Category: AI Stocks

Lumentum FQ1 Update: Strong Contender in AI Optical Networking

Posted on by io-fund

The I/O Fund has been looking closely at the networking stack to position for 2025 due to the increased demand from the expanding role that optical networking will play in artificial intelligence clusters.

Lumentum is a strong candidate within the networking stack as the company supplies components for datacom transceivers and optical interconnects. We recently covered a close competitor Coherent, who is quite similar in terms of its products. As discussed in the Coherent writeup, transceivers and optical interconnects convert electrical signals into optical signals for fiber optic networks within the data center. Traditionally, optical links have been used for compute and storage servers, yet AI/ML servers are driving an increase in demand.

AI models are driving an exponential increase in compute requirements, meanwhile the scaling of workloads is limited by the existing network. Although GPUs and AI accelerators capture the headlines, as we move into 2025, hyperscalers will become equally as focused (if not more so) on networking capabilities as GPUs and ASICs are reaching the upper limit of what networking components and interconnects are capable of.

In response, transceiver speeds have been increasing, as traditionally, the highest data rates ranged from 100G to 200G to 400G. AI servers are driving a market for 800G data rates, which are shipping in production now, and 1.6T rates, which are shipping in 2025. These interconnects help to meet demand for high-speed, low-power data transmission in data centers. Over the coming year, a transition to 200G lane speeds for 800G and 1.6T single-mode optics and InP (indium phosphide) laser transmitters will cause some of these little-known suppliers to reach a critical inflection point in revenue, margins and cash.

The high-speed optical transceiver market is expected to grow at a 30% CAGR to exceed $10B between now and 2028. Notably, discussions from Lumentum’s management team points toward a more noticeable inflection in the second half of 2025 due to EML-related products being capacity constrained, yet we think it’s prudent to start tracking these companies now in an effort to be early. 

Optical Networking Components for 800G and 1.6T Transceiver Applications:

Lumentum’s cloud and networking segment inflected in the September quarter with 11% QoQ growth and more sequential growth expected in the December quarter. This was driven by silicon-based optical and photonic products, such as lasers, optical and datacom transceivers, and 400G and 800G optical modules.

About a year ago, Lumentum acquired a company called Cloud Light for its 800G transceivers. At time of acquisition, over half of Cloud Light’s $200M in revenue was from 800G modules, resulting in a doubling of Lumentum’s cloud data center infrastructure revenue.

The acquisition allowed Lumentum to add Cloud Light’s SR transceiver to the 100G VSCELs to potentially supply 800G transceivers to Nvidia. Following the acquisition, Lumentum is expected to become a supplier to Nvidia in early 2025 pending a qualification process with the Thailand facility.

An analyst pointed out the growth in the AI-related segment is forecast to be about 20% QoQ, from $282.3 million this quarter with an additional $55 million in sequential growth guided. The CEO stated it was from a mix of datacom chips and datacom modules although datacom chips will see bigger growth in the coming quarters: “I'd say Datacom chip growth is not a lot until the next couple of quarters because the capacity comes in increments in chunks.”

200G EML Datacom Transceivers:

Transceiver technologies that Lumentum provides include VSCELs, CW lasers for silicon photonics and EML-based lasers. Of these, the 200G EMLs are what is expected to drive the H2 2025 inflection. Management stated in the August earnings call that the 200G lane speeds in the 1.6T optical transceivers “play to our strengths” and that “we anticipate being a key laser supplier in initial 1.6T transceiver deployments as we ramp up 200G EMLs later this fiscal year.”

Electro-absorption modulated lasers (EMLs) enable 200G per lane transmission, which is enabling the 1.6TBps data rates for AI servers. As pointed out in last week’s analysis, EMLs were traditionally used by telecom customers, yet became attractive for AI servers due to meeting the 200G per second speeds necessary for 1.6T optical modules to support AI models. These are called single mode optics, made of Indium Phosphide, which has been used instead of silicon for long-haul networking due being a superior choice for optical functions, such as enabling the laser, modulator, photodetector and amplifier. InP is more expensive at the component level as four EMLs are needed compared to two lower-cost CW lasers for silicon photonics modules, yet this difference at the component level can be made up for in data centers as InP reduces power consumption.

Lumentum is already a lead supplier for 100G EML transceivers, and is setting up to be in pole position for the 200G EML transceivers. Per the November earnings call: “our 100G EMLs are currently shipping in high volumes to a wide range of optical transceiver suppliers for use in leading edge single-mode 400G and more importantly, 800G optical transceivers. These customers are now designing our 200G EMLs into their next generation of transceivers, positioning us well for the upcoming transition to 200G per lane.”

200G per Lane to Ramp in 2025

Management is optimistic in capturing the transition to 200G lane speeds that is expected to drive the importance of single-mode optics and indium phosphide laser transmitters. The company’s indium phosphide 100G EMLs (Externally-Modulated Lasers) are being shipped and used in leading single-mode 400G and 800G optical transceivers. These customers are now designing the company’s 200G EMLs into their next generation of transceivers.

Management provided a few clues as to when to expect an impact in their revenue growth from the 200G per lane datacom transceivers. For the upcoming quarter, datacom transceiver shipments are expected to increase QoQ and will continue to grow throughout the calendar year 2025. 

Regarding the timing, it was stated: “And so we're going to participate at the component level, as I talked about in the script, with our 200-gig EMLs and that ramps really more towards the summer of next year. But we're in the qualification stages today and have received volume orders today as our capacity is quite constrained. But I'd say that by the end of next calendar year, 1.6T should be ramping in a significant way.”

There was some talk about pricing power on EMLs, with management stating: “I think that we're justified in looking at price optimization on EMLs is one area that we are looking at and have implemented some strategic pricing for those products.”

EML Fully Subscribed in 2025:

In the August earnings call, it was stated the Indium Phosphide capacity is fully subscribed “to at least the end of calendar 2025. And therefore, we can only meet this demand by growing capacity.”

To increase capacity, the company is investing in wafer fab facilities, with $43 million spent in FQ4. In Q1, $74 million was invested in Capex “primarily driven by investments in high-speed transceiver capacity additions at our Thailand manufacturing site as well as indium phosphide wafer production capacity.”

Due to strong demand, the company is working to increase the EML production capacity by 40% in Q4 FY2025 compared to the same period last year, and then implied higher capacity growth the following year (beginning in June) – reference Q&A transcript below.

The company’s Datacom transceiver capacity expansion in Thailand is progressing well. The first production line is operational and management expects to complete additional phases in the next 18 months to meet the strong demand. These expansions are part of the company’s plan to expand facilities outside China.

Future Transceiver Technologies:

Looking further out into 2026, Lumentum is working on higher speed optical links, including 400G per lane, and new architectures, such as co-packaged optics requiring ultra-high power lasers. Specifically, the company’s experience in InP long haul transceivers is being tapped as AI servers scale out, especially since InP reduces power consumption compared to silicon.

Optical Switching:

Optical switches are a new kind of switch for AI clusters that handles the switching optically instead of using transceivers to convert photons to electrons, and back again. There are many competitors within optical switching, with heavyweights Broadcom and Arista coming to mind, yet Lumentum believes their MEMS-Based technology can set them apart. Although the discussion around MEMS can get quite technical, the idea is that Lumentum is a smaller, (potentially) key supplier for customers putting optical circuit switches into their data centers. Another use case for using Lumentum is to rearchitect or write software to enable the optical circuit switching.

According to the most recent earnings call, Lumentum has “already shipped evaluation units to customers who have provided overwhelmingly positive feedback on our performance.” It was also stated that “more meaningful growth will probably be in calendar 2026” for the optical switching circuit products.

Data Center Interconnects:

For long-distance transmission, Lumentum offers tunable lasers for data center interconnects (DCIs). These transmissions are traditionally used for telecom purposes and can range up to hundreds of kilometers, yet are now seeing demand for data center buildouts. Per the call: “we're seeing dramatic strength in anything ZR, anything to connect data centers as data centers are being built out, and that can take the form of ZR modules. But given our share of tunable lasers that go into ZRs, that's where we're going to see a dramatic pickup in the telecom side.”

Three Hyperscaler Customers for 2025

Lumentum recently added a third hyperscaler customer for a total of three hyperscaler customers. According to the earnings call: “we expect to start shipping volume production against these new customer awards in the first half of calendar 2025, and they will ramp through the year, consistent with the revenue targets we set out previously.”

According to a Susquehanna analyst, this is the return of the primary CloudLight customer i.e., Google. This is in addition to the new customer added last quarter.

With that said, Lumentum is competing for the larger orders expected to be placed sometime in 2025: “And I think we're positioning ourselves very well. We're having the capacity in place, as I said, with clean rooms as well as equipment. So we're planning for success, but we still have to earn that. But that said, these are all very, very large customers that consume a lot of transceivers. And so getting in the door is step one and earning bigger share is really what we're striving to do now.”

