cyber Monday e-commerce sales broke records again this year, with Adobe pointing out that US sales increased 10.2% YoY to $10.8 billion on Black Friday while Cyber Monday sales rose 7.3% YoY to ~$13.3 billion. Peak sales hit $15.8 million per minute on Monday evening.

Shopify is a major beneficiary of Black Friday sales, and coming off a strong Q3, saw another record-breaking holiday. Shopify’s growth was quite strong at two times higher than overall Black Friday sales, with GMV increasing 22% YoY to a record $5 billion. For Black Friday/Cyber Monday, GMV rose 24% YoY to $11.5 billion with peak sales hitting $4.6 million per minute.

Q3 was strong with revenue growth accelerating to 26% YoY, operating income more than doubling YoY and FCF margin approaching 20%, the true test will be Q4. Shopify will need to prove to the Street that it can continue to re-accelerate revenue into 2025 given the strong Black Friday trends and international expansion efforts.

Shopify Revenue Growth Reaccelerates in Q3

Shopify reported a strong third quarter earlier in November, with revenue growth reaccelerating more than 500 bp sequentially. Q3 revenue increased 26.1% YoY to $2.16 billion, with growth accelerating from 20.7% in Q2. Excluding logistics (comps from Q2 23 to Q2 24), Q3 was the sixth consecutive quarter with revenue growth of >25%.

For Q4, management guided revenue growth in the mid- to high-20% range, benefiting from the holiday season and building upon Q3’s growth. Given the recent data on Black Friday sales, Shopify is well on its way to deliver on this guide.

Shopify's revenue growth reaccelerated in Q3 after decelerating for five consecutive quarters. Source: I/O Fund

Shopify pointed out three key drivers of revenue growth and strength in Q3:

Strong GMV growth
Subscription Solutions revenue growth
Increased Payments penetration

I break these key points down for you below.

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GMV Driven by European Growth of 35%

International helped to drive the beat this quarter, with GMV “outside North America growing 33% in Q3. European GMV grew greater than 35% as our largest markets of the UK, Germany, France, and the Netherlands continue to gain traction.”

Global GMV increased 24% to $69.7 billion in the third quarter, the fifth quarter in a row where growth exceeded 20%. This was driven by same-store sales growth by Shopify and Shopify Plus merchants (organic growth from existing stores), as well as that international strength. Shopify Plus is tailored to large and enterprise businesses, offering exclusive conversion and automation features and lower fees to help drive growth for those merchants.

Additionally, Q3 offline GMV was up 27% YoY, and has more than doubled in just the past three years. Q3 B2B GMV grew over 145% YoY, and has now had five consecutive quarters of triple-digit growth. This shows Shopify’s diversity ability to grow beyond digital stores for small-to-medium sized retail customers, which had driven the bulk of the business during the stock’s Covid surge. The expansion into Europe also shows promising signs of Shopify’s ability to scale globally in a more meaningful way. The company stated they “made enhancements to localization, shipping, and compliance, and are pairing that with intensified marketing efforts” for Europe.

Black Friday was also strong and an early indicator for Q4, with Shopify recording $5 billion in GMV for the holiday, a 22% YoY increase, in-line with last year’s growth. Deutsche Bank analysts noted that this GMV puts Shopify on track to hit Q4 GMV expectations of $92.8 billion, correlating to a 23.6% YoY increase, about in line with Q3’s growth rate.

To note, GMV growth of 24% lags revenue growth of 26%. This is not necessarily a negative; however, it does hint that customer spending could be slowing slightly, and a further decoupling of the two rates could suggest a revenue re-acceleration may be short-lived if this decoupling continues.

Subscriptions: MRR Accelerates 3-Points

Shopify’s Subscription Solutions revenue, the second stated driver of revenue growth, increased 26% YoY to $610 million, and represents 28% of revenue. Growth has decelerated from 34% YoY in Q1 and 27% YoY in Q2, but MRR trends point to growth stabilizing around 26% or reaccelerating slightly come Q4 and into 2025 with some pricing and merchant growth tailwinds.

In Q3, MRR growth accelerated 3 points to 28% YoY, up from 25% in Q2, reaching $175 million. Plus contributed 31% of MRR, flat with last quarter, while Plus, Standard and Point of Sale all saw “continued growth” in Q3.

In Q3, MRR growth accelerated 3 points to 28% YoY, up from 25% in Q2, reaching $175 million. Source: I/O Fund

Shopify Payments up 31%, Shop Pay up 42%

Shopify Payments facilitated $43 billion in GPV in Q3, up 31% YoY, with penetration rising to 62% of GMV (compared to 58% last year). Shop Pay similarly increased 42% YoY to $17B in GMV. Management attributed the strength in payments to a few factors: strong performance of merchants utilizing Payments, more of which are Plus subscribers, higher global adoption of payments; and increasing penetration of Shop Pay.

