Nvidia’s much-anticipated Q4 earnings report saw the AI GPU leader post another large beat and raise as it reported revenue growth of 265% YoY. Nvidia guided fiscal Q1 revenues nearly $2 billion above consensus on top of its almost $2 billion revenue beat in Q4, mirroring what we saw in Q3 as demand for its H100 Hopper GPUs remains elevated.
The consistency and magnitude of the top-line beats is impressive, with Q1’s guide signaling three quarters in a row of revenue growth above 200%. However, it’s the growth further down the income statement where Nvidia’s report truly shines. Nvidia’s stronghold grip on the data center market at the moment combined with pricing power and elevated demand for its H100 GPU has allowed substantial growth in operating income and has generated robust earnings.
Read our pre-earnings write-up here.pre-earnings write-up here.
Revenue and EPS:
- Q4 revenue was $22.1 billion, beating estimates by 7.56%. This represented YoY growth of 265%, a 60 percentage point acceleration from 205% YoY in Q3.
- FY24 revenue was $60.92 billion, an increase of 126% YoY.
- Q1 revenue was guided at $24 billion, +/- 2%, ahead of estimates for ~$21.9 billion. This represents YoY growth of 235%, or a 30 percentage point deceleration from Q4’s growth rate. We had covered in our pre-earnings write up that revenue growth will peak in Q4 for now at the 265%. This seems to still be the case unless next quarter comes in at $2.2 billion over the current guide. As we have seen these past few quarters, it’s not out of the question that Nvidia beats by this much next quarter. However, it’s looking less likely that Nvidia can sustain this peak growth as we move into the second half of the year.
- Q4 GAAP EPS of $4.93 beat estimates by 16.8%, representing YoY growth of 765%.
- Q4 adjusted EPS of $5.16 beat estimates by 11.2%, representing YoY growth of 486%.
Margins:
Nvidia’s Q4 report highlighted the incredibly strong leverage and margin expansion that the rapid growth in the data center is driving.
- GAAP gross margin was 76% in Q4, and adjusted gross margin was 76.7%, an expansion of 1270 and 1060 bp YoY respectively.
- GAAP operating margin was 61.6% in Q4, and adjusted operating margin was 66.7%, an expansion of 4080 and 2990 bp YoY respectively.
- GAAP net margin was 55.6% in Q4, and adjusted net margin was 58.1%, an expansion of 3320 and 2220 bp YoY respectively.
Notably, Nvidia is guided “Beyond Q1, for the remainder of the year, we expect gross margins to return to the mid-70s percent range.” It was mentioned on the call that the slightly softer gross might be caused by the higher cost of HBM3.
- For FY24, GAAP gross margin was 72.7% up from 56.9% in FY23. Adjusted gross margin was 73.8% up from 59.2% in FY23.
- For FY24, GAAP operating margin was 54.1% up from 15.7% in FY23. Adjusted operating margin was 60.9% up from 33.5% in FY23.
- For FY24, GAAP net margin was 48.9% up from 16.2% in FY23. Adjusted net margin was 53% up from in FY23.
Cash Flows:
- Cash on hand was $26.0 billion, an increase from $18.3 billion in Q3 and $13.3 billion in the year ago quarter.
- Operating cash flow was $11.5 billion in Q4, an increase of 411% YoY. FY24 operating cash flow increased 416% YoY to $28.1 billion. For FY24, operating cash flow more than doubled to 46.1%, compared to 20.9% in FY23.
- Free cash flow was $11.2 billion in Q4, an increase of 546% YoY as FCF margin topped 50%. For FY24, free cash flow increased 618% YoY to $26.9 billion. Free cash flow margin more than tripled to 44.2% from 13.9% last year.
- Debt totaled $10.95 billion.
Key Segments:
Data Center:
Data center revenue dazzled again, with Nvidia attributing the growth to “higher shipments of the NVIDIA Hopper GPU computing platform” alongside growth for InfiniBand. Revenues rose 409% YoY and 27% QoQ to $18.4 billion – in other words, a $3.9 billion increase from Q3. Nvidia generated $47.5 billion in data center revenues in FY24, up 217% YoY from $15 billion in FY23.
This is what they mean by “hockey stick” growth:
To put just how rapid this ascent in data center revenues has been, this year’s $47.5 billion in revenue is 18% more than total revenues in the segment for the past five years combined – Nvidia generated $40.2 billion in data center revenue between FY18 through FY23.