FQ1 Revenue and 2025 Revenue Targets

This quarter, Lumentum reported QoQ growth in its primary AI-related segment, Cloud and Networking. Management also reiterated their goal of reaching quarterly revenue of $500 million by the end of the calendar year 2025 while expecting continued significant growth into 2026 and 2027.

The management team plans to achieve its goal of $500 million quarterly revenue from the current guide of $390 million for the December quarter by increasing the EML capacity by 40% by June, and tapping the transceivers and data center infrastructure opportunities discussed above. If the traditional telecom business recovers, the company is expected to reach their goal before the end of the year.

Chris Coldren, Senior VP, recently said at the Barclays conference that he feels a lot better about telecom, which is another positive catalyst as the company’s revenue has declined in the past due to the inventory corrections at its network equipment customers.

“So, I feel a lot better about telecom than we have been at least several quarters that we're starting to see things improve. And hopefully, history repeats as things tend to improve, then they tend to improve faster than you expect. And then when they get bad, they tend to get worse than you expect. And we'll let you know when that starts to happen, but it definitely feels good.”

  • Q1 FY2025 revenue grew by 6.1% YoY to $336.9 million and set a new record for Datacom laser chip orders. The CEO, Alan Lowe, said in the earnings call, “In the first quarter, we exceeded the high end of our guidance for both revenue and earnings per share. We set a new record for Datacom laser chip orders, including 200-gig EML chips, reflecting strong demand from multiple customers, including an AI infrastructure customer.”
  • Management has guided FQ2 revenue of $390 million, representing YoY growth of 6.3% and 15.8% QoQ growth at the midpoint. “As we previously forecasted, our datacom transceiver shipments are expected to increase sequentially this December quarter, and we expect our transceiver production to continue growing throughout calendar year 2025, driven by demand from multiple hyperscale cloud and AI customers.”

Looking further out, analysts expect FY2025 ending June revenue to grow 17% YoY to $1.59 billion and 28.4% YoY to $2.04 billion in FY2026.

Segments

Cloud and Networking

Q1 FY2025 Cloud and Networking revenue grew by 23% YoY and 11% QoQ to $282.3 million. Profit from this segment increased 13% sequentially and 13% YoY. Segment profit increased to 2.5 percentage points YoY to 12.9%.

Revenue accelerated from a decline of (-11.1%) YoY in FQ4. Management attributed the strong growth to setting “a new record for Datacom laser chip orders, including 200-gig EML chips, reflecting strong demand from multiple customers, including an AI infrastructure customer.”

Management expects strong sequential growth to continue in FQ2: “based on expanding cloud demand and improving trends in the broader networking market, we expect double-digit sequential revenue growth in the second quarter.” Per discussions in the Q&A portion of the call, the implied increase QoQ for FQ2 will be $50 million to $60 million or about 20% sequential growth versus the 15.3% guided QoQ growth for overall revenue.

Industrial Tech

Industrial Tech revenue declined by (-38%) YoY and up 2% QoQ to $54.6 million. Management expects FQ2 revenue “to be approximately flat sequentially due to an uptick in industrial lasers led by our ultrafast lasers, offset by a sequential decline in 3D sensing revenue.” Segment profit declined to 4% from 17.4% in the same period last year.

Margins

The company’s margins are recovering helped by cost controls. The management has set an ambitious goal to achieve an adjusted operating margin of 17% to 20% when the company’s quarterly revenue surpasses $600 million. Management plans to reach the target by better capacity utilization, cost controls, and synergies from prior acquisitions.

Looking further ahead to next year, management expects gross margins to increase while operating margins will come under pressure from increased R&D investments: “we’ll see gross margins tick up sequentially through the fiscal year, but we'll — it will be muted a little bit from an operating margin standpoint because of the increased R&D investment we're making just given the amount of customer pull we have.”

The overhead expenses are also expected to increase in the next couple of quarters due to additional capacities being added. These investments are expected to yield benefits in the middle of this year as production ramps up. The Street can be especially margin-sensitive with hardware companies, and thus, this is important to keep track of:

“No, it does have a little bit of overhead impact [to add capacity] because we're building out in our Thailand facility as we move more of our production of transceivers to Thailand. And so as we move that up and ramp that up, there will be a couple of quarters of overhead expenses associated with that. And so that's already contemplated in the sequential increases in margins. But then as that volume ramps up in the middle part of next calendar year, we'll be able to see the benefit of that moving through the quarter. So we'll explain more about that as the quarters happen, but thank you for asking about that.”

  • Q1 FY2025 gross margin was 23.1% compared to 24.1% in the same period last year. Adjusted gross margin was 32.8% in both the periods. Management expects gross margins to improve sequentially throughout FY2025. “In future quarters, we anticipate company gross margins will sequentially increase as manufacturing utilization improves due to an improving telecom outlook as well as an increase in Datacom laser shipments.”
  • Operating margin was (-24.5%) compared to (-25.4%) in the same period last year. Adjusted operating margin improved to 3% from 0.60% in the same period last year. The difference between GAAP and non-GAAP operating margin is due to the stock-based compensation expenses and amortization of acquired intangibles. Management expects the adjusted operating margin to improve to 6.5% in FQ2.
  • Net margin was (-24.5%) or (-$82.4 million) compared to (-21.4%) or (-$67.9 million) in the same period last year. Adjusted net margin was 3.6% or $12.2 million compared to 5.1% or $16.1 million in the same period last year.
  • Adjusted EBITDA was $37 million or 11% of revenue compared to $34.6 million or 10.9% in the same period last year.

EPS

The EPS is expected to rebound in the coming quarters, with adjusted EPS expected to almost double sequentially in the next quarter. Note the very strong, incoming rebound on adjusted EPS below.

  • FQ1 adjusted EPS came in at $0.18, beating consensus estimates by 48.1%, helped by operating leverage and cost controls.
  • Analysts expect FQ2 adjusted EPS to grow 9.6% YoY to $0.35 and 46% YoY to $0.42 in FQ3.
  • Looking further out, analysts expect the adjusted EPS for FY2025 ending June to grow 56% YoY to $1.58 and 134.5% YoY to $3.70 in FY2026.

Cash Flow and Balance Sheet

The cash flows are improving, driven by the recovery in revenue. With management targeting an adjusted operating margin of 17% to 20% once quarterly revenue surpasses $600 million, cash flow generation should further strengthen in the coming quarters.

  • Q1 FY2025 operating cash flow was $39.6 million or 11.8% of revenue compared to (-$2.3 million) or (-0.7%) of revenue in the same period last year.
  • Free cash outflow was (-$34.5 million) or (-10.2%) of revenue compared to (-$63.1 million) or (-19.9%) of revenue in the same period last year. The company has been investing due to the strong demand for AI. The company’s CEO, Alan Lowe, said in the earnings call, “In Q1, we invested $74 million in CapEx, primarily driven by investments in high-speed transceiver capacity additions at our Thailand manufacturing site as well as indium phosphide wafer production capacity.”
  • The company has cash & short-term investments of $916.1 million and debt of $2.58 billion compared to $887 million and $2.5 billion at the end of FQ4.

Earnings Call Q&A:

EMLs are Capacity Constrained

EML production capacity was the hot topic on the earnings call, with the discussions revealing quite a bit about Lumentum’s strategy as the company attempts to compete against companies like Coherent/Innolight, Eoptolink, and others. Essentially, the company is buying CW lasers while reserving capacity for EML production in-house.

Reserving capacity for EMLs:

Here is what was stated regarding why Lumentum is looking for more H2 2025 strength in both EML lasers and the company’s strategy when approaching limited capacity with what they can build in-house:

“So, we use a lot of CW lasers, not EML lasers yet in the products that we're shipping and released today. So we can buy those CW lasers externally or we can use our very critical EML capacity to add those CW lasers into our products.

We've done the math. There's a lot of good CW laser suppliers. It makes more sense for us to buy those CW lasers and free up that EML capacity to ship to our customers than it would be to convert that EML capacity to CW lasers, for example. So that's one of the things that's pushing off that integration of CW lasers into our products until the second half.

I'd say that we are working on EML-based designs, and those will come to market in the second half of the calendar year. We have to get qualified and go through that. But today, most of the products that we're producing are silicon photonic-based using CW lasers from our strategic supplier partners to keep that EML capacity for our customers.”

–End Quote

1.6T Transceivers Driving Demand for EMLs:

Lumentum’s call is decisively focused on EMLs compared to more broad product discussions on the VSCELs or CW lasers that Coherent’s call covers. When asked why EML is so critical to Lumentum’s strategy, the management team responded with:

“And I'd add that the real performance advantage of EML starts to come in as we talk about 1.6T and future generations of higher performance 1.6T. So, our natural road map also aligns with using more vertical integration where the technologies are much more differentiated at those speeds.” There was also a follow-up: “And as Chris said, a lot of the new next generation of 1.6T likes EMLs better, especially as you get into multi-wavelengths where EMLs can really play a key role there. So yes, we're absolutely going to do that. It probably makes more sense in the second half of the calendar year as we get into these more advanced 1.6T products.

And then we have next-generation 200-gig EMLs, which are really going to differentiate us from our competitors. And I think that really gives us the ability to drive incremental differentiation at the transceiver level and drive higher gross margins.”

It was also stated during this discussion that the goal is to increase EML production capacity by 40% between June of 2024 and June of 2025. There was a question as to why not increase it 100%, to which management relented they would increase by that much, if they could: “So a very good question. If I had the ability to add 100% between now and June, I would do it.”

Most importantly, management hinted there would be more than 40% capacity increases after June, pointing toward wafer capacity for EMLs coming online in Japan: “And so I think we're going to do well in the second half of the calendar year on that. But we are adding capacity beyond the 40% for sure after the June quarter. We're not sitting idle for sure.”

EMLs will Not Ship until Later this Year:

Quick note to say the 11% sequential growth last quarter and the expected 20% growth this quarter in the cloud and networking segment is not coming from EMLs yet.

Per the discussions: “And so these, in general, are transceivers that won't have our EMLs at initial launch, if you will, because these have been in development and designed over the past year or so.

Obviously, these accounts have other opportunities to Alan's point, as we succeed and execute with them, not only will there be more share, but there will be more SKUs and other types of transceivers where we can introduce more of our own content.”

Expanding Outside of China

There were discussions around China with management stating “we’re as tariff-free as you can get with respect to our future,” citing manufacturing in the United States, U.K., Thailand and Japan. Similar to Coherent, Lumentum sees this as a tailwind.

“And with our U.S. headquarter and manufacturing outside of China, I think there's a compelling reason for customers to come our way. So we expect to not only grow our datacom module business and EML chip business, but gain significant share through the next coming years.”

Conclusion:

It’s important to emphasize that it’s not clear who will win the networking wars, yet we think given our detailed process of tracking earnings reports for material inflections, combined with technicals that allow us to reduce risk while tracking breakouts, that we will be able to carefully add the correct winners to our portfolio for 2025.

To hear more on how we plan to position this year, plan to join me for a one-hour special webinar for Q1 2025 on January 14th at 4:30 pm EST.

That’s a wrap for 2024! Thank you for an amazing year, we look forward to continued outperformance in 2025.

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.

Recommended Reading:

Where I Plan To Buy Nvidia Stock Next

Posted on by io-fund

This article was originally published on Forbes on Dec 23, 2024,05:03pm ESTForbes Forbes on Dec 23, 2024,05:03pm EST

Blackwell is the word for Nvidia as the AI leader heads into 2025, with multiple configurations and a mid-year upgrade (B300/GB300) for its new powerful GPU set to ramp significantly over the next few quarters. As recapped to the I/O Fund’s premium members after its Q3 earnings report, the I/O Fund is tracking multiple supply chain signals indicating Blackwell sales will likely far exceed the GPU sales we saw in 2023 and 2024 combined – to the tune of bringing Nvidia to $200 billion in data center revenue.

Analysts are already increasing their forecasts for Blackwell shipments for Q4 and for Q1, with forecasts for 250,000 to 300,000 shipments in Q4 nearly tripling to 750,000 to 800,000 in Q1. This compares to previous views seeing Q4 shipments of 150,000 to 200,000 ramping to 550,000 in Q1. This suggests Blackwell revenue estimates for Q1 are already moving 40-60% higher, potentially driving positive revenue revisions throughout the year as it becomes Nvidia’s primary GPU product.

Nvidia has tailwinds in 2025 from increased pricing power with Blackwell, output and shipment estimates already rising before the ramp begins, AI capex still quickly growing, and GPU clusters starting in the 100K range where Hopper maxed out, even as competition from AMD, Broadcom and others begins to increase.

Nvidia also has the benefit from the end of its fiscal year early next year, with the Street soon looking to 2026 numbers – which very well could be too low given the signals Blackwell is already giving. At the moment, Nvidia is trading at just 30x 2026’s estimated earnings of $4.43, its cheapest bottom line valuation since shares were $95 in May 2024 – and Blackwell still holds the potential to drive quarterly revenue beats the same way Hopper has and with margins returning to Hopper’s highs.

The bigger picture for Nvidia moving forward is that Blackwell holds the potential to dwarf Hopper, and the I/O plans on keeping its members informed on what it sees ahead for Nvidia with frequent updates for members. With that in mind, here’s what the I/O Fund sees as 2024 ends and 2025 begins.

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 Technicals: A Swing Higher In the Cards

Nvidia appears to be setting up for the next swing higher. As long as any further weakness holds over $116, this move should target between $165 – $173, with the potential to reach as high as $193.

If this swing gets confirmed, it would likely be the final 5th wave in the historic uptrend that started in October of 2022. This does not mean that the technicals do not support significantly higher prices, it only means that Nvidia will first have to deal with a notable correction in both price and time before it sees those levels.

The pattern off the October 2022 low developed as a classic 5 wave pattern. In early 2024 price went vertical. This was accompanied with max volume and peak momentum. This is the standard pattern seen in 3rd waves, and it tends to be the most powerful part of a 5 wave pattern. From the perspective of sentiment, this is the part of the trend where everyone realizes at once the direction of the trend. Shorts cover at the same time as the crowd buys, creating that standard pattern in 3rd waves.

This would mean that the correction in June of 2024 was the 4th wave, and that this is likely in the final 5th wave higher. The sentiment pattern in 5th waves to new highs in price, but on lower momentum and lower volume, which is what is happening now.

Nvidia Chart 1

Nvidia appears to be setting up for the next swing higher. Source: I/O Fund

Zooming into the 4th wave correction that started in June of 2024 offers a better idea of the two potential paths that I am currently tracking.

Nvidia Chart 2

Zooming into the 4th wave correction that started in June of 2024 gives a better idea of the two potential paths that I am currently tracking. Source: I/O Fund

  • Blue – The final 5th wave is playing out as an ending diagonal pattern, which is common for 5th waves. This type of pattern is a 5 wave pattern in itself that is characterized with large swings in both directions. Our target zone for the bottom on this 4th wave is $126 – $116. If Nvidia can push over $140.75, then then odds favor this scenario.
  • Red – Nvidia is in a much more complex 4th wave. If this is playing out, NVDA would see the $116 level break, which opens the door to a potential low at $101, $90, or $78.

One final point worth mentioning is how the broad semiconductor sector is performing in relation to the S&P 500. Semiconductors tend to be much more sensitive to the consumer, and economy than most sectors. For this reason, in periods of economic expansion, semiconductors tend to lead, outperforming the broad market.

However, when this sector starts to move against the broad market, it tends to be a warning that volatility is ahead. In fact, every time that the semiconductor sector has made a lower high while the broad market made a higher high – i.e., semiconductors do not confirm the move higher – this preceded some period of volatility since the 2021 top.

S&P 500 and Semiconductor Charts

When semiconductors start to move against the broad market, it tends to be a warning that volatility is ahead. Source: I/O Fund

This pattern can be seen going back to 2000 and consistently warned of weakness. As of now, this is one of the largest and longest periods of divergence between the semiconductor sector and the broad market on record.

If the broader semiconductor sector stays below its July 2024 high, I would consider this a warning. This does not mean that I do not see potential upside, it only means that any long positions the I/O Fund takes will have strict targets at which we take gains and stops to protect us in case the market turns against us.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more hereLearn more here.

Conclusion

Make no mistake, Nvidia is the best stock of the decade and it’s 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.

Nvidia has been our largest position for the last 4 years. The I/O Fund sent out nine buy alerts to our readers to buy this position below $20 in 2021 – 2022. The I/O Fund believes the future is bright for Nvidia, and believe the potential next swing is worth playing. However, with all the warning signs, any new long position will have strict risk controls until these warnings reset.

The I/O Fund is also closely analyzing the supply chain to identify overlooked beneficiaries of the AI infrastructure buildout, sharing this information as well as potential buy and sell plans and real time trade alerts with premium members. The I/O Fund recently entered two separate beneficiaries for gains of 23% and 17% since November. Learn more here.

I/O Fund Portfolio Manager Knox Ridley and I/O Fund Equity Analyst Damien Robbins contributed to this report.

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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Micron FQ1 Earnings Preview: Look for a Focus on Profitability and Pricing Power

Posted on by io-fund

Micron will release its Q1 FY2025 results on Dec 18. Analysts expect revenue to grow 84.3% YoY to $8.71 billion. The adjusted EPS is expected to come in at $1.77, compared to (-$0.95) in the same period last year and a solid 50% sequential growth from $1.18 in FQ4.

The AI-related portion of its revenue will not only ramp in FY2025, but it’s also accretive to margins. Meanwhile, peer-related semiconductor stocks that provide custom silicon or AI servers will see the opposite effect, which is that a higher mix of AI products actually weighs on margins.

Management had guided margins to improve sequentially due to better pricing and portfolio mix. During the FQ4 earnings call, the CFO said, “Fiscal Q1 gross margin is projected to improve sequentially primarily due to better pricing and portfolio mix. Recall that, in fiscal Q4, HBM remained accretive to both DRAM and overall company gross margins. We project changes in our portfolio mix to continue to be an important and favorable contributor to gross margins over time.”

Last week, there was an important announcement that stated Samsung is unable to supply HBM3e to Nvidia in 2024. Per the report: “Daily Korea indicates that Samsung’s hopes of supplying HBM3E to NVIDIA in 2024 now appear almost impossible, though prospects for beginning supply in 2025 seem more promising.” This is a major positive for Micron, who along with SK Hynix, is a key supplier for HBM3e. With Samsung unable to supply HBM3e, this could help to increase Micron’s pricing power on what limited supply there is available. We expect the earnings call to focus on this news as analysts will want to figure out how to update their estimates based on the recent announcement that memory-behemoth Samsung is out of the picture for now.

Per our free newsletter last week, Micron has low exposure to China in the mid-teens compared to many AI semiconductor companies and equipment providers having 30% or higher exposure. Plus, with Micron being a United States memory fab, the company will continue to see a boost from the CHIPS Act as well as incremental strength compared to peers once tariffs are implemented.

Revenue

FQ1 revenue is expected to grow 84.3% YoY to a record $8.71 billion, led by strong AI data center demand. Strong growth is expected to continue, and analysts expect revenue to grow by 55.4% and 43% YoY in the subsequent two quarters.

  • Last quarter revenue grew by 93.3% YoY to $7.75 billion and was the peak revenue growth quarter for the company.
  • DRAM revenue increased 93% YoY and 14% QoQ to $5.3 billion in FQ4, representing 69% of total revenue. Bit shipments were flat sequentially and prices increased in the mid-teens percentage.
  • NAND revenue increased 96% YoY and 15% QoQ to $2.4 billion, representing 31% of total revenue. Bit shipments and prices increased by a high single-digit percentage sequentially.
  • Looking further out, analysts expect FY2025 revenue ending Aug to grow 52.2% YoY to $38.22 billion and 21.6% YoY growth to $46.46 billion in FY2026.

Margins

Margins have improved, helped by better pricing due to the favourable supply-demand environment, cost controls, and ramp of higher-value products.

  • FQ4 gross margin was 35.3% compared to (-10.8%) in the same period last year. Management expects it to further improve to 38.5% in the next quarter. Adjusted gross margin also improved significantly to 36.5% from (-9.1%) in the same period last year, which was helped by higher pricing and a higher-margin product mix. The same positive attributes will help the adjusted gross margin to improve to 39.5% in FQ1.
  • FQ4 operating margin improved to 19.6% compared to (-36.7%) in the same period last year. Management expects it to further improve to 24.6% in the next quarter. Adjusted operating margin improved 52.6 percentage points YoY to 22.5%, which was helped by higher gross margins and operating leverage. Management guide for FQ1 is 27%.
  • FQ4 net income was $887 million or 11.4% of revenue compared to a net loss of (-$1.43 billion) or (-35.7%) of revenue in the same period last year. Adjusted net income was $1.34 billion or 17.3% of revenue compared to (-$1.18 billion) or (-29.4%) of revenue in the same period last year.

EPS

Micron has officially bottomed on EPS and is firmly returning to positive growth. Adjusted EPS was $1.18, up 90% QoQ from $0.62 in Q3 and significantly improved from (-$1.07) in the year-ago quarter, helped by better pricing, cost controls, and higher-value products.

  • FQ1 EPS guide is $1.54 and adjusted EPS guide is $1.74. Analysts expect adjusted EPS to come at $1.77, compared to (-$0.95) in the same period last year and a solid 50% sequential growth.
  • Analysts expect strong EPS growth to continue in the coming quarters as they expect FQ2 adjusted EPS to grow 366.3% YoY to $1.96 and 272.7% YoY to $2.31 in FQ3.
  • Looking further out, analysts expect FY2025 ending Aug adjusted EPS to grow 579% YoY to $8.83 and 47% YoY to $12.98 in FY2026.

Cash Flow and Balance Sheet

The operating cash flows have improved with higher revenue and profitability.

  • FQ4 operating cash flow was $3.41 billion or 43.9% of revenue compared to $249 million or 6.2% of revenue in the same period last year.
  • Adjusted free cash flow was lower at $323 million or 4.2% of revenue compared to (-$758 million) or (-18.9%) of revenue in the same period last year, as Micron spent $3.1 billion in capex. Management expects capex to increase sequentially to $3.5 billion in FQ1.
  • Management stated that capex would be meaningfully higher in fiscal 2025 in the mid-30s percentage range to support “growth in both greenfield fab construction and HBM” investments as Micron works to build out its fabs in New York and Idaho. Capex totaled $8.1 billion in FY24; management expects capex to rise around 35% of FY2025 revenue, i.e., it comes to about $13 billion, and the company is able to support it due to higher profitability.
  • The company stated wafer capacity is below peak levels, partly due to an increasing mix of HBM that is reducing DRAM supply for traditional products. The capex spending is needed to continue to supply HBM. There is also a low-capex environment for NAND at the moment, and it was stated this would ultimately lead to healthy NAND supply-demand dynamics.
  • The U.S. Department of Commerce also recently finalized the $6.1 billion funding to Micron under the Chips Act. The Department will disburse the funds based on Micron’s completion of project milestones.
  • Inventory was $8.9 billion, or 158 days, and Micron expects to draw down this inventory to support revenue growth in FY25.
  • The company had cash and investments of $9.16 billion and debt of $13.4 billion compared to $9.22 billion and $13.3 billion at the end of FQ3.
  • The company repurchased shares worth $300 million and paid $129 million in dividends in FQ4.

Business Units

Compute and Networking (CNBU) revenue was $3.02 billion, up 17% QoQ and 152% YoY. This was a significant growth acceleration, up from 85% YoY in Q3 and 59% YoY in Q2.

Management said that “data center server DRAM achieved a quarterly revenue record in fiscal Q4, driven by strong demand for high-capacity solutions as well as our continued ramp of HBM.” ‘

The company expects HBM TAM to grow from $4 billion in CY23 to over $25 billion in CY25. Micron reiterated it will be able to capture a similar market share of HBM as it has in DRAM sometime in CY2025, which was 21.5% of market share in early 2024.

Mobile (MBU) revenue increased 18% QoQ to $1.88 billion, though YoY growth of 55% decelerated from 94% YoY in FQ3. Management said seasonal product launches drove the sequential growth.

Micron hinted when investors can expect AI PC growth, which looks to be H2 2025: “PC unit volumes remain on track to grow in the low single-digit range for calendar 2024. We expect unit growth to continue in 2025 and accelerate into the second half of calendar 2025 as the PC replacement cycle gathers momentum with the rollout of next-gen AI PCs, end of support for Windows 10 and the launch of Windows 12.”

The demand for DRAM is increasing due to the rise of AI-powered devices. On average, PCs required 12GB of DRAM last year, while AI PCs will need a minimum of 16GB and up to 32 to 64GB of DRAM for the mid and premium segments. Similarly, mobile devices required 8GB of DRAM, whereas AI-powered mobile devices will come with 12GB to 16GB of DRAM.

Storage (SBU) revenue rose 24% QoQ and 127% YoY to $1.68 billion, with the YoY growth rate accelerating from 116% in Q3. Management said the growth was “led by data center SSD, which reached a quarterly revenue record,” while NAND storage reached a record for the full year.

Embedded (EBU) was the only segment to record a sequential decline in Q4, with growth down (-9%) QoQ but rising 36% YoY to $1.17 billion. Management added that the “automotive segment achieved a new fiscal year revenue record for the fourth consecutive year.”

Management expects automotive growth in the second half of the FY2025. “The automotive industry continues to adjust the mix of EV, hybrid and traditional vehicles to meet evolving customer demand. As auto customer inventories adjust to this new mix, we expect a resumption in our automotive growth in the second half of fiscal 2025.”

Other noteworthy points to watch

HBM Revenue

Micron started shipments of HBM3e 12 high 36-gigabyte units in FQ4. These units provide up to 20% lower power consumption and 50% higher DRAM capacity than its competitors’ 8 high, 24-gigabyte solutions. They expect the ramp of HBM3E 12-high in early CY2025 and an increase in the 12-high mix in the shipments throughout 2025.

Management also said that in CY2025 and 2026, they have a diversified HBM revenue base since they have won business with a broader range of customers for the HBM3E. They expect robust demand for the D5 and LP5 solutions.