For Q4, Payments are likely to provide a headwind down the line, due to holiday season dynamics. In Q3, the lower margins on Payments came from a higher mix of Shopify Plus merchants, which are larger enterprises at a fixed rate, and due to a higher mix of credit card usage compared to debit card usage. Shopify explained that Q4 “sees a higher percentage of revenue from Payments given the high-volume holiday selling season,” and as a result, management expects “higher dollar losses on Payments” due to that volume growth.

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Q4 Earnings Pop May be Short-Lived

Analysts are forecasting that Shopify regresses back towards revenue growth in the 20% range by FY25. Currently, Shopify is estimated to report 27.2% YoY growth in Q4, supported in part by 24% YoY growth in Cyber Week GMV. This would mark a sequential acceleration of 110 bp, and 360 bp faster growth than the 23.6% recorded last Q4.

Analysts are forecasting that Shopify regresses back towards revenue growth in the 20% range by FY25. Source: I/O Fund

Shopify’s revenue growth is more correlated to GMV growth now as opposed to 2022 and early 2023. For example, Shopify was reporting revenue growth rates >10 percentage points higher than GMV growth due to GPV growth, pricing and merchant revenue growth.

By Q4 2023, revenue growth became much more closely tied to GMV – Shopify reported 23.2% GMV growth in that quarter and 23.6% revenue growth, and in Q1 2024, GMV growth was 22.8% versus revenue growth of 23.4%. However, Q3 showed a larger decoupling of the two, with GMV growth of 24.0% lagging revenue growth by more than 2 percentage points.

Q3 showed a larger decoupling of GMV and revenue growth, with GMV growth of 24.0% lagging revenue growth by more than 2 percentage points. Source: I/O Fund

This suggests that if GMV growth begins to peak in Q4 and decelerate, revenue growth may soon follow if Shopify cannot push GPV growth to >30% or pull additional levers such as pricing to maintain a high-20% revenue growth rate.

To point out, analysts currently expect GMV growth of ~23.6% in Q4, again much slower than the 27.2% estimated revenue growth rate, though increased Payments volume will play a role in that. Moving into 2025, if GMV trends towards 20%, there’s risk that revenue growth will follow.

These are a few things that I’m watching for as I continue to evaluate Shopify. I provide weekly deep dives, real-time trade alerts and weekly webinars to evaluate positions and discuss potential entries and exits. Learn more here.

Executing Well with 132% Growth in Adjusted Operating Income

Shopify is executing very well despite margin headwinds, driving operating income growth well in the triple digits despite contracting gross margins in Q3.

Corporate gross margin contracted 90 bp, dropping from 52.6% last year to 51.7%, weighed down by Merchant Solutions (accounting for 55% of gross profit dollars), where gross margin contracted 130 bp to 39.7%. Management added that Payments had an adverse impact to Merchant Solutions’ gross margin for two reasons: it accounted for a larger portion of revenue, while it also had lower margins due to higher Plus merchant mix on a fixed rate and a higher credit card mix compared to debit cards.

Despite the headwinds to gross margin, Shopify’s cost optimization efforts are bearing fruit. Gross profit increased 24% YoY, or $217 million in dollar terms, while operating expenses increased just 7% YoY, or $56 million in dollar terms. This drove a 132% YoY increase in adjusted operating income from $122 million in $283 million, or 13.1% of revenue. This led to a 99% increase in adjusted net income, excluding equity investment impacts.

Q4 is expected to see this dynamic continue, despite more margin headwinds. Based on management’s guidance, gross margin is expected to contract 3.2% QoQ and 1.1% YoY while operating income is projected to increase 2.8% QoQ and increase 2.5% YoY.

Shopify Stock Has Potential Catalysts Ahead

Shopify has a couple catalysts ahead, one in moving upstream to capturing more enterprises on the platform, and the other within AI and automation features facilitating daily workflows for merchants.

In Q3, management highlighted that the quarter was “an exceptional quarter in terms of new enterprise-level brands” from all verticals coming to Shopify. Management said that enterprise “is a massive opportunity to build for the long term,” with the opportunity only beginning to bud, with just 16 enterprise launches in Q3.

Shopify believes it offers a value proposition for enterprises to switch to its platform due to flexibility and speed. To demonstrate this, management explained that “one merchant recently brought over 44,000 SKUs to Shopify in less than three minutes, a task that used to take hours if not days. This significant reduction in data migration hassle is a big deal as it removes major friction point for merchants looking to move to Shopify.” Migrating over more enterprise brands in the coming quarters can provide tailwinds to both GMV and GPV, bringing more sales and more payment transactions to the platform.

The data migration point ties hand in hand with another catalyst for Shopify, arising from AI and automation features. Shopify is working on improving merchant automation, from data migration to inventory management and more. Shopify Flow, which is Shopify’s low-code workflow automation app that empowers merchants to build custom automations has been improved with 304 new actions in the API. Shopify Inbox is now utilizing AI to assist merchants in quickly responding to customer inquiries, while new automations for tax filings and VAT were added to Shopify Tax.

Shopify is also implementing artificial intelligence to drive higher levels of personalization for customers, and in turn, drive higher value for merchants. President Harley Finkelstein explained Shopify thinks “search and AI together makes the Shop search way more relevant, way more personalized,” and that “the change that we've made, in some cases, have led to an 18% increase in sessions where a buyer engages in a recommendation with our new home feed.”

To that extent, Shopify announced that Mikhail Parakhin recently joined as CTO, after spending more than a decade at Microsoft helping to launch Copilot and spearheading search and AI innovations at Yandex. Shopify said that Parakhin “brings a wealth of experience in AI and search technologies” and “in just over two months since he joined us, he has already made a significant impact enhancing our products.”

Technical Analysis:

As long as any weakness can hold $89.95, I expect the uptrend to push into the $132 region and then the $150 – $190 region. If any further weakness cannot hold $89.95, then the odds SHOP will push higher go down significantly. It is well above this level, so we should continue to look higher.

As long as any weakness can hold $89.95, I expect the uptrend to push into the$132 region and then the $150 – $190 region. Source: I/O Fund

Once it gets to the $132 – $190 region, what next? This is where SHOP gets a little tricky. The larger uptrend off the 2022 low has unfortunately been quite messy. This opens the door to several potential larger patterns in play. What my firm can say with a higher degree of confidence is that if SHOP can break above the $190 region and do so on elevated volume and in a direct manner, it will favor the more bullish interpretation of what is potentially playing out.

However, if it fails to breakout over the $190 region, and instead see a larger pullback from the $150 – $190 region, then we will likely see a notable correction before pushing higher. We really will not know what is in play from a technical analysis perspective until we get into the above target range and see what SHOP’s price does next.

Conclusion

Shopify has performed well despite gross margin headwinds, as prudent cost optimization efforts are leading to significant operating leverage. Q3 demonstrated this with triple digit operating income growth despite gross margin contracting nearly 1 percentage point. Although this dynamic along with strong growth is expected to continue into next quarter, ideally I’d want to see GMV keep pace with revenue growth into 2025.

Analysts seem to agree with next year consensus showing growth exiting next year at 21.2%. Although the near-term catalyst is strong Black Friday performance, likely leading to strong holiday performance (we will see), the medium-term catalysts are found in global expansion, increased enterprise mix, and placing more focus on AI and automation features to help merchants increase productivity and drive more sales.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Marvell Q3 Earnings: Strong Sequential Growth; Expanded AWS Partnership

Posted on December 5, 2024June 30, 2026 by io-fund

Marvell reported impressive Q3 results that beat revenue estimates by 4% and adjusted EPS estimates by 5.5%, led by strong AI demand. The Q4 guide was an outlier, as it beat revenue estimates by 9.1% and adjusted EPS estimates by 13.5%. Management expects to significantly exceed the full year AI revenue target of $1.5 billion and set the tone the company will easily beat the FY2026 AI revenue target of $2.5 billion.

Marvell also announced an expanded five-year partnership with AWS this week to supply the cloud infrastructure giant with custom Trainium and Inferentia chips. The deal is “multi-generational,” implying Marvell will continue to supply the Trainium2 5nm (Trn2) being released for general availability this week while also supplying the newly-announced Trainium3 (Trn3) on the 3nm process node expected to ship at the end of 2025. Amazon is an investor in Anthropic with plans to build a supercomputing system with “hundreds of thousands” of Trainium2 chips called Project Rainier.

The CEO stated the following when asked for more details on the expanded AWS partnership in the Q&A: “And the announcement we made with AWS is very significant for both companies. For us as a supplier to them, as you pointed out — first of all, it's a five-year agreement. It covers AI custom products as well as a broad range of networking products. It's significant in its — in the revenue that it's going to drive for us. And most importantly, it is multi-generational in nature. So, with this agreement and with these kinds of relationships that we're building with these customers, we have even more confidence than before to achieve our goals that we're driving.”

Financials:

Revenue: 19% Sequential Growth in Q3 and Q4

FQ3 revenue accelerated to 6.9% YoY and 19.1% QoQ growth to $1.52 billion, helped by stronger than expected ramp in the AI custom silicon business. For the next quarter, management expects revenue to grow to 26.2% YoY and 18.7% QoQ to $1.8 billion at the midpoint.

The CEO Matt Murphy said, “The exceptional performance in the third quarter, and our strong forecast for the fourth quarter, are primarily driven by our custom AI silicon programs, which are now in volume production, further augmented by robust ongoing demand from cloud customers for our market-leading interconnect products. We look forward to a strong finish to this fiscal year and expect substantial momentum to continue in fiscal 2026."

Margins:

The gross margin needs to be watched closely as a higher mix of custom silicon will result in a lower gross margin. However, there was a question about this on the call and the CFO remained confident the operating margin will expand. He also stated to expect strong optics and networking growth next year, which are accretive to margins.

There were restructuring charges that weighed on the GAAP metrics. Non-GAAP metrics are more important in this case. Reference the additional paragraph on the restructuring charges below.

Q3 adjusted gross margin was 60.5% compared to 60.6% in the same period last year, yet missed the guide of 61% due to higher-than-expected revenue from custom silicon. Management guide for the next quarter is 60% and expects to be about 60% through next year.
Q3 operating margin was (-46.4%) due to the restructuring charges discussed below. Management guide for Q4 is 10.6%.
Adjusted operating margin was 29.7% compared to 29.8% in the same period last year. It was better than the management guide of 28.9%. Management guide for Q4 is 33%.
Net loss was ($676.3 million) or (-44.6%) of revenue compared to ($164.3 million) or (-11.6%) of revenue in the same period last year. The company reported restructuring charges of $715 million.
Adjusted net income was $373 million or 24.6% of revenue compared to $354.1 million or 25% of revenue in the same period last year.

The CFO also pointed to improvement in the bottom line in the coming quarters. “We see a strong setup for next fiscal year as well. We remain focused on continuing to drive strong operating leverage, expanding our operating margins, bringing down stock-based compensation as a percentage of revenue and efficient cash flow generation to continue to return meaningful cash to shareholders. I'm also pleased with our guidance to return to GAAP profitability in the fourth quarter and we are looking forward to continue to drive improvement in this metric.”

EPS: 43% Growth QoQ

The company beat on adjusted EPS by 5.5% at $0.43 compared to $0.41 expected. The Q4 GAAP EPS is expected to be $0.16 +/- $0.05 and the adjusted EPS is expected to be $0.59 +/- $0.05.

Per the opening remarks: “As a result, our non-GAAP earnings per share of $0.43 was also well above the midpoint of guidance, growing by 43% sequentially. This earnings growth rate, which was more than doubled our top-line growth rate, highlights the substantial operating leverage in our business model.”

As we look further out, the analyst estimates for fiscal year EPS is expected to grow 75% from FY2025 to FY2026 and then grow another 33% into FY2027.

Restructuring Charges:

The company reported restructuring charges of $715 million in Q3. Management mentioned that restructuring charges are essentially behind them now and that these investments are aimed at focusing on the fast-growing AI data center segment.

The CEO said in the earnings call, “In the third quarter, we made decisions to further solidify and purposefully redirect our investments towards data center relative to our other end markets. These actions resulted in a restructuring charge in the third quarter. The goal of these actions is to increase our R&D intensity towards the data center, our largest and fastest growing opportunity, while continuing to drive significant operating leverage going forward.”

The CFO further said, “As Matt mentioned in his prepared remarks, in the third quarter, we made additional decisions to further redirect investments towards the data center. This resulted in an aggregate restructuring charge of $715 million, which is reflected in our GAAP results for the third quarter. The two largest components were impairment charges for acquired intangible assets and certain purchased technology licenses and their future contractual obligations.

I would also note that approximately three quarters of these restructuring charges are non-cash in nature and that the aggregate restructuring charges are now largely behind us. These charges are a reflection of the fact that we have invested significantly in updating our enterprise and carrier product portfolios over several years and we plan on more targeted investments in these end markets going forward.”

Cash Flow and Balance Sheet

Operating cash flow margin of 35.4% is flat YoY with $536.3 million in operating cash flow this quarter. The free cash flow of $460.8 million resulted in margin of 30.4%. The company has $868 million in cash on its balance sheet and $4.1 billion in debt.

Inventory decreased from 98 days to 67 days for total inventory of $859 million.

Key Segments

Data Center

Data center revenue of $1.1 billion grew 98% YoY and grew 25% sequentially. Management stated: “We are seeing strong custom AI demand continue into the fourth quarter and have secured supply chain capacity to support our customers' growth forecasts.”

Marvell’s data center revenue accounts for 73% of revenue and the CEO stated he “expects this percentage to increase again in the fourth quarter.”