According to the CFO commentary on the call for next quarter: “We expect sequential growth in data center and ProViz, partially offset by seasonal decline in Gaming.” As our pre-earnings writeup pointed out, a few analysts were modeling $25 billion data center quarters (for $100 billion per year), so it makes sense that we will see sequential growth in the data center into the foreseeable future.
The CFO also stated that 40% of data center revenue is from inference. This is the first I remember management discussing the percentage that is from inference, and I believe that’s because AMD is pushing hard on the narrative that the MI300s will specifically outperform on inference.
Regarding China, the following was stated: “Growth was strong across all regions except for China, where our Data Center revenue declined significantly following the U.S. government export control regulations imposed in October. Although we have not received licenses from the U.S. government to ship restricted products to China, we have started shipping alternatives that don't require a license for the China market. China represented a mid-single-digit percentage of our Data Center revenue in Q4, and we expect it to stay in a similar range in the first quarter.”
Gaming:
Gaming revenue in Q4 was $2.9 billion, representing a 56% YoY increase against a softer comp and flat growth QoQ. FY24 revenue was $10.4 billion, up 15% YoY.
Pro Viz
Pro Visualization revenue in Q4 was $463 million, up 105% YoY and 11% QoQ. FY24 revenue in the segment was $1.6 billion, up 1% YoY.
Automotive:
Automotive revenue was $281 million in Q4, up 8% QoQ but down 4% YoY. FY24 revenue was $1.1 billion, up 21% YoY as more automakers in China adopt Nvidia’s Drive platform for autonomous driving capabilities.
Additional Notes:
Nvidia’s rapid top-line growth is the primary eye-catching statistic, as no other companies in tech can report such blistering revenue growth at a rate above 200% for multiple quarters at an annualized revenue rate near $90 billion. However, the strengths of Nvidia’s report lie within the operating leverage that this growth is driving.
Operating income in Q4 increased 983% YoY to $13.6 billion, driving a 769% increase in net income to $12.3 billion.
For the full year, operating income of 681% to nearly $33.0 billion, up from $4.2 billion in FY23, while net income rose 581% YoY to $29.8 billion from $4.3 billion in FY23. FY24’s GAAP EPS of $11.93 was nearly 6x higher than FY23’s $1.74.
Cash flow generation surged, with OCF margin more than doubling and FCF margin tripling in FY24. OCF and FCF have increased sequentially each quarter this year, as top-line growth is flowing directly through to the bottom line.
Earnings Call:
There wasn’t much to dissect in the earnings call as what was delivered was another blowout quarter. However, there were some questions on supply that I want to note here. It’s no secret that demand is greater than supply, hence these blowout quarters. It did seem analysts were poking holes at what the timing could be as to when supply won’t be able to continue to afford this extraordinary growth. The answers to the questions were not very informative, rather I’m noting that this seems to the be predominant concern among the analysts even if management chose to remain vague.
Question
Stacy Rasgon (Analysts)
I wanted to — Colette, I wanted to touch on your comments that you expected the next generation of products, so that black well [B100s] to be supply constrained. Can you dig into that a little bit? What is the driver of that? Why does that get constrained as Hopper is easing up? And how long do you expect that to be constrained? Like do you expect the next generation to be constrained like all the way through calendar '25? Like when do those start to ease?
Answer
Jensen Huang (Executives)
Yes. The first thing is overall, our supply is improving. Overall, our supply chain is just doing an incredible job for us. Everything from, of course, the wafers, the packaging, the memories, all of the power regulators to transceivers and networking and cables, and you name it, the list of components that we ship […] The supply chain is really doing fantastic supporting us. And so overall, the supply is improving. We expect the demand will continue to be stronger than our supply provides, and through the year and we'll do our best. The cycle times are improving and we're going to continue to do our best. However, whenever we have new products, as you know, it ramps from 0 to a very large number, and you can't do that overnight. Everything is ramped up. It doesn't step up. And so whenever we have a new generation of products and right now, we are ramping H200s, there's no way we can reasonably keep up on demand in the short term as we ramp […] So we'll — with all new products, demand is greater than supply. And that's just kind of the nature of new products, and we work as fast as we can to catch up with the demand. But overall, net-net, overall, our supply is increasing very nicely.”
Here was another question on supply that was shrugged off, so to speak, yet helps our members to understand the Q&A had a few analysts focused on figuring out the supply constraints:
Question
Timothy Arcuri (Analysts)
I wanted to ask about how you're converting backlog into revenue. Obviously, lead times for your products have come down quite a bit. Colette, you didn't talk about the inventory purchase commitments, but if I sort of add up your inventory plus the purchase commits and your prepaid supply, sort of the aggregate of your supply, it was actually down a touch. How should we read that? Is that just you saying that you don't need to take as much of a financial commitment to your suppliers because the lead times are lower? Or is that maybe you're reaching some sort of steady state where you're closer to filling your order book and your backlog?