Management mentioned that they expect multiple billions of HBM revenues in FY2025. “We delivered several hundred million dollars of revenue in fiscal year '24 and we look forward to delivering multiple billions of dollars of revenue of HBM in fiscal year '25.” The other key point is that the HBM business will continue to be accretive to margins in FY2025.

DRAM/NAND Commentary

The management stated during the FQ4 earnings call that they are upgrading their expectation for calendar 2024 industry DRAM bit demand growth to be in the high-teens percentage range. It was further stated: “In calendar 2025, we expect both DRAM and NAND industry bit demand growth to be around the mid-teens percentage range.”

The management also stated: “We see increasing DRAM and NAND content both in traditional as well as AI servers” and that “our mix of data center revenue reached a record level in fiscal 2024 and we expect will grow significantly from here in fiscal 2025.”

There is a slight slowdown in management’s guide for DRAM for next year, as it’s being stated that growth in the high teens is expected for 2024, while growth in the mid-teens is expected for 2025. As we noted in our previous analysis, the slowdown is coming from AI PCs and smartphones.

“At 2024, we have increased the outlook to high teens based on the strength in the data center. And 2025, as we look at it, just keep, in fact — mind two factors: one is we are now comparing it to the higher base of 2024, which has gone to high teens. So that, of course, impacts the percentage of the '25. And second piece is that, as we have noted, that smartphone and PC, which at the end market level are continuing to do fine.

But given for the 3 factors that we have mentioned in our earnings call script that the customers built some inventory. The sell-in is somewhat less than their sellout in terms of memory, and we have said that by spring of 2025, we expect in PCs customer inventory levels to get to healthier levels versus now, and these will continue to improve.”

Another factor is that HBM3E is leading to wafer capacity constraints. It has a 3:1 trade ratio, which means it takes 3X more wafers to produce HBM3e.

Valuation

The company is trading at a P/S ratio of 4.9 and a forward P/S ratio of 3.2. It is trading at a P/E ratio of 160.4 and an attractive forward P/E ratio of 12.5, helped by the strong top-line and bottom-line growth.

Conclusion

Wall Street has doubted the company for most of the year yet the last earnings report for FQ4 was quite strong. Some of the weakness may be coming from Samsung’s entry into the space, which now looks decidedly delayed. The company has strong top-line and bottom-line growth. Along with this, the HBM revenue will ramp up in FY2025 and continue to be accretive to margins, which will be a key catalyst.

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

Recommended Reading:

Vertiv: AI Data Center and Direct Liquid Cooling Stock; Nvidia Supplier

Posted on by io-fund

Vertiv offers power management and thermal management to data centers and telecom companies, such as Alibaba, AT&T, China Mobile, Tencent and Verizon. The company was formed in 2016 after spinning off from Emerson, and reported $6.8 billion in revenue last year. Vertiv is considered one of the larger players in data center technologies in terms of power management and thermal management, with 24,000 employees and 30 manufacturing facilities.

Vertiv offers many thermal management solutions. Among them is the Liebert XDU, which is a compact unit that sits in the row near the rack or on the perimeter. The liquid-to-liquid cooling distribution unit (CDU) functions as a heat exchanger between the data center and IT equipment, and is used in all forms of liquid cooling: direct-to-chip, rear door heat exchange and immersion. The Liebert XDU offers a secondary fluid cooling loop so that alternative cooling fluids can be used alongside water.

In 2023, Vertiv acquired a company called CoolTera, after partnering with the company for three years, to add advanced cooling technologies to its thermal management portfolio. One of the main areas of need for data centers and colocation sites is to convert air-cooled equipment to liquid cooled equipment. Retrofitting existing air-cooled infrastructure is an area where Vertiv specializes, as opposed to only providing thermal solutions for new servers and racks.

The benefits of retrofitting was touched on in the most recent earnings call: “A great example of enabling the industry to be future-ready is our truly unique Vertiv CoolPhase CDU, which makes it simple to deploy high density liquid cooling where needed without having to reengineer the entire data center environment, even in the absence of a chilled water loop.”

In 2024, Vertiv joined the Nvidia Partner Network with a statement that Vertiv is “collaborating to build state-of-the-art liquid cooling solutions for next-gen NVIDIA accelerated data centers powered by GB200 NVL72 systems.” Now that we are close to the roll-out for Blackwell, Vertiv has officially announced a co-developed GB200 NVL72 system with up to 40% less power management space and up to 20% lower cooling costs. Vertiv is also partnered with Intel to supply air-cooled and liquid-cooled servers for the Gaudi3 AI accelerators.

Notably, Vertiv is a vendor that supplies original design manufacturers (ODMs) such as Dell with thermal management. Here is how the mutually beneficial relationship was described (as opposed to being direct competitors):

“ODMs play certainly an important role in the go-to-market for the likes of us. ODMs in a play that for liquid cooling sometimes is a white space play. They have a role with their servers, with their racks, with their integration. So it’s natural that they integrate liquid cooling technology in what they do. […] When we think about those ODMs, we think of them as a go-to-market for us. And those ODMs very often also rely on our ability not only to deliver and provide technology, but also to provide the service and the liquid cooling know-how at rack, row and system level that they might need kind of being complemented with. So we do not look at that part of the market as competition. We look at a part of the market that we have opportunity to synergize with.”  

The data center accounts for 80% of Vertiv’s business, up from 75% when we initially covered Vertiv back in June. The communications networks and commercial/industrial facilities is at 20% of revenue.

A few quarters back, the management team stated that AI-related projects were doubling in a two-month time frame:

“The ramp-up of production of liquid cooling globally continues as planned, and I'm happy to report we have production underway already at two of the three plants we shared with you we were planning to activate in 2024. We are on track with the capacity ramp-up as shared in February. We continue to see strong momentum with AI-related orders. While we are not disclosing specific detail on our liquid cooling orders, or more broadly AI-related orders, we did see the pipeline for AI projects more than double in the last two months.”

More recently, in Q3, management highlighted its belief that liquid cooling will grow rapidly over the next three years. Per the earnings call: “We believe from a market value standpoint that air and heat rejection combined will be 70% of the market and liquid 30% over the next few years. Air and heat rejection will grow at a 10% CAGR and liquid at a 30% CAGR, all growing very nicely."

At the recent Investor’s Event, Vertiv raised its long-term projections with an updated horizon from 2028 to 2029:

Source: Vertiv’s Investor Event PresentationVertiv’s Investor Event Presentation

Q3 Financials and 2024 Investor Event Financial Forecast Updates:

Q3 revenue grew by 19% YoY to $2.1 billion, beating estimates by 4.8%. Adjusted EPS rose by 46.2% YoY to $0.76, beating consensus estimates by 10.2%. Management also revised financial metrics during the recent 2024 Investor Event, which is discussed below.

Revenue

The company is witnessing an inflection in revenue due to strong AI data center growth (data center accounts for 80% of revenue). During the 2024 Investor Event held on Nov 18, the company's financial objectives were rolled forward one year through 2029 and guided for higher organic revenue growth for the forecasted period. The long-term organic revenue growth guidance has been raised from 8% to 11% (2023-2028F CAGR) to 12% to 14% (2024-2029F CAGR).

  • Q3 revenue grew by 19% YoY to $2.1 billion. Organic sales (adjusted to exclude foreign currency exchange rate impact) growth was 19.2%, which was helped by double-digit growth in all three regions.
  • The company’s CEO, Giordano Albertazzi said in the Q3 earnings call, “Pipelines continue to grow. We saw pipeline increase sequentially from Q3 – from Q2 to Q3 across all regions. We also are seeing more convincing signals that AI is indeed accelerating in EMEA.”
  • Organic sales in the Americas region grew by 20.5% YoY to $1.2 billion. Demand in the colocation and hyperscale markets drove organic sales growth in the Americas, with strong contributions from switchgear, busway, and liquid cooling and services.
  • The APAC region showed a 470-basis sequential improvement to 10.4% YoY growth to $432.4 million, helped by strong growth in China and the Rest of Asia.
  • The EMEA region witnessed the fastest growth, with 25.2% YoY to $442.5 million, driven by robust demand from colocation and hyperscale markets.
  • Management has guided Q4 revenue between $2.115 billion to $2.165 billion, representing YoY growth of 14.8% at the midpoint. The organic sales growth guide for Q4 is 11% to 15%.
  • Analysts expect Q4 revenue to grow 15.5%, followed by 17.5% and 16.8% in the subsequent two quarters.
  • Management has guided FY2024 revenue in the range of $7.78 billion to $7.83 billion, representing YoY growth of 13.7% at the midpoint. The organic sales growth guide for FY2024 is 14% at the midpoint. Analyst consensus for FY2025 indicates an acceleration to growth of 18.4% on revenue.
  • During the Q3 earnings call, the CEO said, “The orders trends and our robust backlog indicate that growth in 2025 will accelerate relative to 2024’s 14%.” During the recent Investor Event, management provided organic sales growth guidance of 16% to 18% for FY2025, representing a solid 3-point acceleration at the midpoint.