Per the opening remarks: “AI continues to lead the way, enabling our data center revenue to almost double year-over-year in the third quarter, and we expect it to continue driving strong growth in the fourth quarter. With three quarter of strong AI results under our belt for this fiscal year and an even stronger fourth quarter forecast, we are clearly set to significantly exceed the full year AI revenue target of $1.5 billion, outlined earlier this year at our AI event.”

Marvell’s AI Market Opportunity: Back in April at the company’s AI Day, Marvell laid out a TAM of $42 billion for custom silicon by CY2028, of which the CEO believes Marvell will take 20% market share. This totals about $8 billion for its custom silicon AI opportunity. Assuming that materializes, the CEO is essentially forecasting 700% growth in custom silicon if we assume $1 billion is from ASICs and $500 million is from networking. Earlier, the CEO stated it was roughly half-and-half between their two AI-related segments. There is a significant customer expected to ramp in 2026, and I suspect we will see a new forecast when the company can more openly talk about an official announcement. On the networking side, the TAM is another $31 billion.

Here is an analyst note that echoes how Marvell’s current TAM forecast may be too low:

“Oppenheimer analyst Rick Schafer thinks that each of Marvell’s four custom chips could achieve $1 billion in sales next year. Production is already ramping up on the Trainium chip for Amazon, along with the Axion chip for the Google unit of Alphabet. Another Amazon chip, the Inferentia, should start production in 2025. Toward the end of next year, deliveries will begin on Microsoft’s Maia-2, which Schafer hopes will achieve the largest sales of all.”

Enterprise Networking and Carrier Infrastructure:

The carrier infrastructure segment saw revenue of $84.7 million, and was down (73%) YoY yet was up 12% QoQ. Enterprise networking was down (44%) YoY and was flat QoQ.

Per the opening remarks: “We began to see a recovery in both of these end markets, with revenue collectively growing 4% sequentially. We expect the pace of recovery to accelerate in the fourth quarter with aggregate revenue from enterprise networking and carrier infrastructure forecasted to grow sequentially in the mid-teens on a percentage basis.”

Consumer End Market:

Consumer was down (43%) yet was up 9% QoQ. Next quarter, the forecast is weak due to gaming: “Looking ahead to the fourth quarter, we expect revenue from the consumer end market to decline sequentially in the mid-teens on a percentage basis. This is due to seasonality in gaming demand, which typically weakens in our fourth quarter, bottoms out in our first fiscal quarter and then begins to rebound in the second quarter.”

Automotive/Industrial:

The automotive/industrial segment was down (22%) yet was up 9% QoQ. The segment is expected to grow sequentially in the low-to-mid single digits next quarter.

Earnings Call:

Newly Launched 3nm 1.6T DSP (Nvidia Supplier):

The new 3nm Ara PAM4 DSP was announced this week with Marvell being first-to-market with a 3nm 1.6T interconnect. This follows Marvell being the first-to-market with a 5nm 1.6T interconnect. Overall, these interconnects help to reduce power requirements by 20% while enabling higher bandwidth and performance. This is especially important as data centers are currently power constrained. In the press release, the company stated: “We anticipate unit shipments of PAM4 DSPs will more than triple from 2024 to 2029 to nearly 127 million units a year and remain the primary optical technology for connecting assets inside data centers for the foreseeable future.”

As discussed in our July write-up (worth a read under the Quick refresher on Marvell’s Products): Nvidia is a lead partner on the 1.6T solution with the 1.6T being an upgrade from the 800GB, driven by AI workloads needing higher bandwidth: “Artificial intelligence and machine learning drive demand for the 800-gig PAM to increase the speed of input-output and to process the data flows. This doubles the throughput (bandwidth) due to an 8x100Gpbs optical transceiver for inside and between AI clusters.”

In the earnings call, there was an inspiring moment when the CEO was asked how Marvell is able to put be first-to-market with Ara, after being first to market with Nova the 5nm 1.6T electro-optic eighteen months ago. This is what he said:

“And I can tell you, when you enter an inflection in a growth market, the company with the best and leading technology that's available, you can sample it, it works, is going to win. It's that simple.

And so, our team, which is the best in the world at what they do, is heads down focused on driving best possible solutions, the best TCO, the best power and highest performance in the latest process node. And you're going to see that continue across Marvell, but particularly in this area of DSPs and broadband analog and the chipsets that we sell, we intend to maintain our market-share leadership and extend that and be the supplier of choice. So that's — it's as simple as that. We're going faster.”

There was a question from an analyst on tariffs, but the CEO shrugged off the concern and stated the 1.6T DSPs and the 800GB DSPs will continue to be a strong contributor next year.