Answer
Colette Kress (Executives)
Yes. So let me highlight on those three different areas of how we look at our suppliers. You're correct. Our inventory on hand, given our allocation that we're on, we're trying to, as things come into inventory, immediately work to ship them to our customers. I think our customer appreciates our ability to meet the schedules that we've looked for.
The second piece of it is our purchase commitments. Our purchase commitments have many different components into it, component that we need for manufacturing but also often we are procuring capacity that we need. The length of that need for capacity or the length of the components are all different. Some of them may be for the next 2 quarters but some of them may be for multiple years. I can say the same regarding our prepaids. Our prepaids are predesigned to make sure that we have the reserve capacity that we need as several of our manufacturing suppliers as we look forward.
So wouldn't read into anything regarding approximately about the same numbers as we are increasing our supply. All of them just have different lengths as we have sometimes had to buy things in long lead times or things that need a capacity to be built for us.”
There was an important question about that pertains to our thesis that Nvidia will become a predominant player for AI software. Right now, software is at a $1 billion run rate. The comment below was the first that I can recall where the CEO was more detailed as to how Nvidia will become a force in AI software. I’m quoting it in full here as a follow up to our deep dive on AI software in July of 2022:
Answer
Jensen Huang (Executives)
Let me take a step back and explain the fundamental reason why NVIDIA will be very successful in software. […] If you don't have software, you can't open new markets. If you don't have software, you can't open and enable new applications. Software is fundamentally necessary for accelerated computing. This is the fundamental difference between accelerated computing and general-purpose computing that most people took a long time to understand. And now people understand that software is really key.
And the way that we work with CSPs, that's really easy. We have large teams that are working with their large teams. However, now that generative AI is enabling every enterprise and every enterprise software company to embrace accelerated computing, and when it is now essential to embrace accelerated computing because it is no longer possible, no longer likely anyhow, to sustain improved throughput through just general-purpose computing, all of these enterprise software companies and enterprise companies don't have large engineering teams to be able to maintain and optimize their software stack to run across all of the world's clouds and private clouds and on-prem.
So we are going to do the management, the optimization, the patching, the tuning, the installed base optimization for all of their software stacks. And we containerize them into our stack called NVIDIA AI Enterprise. And the way we go to market with it is think of that NVIDIA AI Enterprise now as a run time like an operating system. It's an operating system for artificial intelligence. And we charge $4,500 per GPU per year. And my guess is that every enterprise in the world, every software enterprise company that are deploying software in all the clouds and private clouds and on-prem will run on NVIDIA AI Enterprise, especially obviously, for our GPUs. And so this is going to likely be a very significant business over time. We're off to a great start. And Colette mentioned that it's already at $1 billion run rate and we're really just getting started.
Conclusion:
The I/O Fund portfolio is on fire right now. Our audited results from last year will be out soon, and those results will put us in the 90th percentile of all funds in the world for 2023 and also on a 4-year cumulative basis. From there, the first two months of 2024 have been extraordinary as we positioned for Q1 with a high allocation to many year-to-date winners. However, we do not think it will always remain this way – tech cannot remain in favor forever.
As you know from our pre-earnings writeup, we think Nvidia’s hitting peak growth is “tricky” for investors while acknowledging the valuation is eerily low still — it is very unusual for a stock to be up 250% in a year and yet be cheaper than it was at its bottom (Oct 2022 for Nvidia). The valuation is what makes it a buy on any dips. However, we also won’t be shy about taking gains if we reach predefined price targets. We have one in mind for Nvidia, let’s see if we get there for our next trim.
Too many investors ride high on paper gains, and subsequently lose those gains. We don’t want to choose between holding a high conviction stock and making money. Instead, we want it all – put some money in the bank, lock-in gains, yet hold the stock for the long haul at a high allocation and hedge if tech falls out of favor.
We will keep doing our very best to bring you quality winners alongside risk management with the ultimate goal of answering the million-dollar or billion-dollar question, which is how to safely participate in the life changing gains tech has to offer. We do not believe this question has been satisfactorily answered. Which is why if you see us hit our price target on Nvidia … and trim our high conviction stock … but buy aggressively on dips — then, you’ll know we are working hard to answer this question for our members.
Recommended Reading: