The price action was more muted, yet the earnings report was quite spectacular. Primarily, the guide for Q3 implies data center growth of 226%, an acceleration from the 171% year-over-year reported in Q1. Our research based on the channel checks published by The Financial Times and The Information were pointing toward analysts/sources expecting between $30B to $40B in data center revenue growth. We are going to now easily clear the $40B number. If we assume an incremental $3B in Q4 (which is a reasonable assumption), then we will be at $42.6B.
The $42.6B is now probably too low if we factor in that Nvidia just beat 28% on data center in this quarter and 30% for overall revenue in Q3.
· $8B in data center expected versus $10.3B reported = 28% beat
· Q3 revenue expected of $12.35B versus $16B reported = 29.5% beat
Should the trend continue, it will lead to a $20B revenue quarter for Q4 and overall data center revenue for FY2024 of $48 billion, up from $15 billion last year for growth of 220%. These are hypothetical, but in line with what Nvidia has been reporting.
What I’m trying to describe here is that myself and the analysts covering this stock cannot keep up with the large beats and raises — even when you think you’ve provided a reasonable estimate, Nvidia blows right past it.
Financials Scorecard:
Revenue and EPS:
· Revenue of $13.5B beat estimates of $11.1B for growth of 101.5%
· Q3 Revenue of $12.35B beat estimates of $16B for growth of 169% estimated
· Look for FY2024 estimates to go up, although hopefully they aren’t too aggressive to help secure a beat next quarter. A beat is very important for Nvidia next quarter given the spotlight on this company.
· Adjusted EPS of $2.09 was expected versus $2.70 reported
· The company announced a $25 billion buyback with $4 billion remaining
Margins:
Similar to revenue, this was a blowout quarter on the margins. Although pricing power may not sustain, as software revenue grows, it will continue to help the margins. The strong margin is likely due to a mix from software and also higher average sales prices.
· 70% gross margin is also bonkers. This is the best gross margin in Nvidia’s history (typically in the mid-50%) and this marks the turning point of Nvidia becoming a software company.and this marks the turning point of Nvidia becoming a software company.
· Adjusted gross margin of 71.2% beat guidance of 70%
· Operating margin of 50% beat guidance of 44%. On a year-over-year basis, operating income was up an incredible 1,263% from $499 million last year Q2 to $6.8B this year and was up 218% QoQ.
· Adjusted operating margin of 57.6% beat guidance of 52.7%
· Net margin of 45.9% compares to net margin of 28% last quarter
· Net profits were $6.2B compared to $656 million in the year ago quarter – yes, 8-9X higher!
Earnings Call:
The CFO said the following in her opening comments about supply:
“We expect supply to increase each quarter through next year” and she also said “Demand for our Data Center platform where AI is tremendous and broad-based across industries on customers. Our demand visibility extends into next year. Our supply over the next several quarters will continue to ramp as we lower cycle times and work with our supply partners to add capacity.”
This is an indirect way of implying sales will increase each quarter through next year as Nvidia has plenty of demand.
The call was not as exciting this quarter. Per our notes last quarter, management said the following, which led to the stock action moving from 15% AH to 25% AH.
“Let me see if I can add a little bit more color. We believe that the supply that we will have for the second half of the year will be substantially larger than H1 […] Yes, we do plan a substantial increase in the second half compared to the first half.” -CFO Collette Kress, Q1 call
Considering the analyst was able to get this important color on the last call, the same analyst, Vivek Arya, thought he’d give it a go again by asking about supply. This time, the CFO declined to comment, and the price action AH softened from 9% to 6.5%.
Vivek Arya
Thank you. Just had a quick clarification and a question. Colette, if you could please clarify how much incremental supply do you expect to come online in the next year? You think it's up 20%, 30%, 40%, 50%? So just any sense of how much supply because you said it's growing every quarter […]
Colette Kress
So thanks for that question regarding our supply. Yes, we do expect to continue increasing ramping our supply over the next quarters as well as into next fiscal year. In terms of percent, it's not something that we have here […]
Speaking of demand, the CFO confirmed that cloud service providers (CSPs) are “a little bit more than 50% of revenue” in the data center followed by consumer internet companies.
Regarding software revenue, which is what leads to higher margins, the CFO said the following:
“Colette Kress
And let's see if I can answer your question regarding our software revenue. In part of our opening remarks that we made as well, remember, software is a part of almost all of our products, whether they're our Data Center products, GPU systems or any of our products within gaming and our future automotive products. You're correct, we're also selling it in a standalone business. And that stand-alone software continues to grow where we are providing both the software services, upgrades across there as well.
Now we're seeing, at this point, probably hundreds of millions of dollars annually for our software business, and we are looking at NVIDIA AI enterprise to be included with many of the products that we're selling, such as our DGX, such as our PCIe versions of our H100.”
Conclusion
I took the opportunity to make a plug for technical analysis after SMCI dropped as it was a strong report that received a harsh reaction. I want to make another plug for technical analysis because our last entry at $410 was bold given the stock was up 200% this year. We used technical analysis for this, not fundamentals. Our hope is that we can take gains in the mid-$500s to low $600s per this Forbes article. When we do, we will update our 3-position Portfolio found here on the Dashboard
Risk:
It may seem like Nvidia stock will keep climbing forever, but the words “China ban” can and will rock this stock. There is 20% to 25% exposure to China in the data center. We assume this risk by owning the stock and will use technicals to risk manage when appropriate.
Additional Reading:
https://io-fund.com/premium/nvidia-q1-earnings-est-100-growth-for-data-center-in-q2-is-bonkers