“So, we continue to be diligent here and monitor, but as it appears right now, demand is strong, bookings continue to be strong, visibility is great. We expect that business to grow significantly for us. Next year, on the 1.6T as it relates to that, that will be part of the growth we see next year. We're shipping that product now into production. It will be a contributor next year, but I don't want to take away from the very strong 800-gig cycle that will continue to be driven through our fiscal '26 next year.”

Margins:

It’s no secret that Marvell is weaker on margins than its peers. As custom silicon ramps, this will weigh on the gross margin. However, the CFO pointed out the company has plans to increase its operating leverage next quarter to minimize the impact. It was also pointed out that the optics business is expected to help offset some of the gross margin weakness from the custom program.

Here is what was said regarding operating margins:

“In terms of the leverage, when you look at our Q3 results, we came in at around 30% OEM. And even with gross margin guide down about 0.5%, our operating margin is actually up to 33%, so up by 3%. And so, when you look at our OpEx control, you should expect us to continue to have a very significant focus on levers through next year with the top-line outgrowing OpEx right through next year. And so, really should see a very nice increase in our operating margin through next year, really starting to approach the bottom end of our long-term range towards the end of next year.”

Conclusion:

Nobody deserves a win on Marvell more than the I/O Fund. We have tracked this stock closely, counting 15 analyses in the last five years. We foresee Marvell becoming a larger position in 2025, and we foresee that position increasing in our portfolio again come 2026. Marvell is a market leader in electro-optics, which should become more evident as Blackwell ships in volume next year. In custom silicon, the company is certainly the underdog when it comes to heavyweight Broadcom, yet there will be diversification across AI suppliers with Marvell being a smaller, lesser-known stock sitting on an immense AI opportunity.

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Nvidia’s Stock Has 70% Potential Upside For 2025

Posted on December 2, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Nov 27, 2024,08:45am ESTForbesForbes on Nov 27, 2024,08:45am EST

Nvidia once again posted a $2 billion beat to consensus revenue estimates in Q3, reporting YoY growth of nearly 94% to over $35 billion in revenue. Data center revenue more than doubled in the quarter to over $30 billion with Hopper driving the second largest data center beat in company history, speaking volumes as to the level of demand for its GPUs given that Blackwell will not initially ship until next quarter.

As recapped to our premium members after the earnings report, the I/O Fund is tracking supply chain signals indicating the next generation of GPUs shipping in full volume by mid-2025 (and beginning to ship in the January quarter) will far exceed the GPU sales we saw in 2023 and 2024 combined.

The I/O Fund is already tracking a 30% minimum difference between GB200 NVL72 orders and what the Street has estimated for next year. When adding that the DGX B200 systems will be priced 40% higher, and assuming pricing power affects more SKUs the way it will affect the DGX B200 systems, then it’s possible to see about 70% upside next year for Nvidia.

Nvidia Posts Largest Data Center Beat Since Hopper’s 2023 Breakout

Nvidia reported $35.08 billion in revenue versus consensus of $33.13 billion. Beating on data center revenue is becoming common place for Nvidia, yet what’s interesting is the data center segment posted the largest surprise relative to estimates since Hopper’s breakout quarter in FY24. Nvidia reported $35.08 billion in revenue versus consensus of $33.13 billion.

A bar graph illustrating Nvidia’s impressive revenue performance, showcasing a $35.08 billion revenue surpassing the consensus estimate of $33.13 billion. This marks the largest data center segment beat since Hopper’s breakout quarter in FY24, highlighting Nvidia’s consistent outperformance in the data center sector. Source: I/O Fund

Data center revenue of $30.77 billion increased 112.0% YoY and 17.1% QoQ, beating estimates by $1.95 billion. This marked the largest beat since the $2.46 billion beat in Q2 FY24, as well as the two $1.8 billion beats in Q3 FY24 and Q1 FY25. This is important as this beat was driven solely by Hopper – which is in its seventh quarter with the H100s and H200s.

Blackwell’s is expected to ramp quickly in Q4 and into next year. Analysts estimate Blackwell’s volume in Q4 could be between 150,000 and 200,000, before tripling sequentially to 550,000 in Q1 FY26 (Jan-Apr quarter of 2025). The expectation for AI clusters is to go from tens of thousands, to hundreds of thousands, to millions of GPUs, indicating a long runway for Blackwell and subsequent GPU generations.

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

Nvidia’s Blackwell to Drive a Minimum of 50% Data Center Growth Next Year

What’s shaping up for 2025 is the convergence of multiple strong tailwinds for Nvidia to capture via Blackwell: GPU clusters this generation beginning at the upper end of Hopper’s hundred-thousand clusters, Big Tech capex continuing to increase past one quarter trillion (which we covered two weeks ago), and more importantly, Blackwell’s pricing power versus Hopper.