Expanding Margins Helps Vertiv Stand Apart

Vertiv’s margins are improving helped by strong operating leverage. During the 2024 Investor Event, management provided adjusted operating margin guidance of 25% for FY2029, representing an expansion of 600 bps from the 19% guide for FY2024 over a five-year period. This helps illustrate Vertiv’s ability to stand apart as a hardware company with already-strong margins that are expected to only expand further over time.

The company plans to achieve about 4% improvement through operating leverage by deepening Vertiv Operating System (VOS) adoption, functional optimization, and digitalization, including AI utilization. About 1% will come from productivity gains and another 1% from commercial execution by delivering positive price-cost through customer value creation.

During the 2023 Investor Event, management had guided the adjusted operating margin to be above 20% during the 2026-2028 timeframe. The company is expecting to reach the previous goal two years earlier, as management has provided an adjusted operating margin guide of 21% at the midpoint for FY2025.

  • Q3 gross margin was 36.5% compared to 36% in the same period last year.
  • This compares to 28.4% for FY2022 and 35% for FY2023.
  • Q3 operating margin improved 350 bps YoY to 17.9%. Adjusted operating margin improved 310 bps YoY to 20.1%. Management’s adjusted operating margin guide for Q4 2024 is 20.4%.
  • Q3 net income was $176.6 million or 8.5% of revenue compared to $94.1 million or 5.4% of revenue in the same period last year. Adjusted net income was $290.5 million or 14% of revenue compared to $201.2 million or 11.5% of revenue in the same period last year.

EPS

The company’s Q3 adjusted EPS grew by 46.2% YoY to $0.76. It beat analyst estimates by 10.2%, which was helped by strong operating leverage. Analysts expect strong EPS growth in the coming quarters.

  • Management Q4 adjusted EPS guide is $0.80 to $0.84, representing YoY growth of 46.4% at the midpoint.
  • Analysts expect adjusted EPS to grow 51.2% and 32.8% in Q1 and Q2, respectively.
  • Analysts expect adjusted EPS to grow 32.3% YoY to $3.56 for FY2025 and 25.8% in FY2026.

Cash Flow and Balance Sheet: $1B in FCF This Year

Vertiv announced the annual dividend increase from $0.10 to $0.15, to be paid quarterly. Management expects the 2029 dividend to be about 2x the 2025 annual dividend. In addition to achieving a net leverage ratio of 1.4x, Vertiv has repurchased $600 million worth of shares in 2024 and still has $2.4 billion authorized to repurchase by 2027.

  • Q3 operating cash flow was $375.1 million or 18.1% of revenue compared to 14.3% in the same period last year. It is also a significant improvement from the 13.1% for the FY2023.
  • Q3 adjusted free cash flow was $335.9 million or 16.2% of revenue compared to 12.7% in the same period last year.
  • Management raised the full-year adjusted free cash flow guide to $1.0 billion, up $125 million from the prior guidance. Management expects strong free cash flow generation to continue in 2025.
  • Cash was $908.7 million and debt of $2.931 billion compared to $579.7 million and $2.935 billion in Q2. Net leverage ratio has come down to 1.4x from 2.4x in the same period last year.

Key Metrics

Backlog

The backlog at the end of Q3 was $7.4 billion, up 47% year over year and 5% quarter over quarter. Expansion in all three regions helped drive the strong growth in backlog. As seen below, the 47% rate for the backlog is particularly high and is more than double the rate of revenue growth.

TTM Orders Grow 37% YoY

Management introduced a trailing twelve-month metric last quarter. The CEO said in the Q2 earnings call, “This quarter, we have introduced a trailing 12-month orders metric. As we have previously highlighted, there can be a natural variation to the timing of large orders in any quarter. Trailing 12-month is a good metric to assess order activity, smoothing some of the quarter-to-quarter push and pulls.”

The trailing twelve-month orders grew by 37% YoY and were consistent with 37% TTM growth at the end of the second quarter. Q3 orders grew by 17% and were lower than 57% growth in Q2. Management has tried to temper expectations of such high order growth as previously seen this year: “We've enjoyed extremely strong orders in the first half of 2024 and we would agree that continued approximately 60% order increases are unlikely as we tried to say last quarter.” This also helps illustrate why the company is moving to TTM reporting metric.

Earnings Call:

Backlog Elongation:

Given the backlog is growing at more than double the rate of revenue, there were quite a few questions about the backlog and pipeline on the earnings call. Most of them were too forward-looking for management to answer to, however, one question in particular was insightful in terms of Vertiv continuing to have pricing power. It’s also insightful as the analyst is implying the strong backlog may be coming from deals that are elongating from 9-15 months to 12-18 months; this makes sense if we generally apply what we know about Blackwell coming in H1 2025 and these systems being more complex, perhaps requiring a longer sales cycle.

“Noah Kaye

All right. Thank you. And just to piggyback on this, Gio, for the last few quarters you talked about the elongation in order to revenue conversion cycle times for cloud and colo. And that's supporting some of the strength and visibility you have going into 2025. But just what drives your confidence in remaining price cost positive in 2025 given that longer conversion cycle?

Giordano Albertazzi

When we were talking, first of all, thanks for the question, Noah. When we think in terms of the elongation, we were talking about the elongation happening de facto and specifically for the cola and large cola and hyperscale. And that elongation was at 12, was, let's say from the 9, 15 months to the 12, 18 months. So it's not a dramatic elongation. We're talking about a three-month elongation. So we have good visibility on our pipelines. We have of course, very good visibility on our backlog. We have visibility on the price elements of that backlog and pipeline. We have good visibility on the cost side of the equation. And the cost side of the equation, of course, is very, very important. So combine the two, enhance our continued reiterated statement that we believe price cost to continue to be favorable.”

“Resounding Yes” to Higher Q4 Pipeline:

Although pipeline is not an official key metric offered, an analyst dug around for information on how Q4 is shaping up to which the CEO was quite emphatic is better than Q3. The analyst also asked more about lead elongation but the CEO is clearly referring to Blackwell’s arrival being the impetus.

“Michael Elias

Great. Thanks for taking the question. Two quick ones, if I may. First, I want to be absolutely clear. Are you saying that your demand pipeline entering 4Q is higher than the levels you saw entering 3Q? That's my first question.

And then second, I just want to revisit a prior question related to like elongating lead times. One of the things that we're seeing in the data center market is that as the preleasing window elongates and we go further out, the lower pricing that, that data center capacity is commanding. So as I think through the equipment side, does it stand to reason that as the customer lead time elongates, Vertiv actually has less pricing power in the conversation? Any color there would be helpful. Thank you.

Giordano Albertazzi

Well, thank you, Mike. The answer to the first question is if – the answer is yes. I was just trying to think about the formulation. But yes, that pipeline entering Q4 is higher than the pipeline entering Q3, no doubt. So that is a resounding, yes.

When it comes to the elongated lead times, we do not necessarily see a correlation between lead time elongation. And again, I want to remind everyone it's not a lead time elongation because of Vertiv's need to elongate lead time. So we can, most of the time deliver on shorter lead time on their request. But simply because of lead time gets elongated because that is consistent with our customers, project plans and schedules.”

Production Capacity:

It’s important to make a quick note here that capacity is something Vertiv remains confident on, which is where rival Super Micro may become weak due to cash constraints. According to the Investor Event: “But sometimes, if we go back to some of the earnings call, we talked about, yes, do you have capacity? How much capacity are you making available? Oh, I said, "Hey, we always have this 20%, 25%, 30% wiggle room. That's the way we think about capacity being made available […] And a year from now, we will have a similar probably bigger and more impressive list of all improvements of all the capacity that has been — that will be created. But it is about new factories. New factories in India, new factories in the U.S. opened this year. It's about operating and starting production. Example, for liquid cooling, virtually — actually, not virtually in every continent in which we operate.”

Conclusion:

AI power demand is forecast to rise at a rapid rate. GPU demand is showing no signs of slowing as Big Tech continues to spend billions on AI infrastructure, and each new GPU generation is seeing higher peak power consumption. The industry is quickly taking steps to address this, and power consumption, or more specifically, power efficiency per chip, looks to be emerging as the third realm of competition.

As we’ve made abundantly clear, the arrival of Nvidia’s Blackwell is the moment when things like thermal management and power distribution become mission critical. It will not only be Nvidia’s Blackwell systems, for example, we recently published on Amazon’s Trn2 systems that will have hundreds of thousands of custom chips (i.e., not GPUs). Yet, Blackwell signals the arrival of a moment when key suppliers will have their turn in the spotlight. Vertiv remains on our list as a top contender and supplier of choice in what will become a marathon for key AI beneficiaries at the hardware level.