Q3 earnings aside, this bigger picture is that Nvidia’s Blackwell GPU sales next year will far exceed the GPU sales we saw in 2023 and 2024 — combined. 2025 is shaping up to be potentially the most important year for Nvidia since I first highlighted Nvidia’s AI GPU thesis in my free stock newsletter in November 2018 and when the I/O Fund entered at $3.15 for returns of 3,280%.

Including Q4’s estimate, Hopper has delivered approximately $125 billion to $130 billion in data center revenue in 2023 and 2024. Blackwell, on the other hand, is expected to deliver up to $210 billion next year alone.

Back in August, in the analysis Nvidia Stock: Blackwell Suppliers Shrug Off Delay Ahead Of Q2 Earnings, I wrote:

‘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.”

Despite Blackwell not yet shipping in full volume, there are multiple data points that support this ramp to $200+ billion in revenue.

Perhaps the most important quote was one that could easily be overlooked — Nvidia’s management explained in Q3’s earnings that they have “completed a successful mask change for Blackwell…that improved production yields. Blackwell production shipments are scheduled to begin in the fourth quarter of fiscal 2025 and will continue to ramp into fiscal 2026.”

Since both Hopper and Blackwell will be shipping in tandem beginning in Q4, there’s more emphasis on supply constraints moving forward, as management was clear in saying that both products have “certain supply constraints” with Blackwell’s demand “expected to exceed supply for several quarters in fiscal 2026.” Broadly speaking, supply constraints are nothing new as it’s been widely understood Blackwell is already sold out for next year.

By executing this mask change to improve production yields, Nvidia can theoretically get more usable chips per wafer, alleviating some supply fears and allowing it to meet higher demand levels, leading to higher revenue generation. Management already hinted at this, saying “we will deliver this quarter more Blackwells than we had previously estimated.” CEO Jensen Huang also explained that GPU clusters with Blackwell will be starting where Hopper left off: “You see now that at the tail-end of the last generation of foundation models were at about 100,000 Hoppers. The next generation starts at 100,000 Blackwells.”

Even though Nvidia guided Q4 nearly in-line with analysts' expectations at $37.5 billion, there is still significant room for Blackwell to grow through 2025. Current forecasts point to revenue surpassing the $50 billion-mark one year from now, with revenue growth in excess of 40% for the next five quarters.

A table displaying the wide range of analyst revenue estimates for Nvidia in FY26, highlighting a $40 billion range for Q3 and a $70 billion range for Q4. The potential for Nvidia to achieve over $50 billion in quarterly data center revenue is also noted. Source: I/O Fund

Interestingly, there is still a massive disconnect in analyst estimates as FY26 progresses – estimates for Q3 have a nearly $40 billion range from the low to high estimates. When looking at Q4 of next year, there is a ridiculous $70 billion range, with some analysts predicting $31 billion at the low end while others have estimates as high as $101 billion. Should Nvidia maintain its quarterly cadence of beating by $2 billion from the midpoint of these estimates, and assuming data center mix remains at ~90%, Nvidia could easily exit FY26 with data center revenue at >$50 billion/quarter, or $200+ billion annualized compared to data center revenue of $140 billion this year.

Big Tech’s capex supports this revenue growth story, as Microsoft, Amazon, Meta and Alphabet have all accelerated capex significantly in the past couple of quarters and reaffirmed the need to continue investing aggressively in AI infrastructure moving through 2025.

Additionally, Big Tech is already spending tens of billions on Nvidia’s Blackwell lineup:

Alphabet has reportedly ordered 400,000 GB200s worth $10 billion.
Microsoft has reportedly ordered 60,000 GB200s worth $2 billion.
Meta has reportedly ordered 360,000 GB200s worth $8 billion.

This is but a fraction of 2025’s estimated capex– 2024’s capex could come in at ~$240 billion with an estimated $70 billion spent in Q4, with the four currently tracking for over $270 billion in capex predominantly for AI infrastructure in 2025.

Nvidia has been capturing a lion’s share of AI spending from Big Tech, at ~80% to 85%, and assuming little change in its AI GPU market share with competition primarily arising from AMD and no one else, Big Tech’s spending implies a clear path towards $200 billion in GPU revenue in 2025.

The importance of Big Tech’s capex was also echoed with the CEO stating we will see $1 trillion in data infrastructure rebuild before he expects to see digestion from the hyperscalers. Per Huang: “I believe that there will be no digestion until we modernize a trillion dollars with the data centers.” That would imply another 3X from here for the remaining three-quarter trillion – not in stock price, but in capex. Presumably, it would mean a higher trajectory for the stock price in terms of valuing that revenue.

Nvidia Faces Tough Comps Off Peak Growth

Hopper drove another beat, which Nvidia is becoming widely known for. It’s rare for analysts to openly expect large beats going into a print, yet UBS had correctly tagged the beat this quarter at $2 billion. However, due to declining from peak revenue growth of 265% earlier this year, Hopper-driven growth of 94% is not what will drive the stock up for the next leg higher. Nvidia investors, such as myself, will need Blackwell’s pricing power and Blackwell’s clear demand signals to re-invigorate the stock.

Nvidia reported 93.6% YoY growth, more than 10 points higher than consensus estimates for ~83% YoY growth. Nvidia is now lapping its peak growth quarters, Q4 FY24 and Q1 FY25, where revenue peaked at 265% growth due to Hopper ramping tremendously fast.

Growth technically is decelerating nearly 30 points in Q3 and growth will further decelerate nearly 24 points next quarter, but to be reporting above 93% YoY and almost 70% YoY versus 200-260%+ growth comps is still a very strong report to say the least.

A graph illustrating Nvidia’s year-over-year growth rates, showing a deceleration from peak growth of 265% to current growth of 94%. The graph highlights Nvidia’s consistent beats against analyst estimates, driven by Hopper, and the anticipated future impact of Blackwell. Source; I/O Fund

For Q4, management guided for revenue of $37.5 billion, +/- 2%, just slightly ahead of consensus estimates for $37.02 billion at the midpoint. Analysts are now expecting $38.01 billion in revenue for Q4, just a week after the report, at the upper end of the guided range. Both Hopper and Blackwell will be shipping in tandem moving forward as Blackwell ramps significantly through fiscal 2026.

Margins Issues are Overblown

Analysts were nitpicking margins, yet this concern is overblown. Q3’s margins were relatively in line with guidance despite the $2 billion top-line beat, and for Q4, management forecast margins to contract nearly 2 points sequentially. However, CFO Colette Kress was clear that following Blackwell, gross margin will eventually return to its current percentage: “As Blackwell ramps, we expect gross margins to moderate to the low-70s. When fully ramped, we expect Blackwell margins to be in the mid-70s.”

Investors should never underestimate Wall Street’s ability to miss the bigger picture. Analysts on the call cross-examined this 200 bp sequential decline despite Nvidia having an operating margin of over 60% compared to most of the Mag 7 having operating margins at half that. It’s also completely normal for semiconductors to feel margin pressures in the initial stages of ramping a new product, especially at this scale and pace.

A chart showing Nvidia’s operating margins, highlighting the anticipated 2-point sequential decline in Q4 and the projected return to mid-70s gross margins with the ramp-up of Blackwell. The chart emphasizes Nvidia’s strong current margins compared to industry peers. Source: I/O Fund

GAAP gross margin was 74.6% in Q3, just ahead of guidance for 74.4%. Adjusted gross margin was 75%, in line with guidance. This reiterated my view from last quarter that Q1 was the peak for gross margins, as margins have contracted about 380 bp since then.
For Q4, management guided for GAAP gross margin of 73%, +/- 0.5%, and adjusted gross margin of 73.5%, +/- 0.5%, for a sequential contraction of ~150-160 bp.
GAAP operating margin was 62.3% in Q3, increasing slightly from 62.1% in the prior quarter but up from 53.1% in the year ago quarter. Adjusted operating margin of 66.3% dipped slightly from 66.4% in Q2, but increased from 64.8% in the year ago quarter.
For Q4, similar to gross margins, management guided for sequential contraction based on operating expense forecasts. GAAP operating margin is implied to be 60.2%, while adjusted operating margin is implied to be 64.4%, or about a 200 bp sequential contraction.

Conclusion

The bigger picture for Nvidia moving forward is that Blackwell holds the potential to dwarf Hopper’s revenue generation in fewer quarters. Breaking it down further on CNBC, I stated Nvidia's trajectory will continue due to two words: pricing power I had been quite vocal prior to earnings that Q3’s report was nothing but a blip in the longer-term picture, with 2025 being much more important than this quarterly report.

Make no mistake, Nvidia is the best stock of the decade and we are only four years in. The I/O Fund has an aggressive buy plan at key levels should the stock pull back, and we have a backup plan should the stock overcome the peer pressure we are seeing from the semiconductor industry and meaningfully breakout.

The keyword is “buy” but the skillset is patience. My firm has blended cutting-edge analysis alongside careful, patient buys for returns of 3280% since our first tranche, with 9 buys and real-time alerts from 2021 to 2022 below $20. Most importantly, the I/O Fund continues to offer buy zones for those who’d like to participate. For a limited time, get up to $250 off with one of our biggest sales of the year starting Nov 28th. For more information on our annual sale, click here.here.

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.

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