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.

Recommended Reading:

Vertiv: AI Data Center and Direct Liquid Cooling Stock; Nvidia Supplier

Posted on by io-fund

Vertiv offers power management and thermal management to data centers and telecom companies, such as Alibaba, AT&T, China Mobile, Tencent and Verizon. The company was formed in 2016 after spinning off from Emerson, and reported $6.8 billion in revenue last year. Vertiv is considered one of the larger players in data center technologies in terms of power management and thermal management, with 24,000 employees and 30 manufacturing facilities.

Vertiv offers many thermal management solutions. Among them is the Liebert XDU, which is a compact unit that sits in the row near the rack or on the perimeter. The liquid-to-liquid cooling distribution unit (CDU) functions as a heat exchanger between the data center and IT equipment, and is used in all forms of liquid cooling: direct-to-chip, rear door heat exchange and immersion. The Liebert XDU offers a secondary fluid cooling loop so that alternative cooling fluids can be used alongside water.

In 2023, Vertiv acquired a company called CoolTera, after partnering with the company for three years, to add advanced cooling technologies to its thermal management portfolio. One of the main areas of need for data centers and colocation sites is to convert air-cooled equipment to liquid cooled equipment. Retrofitting existing air-cooled infrastructure is an area where Vertiv specializes, as opposed to only providing thermal solutions for new servers and racks.

The benefits of retrofitting was touched on in the most recent earnings call: “A great example of enabling the industry to be future-ready is our truly unique Vertiv CoolPhase CDU, which makes it simple to deploy high density liquid cooling where needed without having to reengineer the entire data center environment, even in the absence of a chilled water loop.”

In 2024, Vertiv joined the Nvidia Partner Network with a statement that Vertiv is “collaborating to build state-of-the-art liquid cooling solutions for next-gen NVIDIA accelerated data centers powered by GB200 NVL72 systems.” Now that we are close to the roll-out for Blackwell, Vertiv has officially announced a co-developed GB200 NVL72 system with up to 40% less power management space and up to 20% lower cooling costs. Vertiv is also partnered with Intel to supply air-cooled and liquid-cooled servers for the Gaudi3 AI accelerators.

Notably, Vertiv is a vendor that supplies original design manufacturers (ODMs) such as Dell with thermal management. Here is how the mutually beneficial relationship was described (as opposed to being direct competitors):

“ODMs play certainly an important role in the go-to-market for the likes of us. ODMs in a play that for liquid cooling sometimes is a white space play. They have a role with their servers, with their racks, with their integration. So it’s natural that they integrate liquid cooling technology in what they do. […] When we think about those ODMs, we think of them as a go-to-market for us. And those ODMs very often also rely on our ability not only to deliver and provide technology, but also to provide the service and the liquid cooling know-how at rack, row and system level that they might need kind of being complemented with. So we do not look at that part of the market as competition. We look at a part of the market that we have opportunity to synergize with.”  

The data center accounts for 80% of Vertiv’s business, up from 75% when we initially covered Vertiv back in June. The communications networks and commercial/industrial facilities is at 20% of revenue.

A few quarters back, the management team stated that AI-related projects were doubling in a two-month time frame:

“The ramp-up of production of liquid cooling globally continues as planned, and I'm happy to report we have production underway already at two of the three plants we shared with you we were planning to activate in 2024. We are on track with the capacity ramp-up as shared in February. We continue to see strong momentum with AI-related orders. While we are not disclosing specific detail on our liquid cooling orders, or more broadly AI-related orders, we did see the pipeline for AI projects more than double in the last two months.”

More recently, in Q3, management highlighted its belief that liquid cooling will grow rapidly over the next three years. Per the earnings call: “We believe from a market value standpoint that air and heat rejection combined will be 70% of the market and liquid 30% over the next few years. Air and heat rejection will grow at a 10% CAGR and liquid at a 30% CAGR, all growing very nicely."

At the recent Investor’s Event, Vertiv raised its long-term projections with an updated horizon from 2028 to 2029:

Source: Vertiv’s Investor Event PresentationVertiv’s Investor Event Presentation

Q3 Financials and 2024 Investor Event Financial Forecast Updates:

Q3 revenue grew by 19% YoY to $2.1 billion, beating estimates by 4.8%. Adjusted EPS rose by 46.2% YoY to $0.76, beating consensus estimates by 10.2%. Management also revised financial metrics during the recent 2024 Investor Event, which is discussed below.

Revenue

The company is witnessing an inflection in revenue due to strong AI data center growth (data center accounts for 80% of revenue). During the 2024 Investor Event held on Nov 18, the company's financial objectives were rolled forward one year through 2029 and guided for higher organic revenue growth for the forecasted period. The long-term organic revenue growth guidance has been raised from 8% to 11% (2023-2028F CAGR) to 12% to 14% (2024-2029F CAGR).

  • Q3 revenue grew by 19% YoY to $2.1 billion. Organic sales (adjusted to exclude foreign currency exchange rate impact) growth was 19.2%, which was helped by double-digit growth in all three regions.
  • The company’s CEO, Giordano Albertazzi said in the Q3 earnings call, “Pipelines continue to grow. We saw pipeline increase sequentially from Q3 – from Q2 to Q3 across all regions. We also are seeing more convincing signals that AI is indeed accelerating in EMEA.”
  • Organic sales in the Americas region grew by 20.5% YoY to $1.2 billion. Demand in the colocation and hyperscale markets drove organic sales growth in the Americas, with strong contributions from switchgear, busway, and liquid cooling and services.
  • The APAC region showed a 470-basis sequential improvement to 10.4% YoY growth to $432.4 million, helped by strong growth in China and the Rest of Asia.
  • The EMEA region witnessed the fastest growth, with 25.2% YoY to $442.5 million, driven by robust demand from colocation and hyperscale markets.
  • Management has guided Q4 revenue between $2.115 billion to $2.165 billion, representing YoY growth of 14.8% at the midpoint. The organic sales growth guide for Q4 is 11% to 15%.
  • Analysts expect Q4 revenue to grow 15.5%, followed by 17.5% and 16.8% in the subsequent two quarters.
  • Management has guided FY2024 revenue in the range of $7.78 billion to $7.83 billion, representing YoY growth of 13.7% at the midpoint. The organic sales growth guide for FY2024 is 14% at the midpoint. Analyst consensus for FY2025 indicates an acceleration to growth of 18.4% on revenue.
  • During the Q3 earnings call, the CEO said, “The orders trends and our robust backlog indicate that growth in 2025 will accelerate relative to 2024’s 14%.” During the recent Investor Event, management provided organic sales growth guidance of 16% to 18% for FY2025, representing a solid 3-point acceleration at the midpoint.

Expanding Margins Helps Vertiv Stand Apart

Vertiv’s margins are improving helped by strong operating leverage. During the 2024 Investor Event, management provided adjusted operating margin guidance of 25% for FY2029, representing an expansion of 600 bps from the 19% guide for FY2024 over a five-year period. This helps illustrate Vertiv’s ability to stand apart as a hardware company with already-strong margins that are expected to only expand further over time.

The company plans to achieve about 4% improvement through operating leverage by deepening Vertiv Operating System (VOS) adoption, functional optimization, and digitalization, including AI utilization. About 1% will come from productivity gains and another 1% from commercial execution by delivering positive price-cost through customer value creation.

During the 2023 Investor Event, management had guided the adjusted operating margin to be above 20% during the 2026-2028 timeframe. The company is expecting to reach the previous goal two years earlier, as management has provided an adjusted operating margin guide of 21% at the midpoint for FY2025.

  • Q3 gross margin was 36.5% compared to 36% in the same period last year.
  • This compares to 28.4% for FY2022 and 35% for FY2023.
  • Q3 operating margin improved 350 bps YoY to 17.9%. Adjusted operating margin improved 310 bps YoY to 20.1%. Management’s adjusted operating margin guide for Q4 2024 is 20.4%.
  • Q3 net income was $176.6 million or 8.5% of revenue compared to $94.1 million or 5.4% of revenue in the same period last year. Adjusted net income was $290.5 million or 14% of revenue compared to $201.2 million or 11.5% of revenue in the same period last year.

EPS

The company’s Q3 adjusted EPS grew by 46.2% YoY to $0.76. It beat analyst estimates by 10.2%, which was helped by strong operating leverage. Analysts expect strong EPS growth in the coming quarters.

  • Management Q4 adjusted EPS guide is $0.80 to $0.84, representing YoY growth of 46.4% at the midpoint.
  • Analysts expect adjusted EPS to grow 51.2% and 32.8% in Q1 and Q2, respectively.
  • Analysts expect adjusted EPS to grow 32.3% YoY to $3.56 for FY2025 and 25.8% in FY2026.

Cash Flow and Balance Sheet: $1B in FCF This Year

Vertiv announced the annual dividend increase from $0.10 to $0.15, to be paid quarterly. Management expects the 2029 dividend to be about 2x the 2025 annual dividend. In addition to achieving a net leverage ratio of 1.4x, Vertiv has repurchased $600 million worth of shares in 2024 and still has $2.4 billion authorized to repurchase by 2027.

  • Q3 operating cash flow was $375.1 million or 18.1% of revenue compared to 14.3% in the same period last year. It is also a significant improvement from the 13.1% for the FY2023.
  • Q3 adjusted free cash flow was $335.9 million or 16.2% of revenue compared to 12.7% in the same period last year.
  • Management raised the full-year adjusted free cash flow guide to $1.0 billion, up $125 million from the prior guidance. Management expects strong free cash flow generation to continue in 2025.
  • Cash was $908.7 million and debt of $2.931 billion compared to $579.7 million and $2.935 billion in Q2. Net leverage ratio has come down to 1.4x from 2.4x in the same period last year.

Key Metrics

Backlog

The backlog at the end of Q3 was $7.4 billion, up 47% year over year and 5% quarter over quarter. Expansion in all three regions helped drive the strong growth in backlog. As seen below, the 47% rate for the backlog is particularly high and is more than double the rate of revenue growth.

TTM Orders Grow 37% YoY

Management introduced a trailing twelve-month metric last quarter. The CEO said in the Q2 earnings call, “This quarter, we have introduced a trailing 12-month orders metric. As we have previously highlighted, there can be a natural variation to the timing of large orders in any quarter. Trailing 12-month is a good metric to assess order activity, smoothing some of the quarter-to-quarter push and pulls.”

The trailing twelve-month orders grew by 37% YoY and were consistent with 37% TTM growth at the end of the second quarter. Q3 orders grew by 17% and were lower than 57% growth in Q2. Management has tried to temper expectations of such high order growth as previously seen this year: “We've enjoyed extremely strong orders in the first half of 2024 and we would agree that continued approximately 60% order increases are unlikely as we tried to say last quarter.” This also helps illustrate why the company is moving to TTM reporting metric.

Earnings Call:

Backlog Elongation:

Given the backlog is growing at more than double the rate of revenue, there were quite a few questions about the backlog and pipeline on the earnings call. Most of them were too forward-looking for management to answer to, however, one question in particular was insightful in terms of Vertiv continuing to have pricing power. It’s also insightful as the analyst is implying the strong backlog may be coming from deals that are elongating from 9-15 months to 12-18 months; this makes sense if we generally apply what we know about Blackwell coming in H1 2025 and these systems being more complex, perhaps requiring a longer sales cycle.

“Noah Kaye

All right. Thank you. And just to piggyback on this, Gio, for the last few quarters you talked about the elongation in order to revenue conversion cycle times for cloud and colo. And that's supporting some of the strength and visibility you have going into 2025. But just what drives your confidence in remaining price cost positive in 2025 given that longer conversion cycle?

Giordano Albertazzi

When we were talking, first of all, thanks for the question, Noah. When we think in terms of the elongation, we were talking about the elongation happening de facto and specifically for the cola and large cola and hyperscale. And that elongation was at 12, was, let's say from the 9, 15 months to the 12, 18 months. So it's not a dramatic elongation. We're talking about a three-month elongation. So we have good visibility on our pipelines. We have of course, very good visibility on our backlog. We have visibility on the price elements of that backlog and pipeline. We have good visibility on the cost side of the equation. And the cost side of the equation, of course, is very, very important. So combine the two, enhance our continued reiterated statement that we believe price cost to continue to be favorable.”

“Resounding Yes” to Higher Q4 Pipeline:

Although pipeline is not an official key metric offered, an analyst dug around for information on how Q4 is shaping up to which the CEO was quite emphatic is better than Q3. The analyst also asked more about lead elongation but the CEO is clearly referring to Blackwell’s arrival being the impetus.

“Michael Elias

Great. Thanks for taking the question. Two quick ones, if I may. First, I want to be absolutely clear. Are you saying that your demand pipeline entering 4Q is higher than the levels you saw entering 3Q? That's my first question.

And then second, I just want to revisit a prior question related to like elongating lead times. One of the things that we're seeing in the data center market is that as the preleasing window elongates and we go further out, the lower pricing that, that data center capacity is commanding. So as I think through the equipment side, does it stand to reason that as the customer lead time elongates, Vertiv actually has less pricing power in the conversation? Any color there would be helpful. Thank you.

Giordano Albertazzi

Well, thank you, Mike. The answer to the first question is if – the answer is yes. I was just trying to think about the formulation. But yes, that pipeline entering Q4 is higher than the pipeline entering Q3, no doubt. So that is a resounding, yes.

When it comes to the elongated lead times, we do not necessarily see a correlation between lead time elongation. And again, I want to remind everyone it's not a lead time elongation because of Vertiv's need to elongate lead time. So we can, most of the time deliver on shorter lead time on their request. But simply because of lead time gets elongated because that is consistent with our customers, project plans and schedules.”

Production Capacity:

It’s important to make a quick note here that capacity is something Vertiv remains confident on, which is where rival Super Micro may become weak due to cash constraints. According to the Investor Event: “But sometimes, if we go back to some of the earnings call, we talked about, yes, do you have capacity? How much capacity are you making available? Oh, I said, "Hey, we always have this 20%, 25%, 30% wiggle room. That's the way we think about capacity being made available […] And a year from now, we will have a similar probably bigger and more impressive list of all improvements of all the capacity that has been — that will be created. But it is about new factories. New factories in India, new factories in the U.S. opened this year. It's about operating and starting production. Example, for liquid cooling, virtually — actually, not virtually in every continent in which we operate.”

Conclusion:

AI power demand is forecast to rise at a rapid rate. GPU demand is showing no signs of slowing as Big Tech continues to spend billions on AI infrastructure, and each new GPU generation is seeing higher peak power consumption. The industry is quickly taking steps to address this, and power consumption, or more specifically, power efficiency per chip, looks to be emerging as the third realm of competition.

As we’ve made abundantly clear, the arrival of Nvidia’s Blackwell is the moment when things like thermal management and power distribution become mission critical. It will not only be Nvidia’s Blackwell systems, for example, we recently published on Amazon’s Trn2 systems that will have hundreds of thousands of custom chips (i.e., not GPUs). Yet, Blackwell signals the arrival of a moment when key suppliers will have their turn in the spotlight. Vertiv remains on our list as a top contender and supplier of choice in what will become a marathon for key AI beneficiaries at the hardware level.

Recommended Reading:

Marvell Q3 Earnings: Strong Sequential Growth; Expanded AWS Partnership

Posted on 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.

Recommended Reading:

Nvidia’s Stock Has 70% Potential Upside For 2025

Posted on 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.

Data Center Revenue Surprise chart

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.

2025 Fiscal Chart

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.

Beth Kindig's Tweet on Nvidia

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.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more hereLearn more here.

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.

Revenue Growth Chart

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.

Nvidia GAAP Margins Chart

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.

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.

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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Nvidia Stock Is A Buy On Dips Before Blackwell Arrives In 2025

Posted on by io-fund

This article was originally published on Forbes on Nov 20, 2024,04:48am ESTForbesForbes on Nov 20, 2024,04:48am EST

Nvidia’s stock broke to all-time highs recently, trading at $148 in early November and $147 yesterday. The stock has left many investors wondering “what comes next” after the unrelenting, historic surge that began seven quarters ago.

To help my readers determine where Nvidia’s stock will go next, I’ve been fastidious in my analysis about the company’s outsized AI potential since 2018, tracking Big Tech capex as a proxy for AI demand since 2022, discussing the anomalous earnings and revenue revisions throughout 2023 and 2024, and reporting on never-before published data on supply chain checks as recent as two months ago.

The thoroughness is needed, however, as rumors from the media and short sellers alike run amuck. Rest assured, as 2025 approaches, supply chain data is giving bullish signals that the new 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.

Regarding my firm’s confidence in tracking supply chain data, when The Information stated Nvidia was experiencing a material delay on the next generation of GPUs, going so far as to state that Taiwan Semiconductor had machines sitting idle, I quickly refuted the report based on supply chain data my firm had been tracking. Those data points continue to indicate Blackwell is ramping. Here is what I stated:

“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.”

Fast forward two months, and next year’s fiscal estimates stand at $185 billion up from $167 billion; showing no material impact from the delay (quite the opposite). Our firm was also able to use that same supply chain data to buy Nvidia in July/August, for an average cost basis of $109. The I/O Fund’s first trade was at $3.15, but we actively track the stock and publish our real-time trade alerts for anyone who feels they missed out on the AI juggernaut.

$5B+ in Blackwell Revenue for Q4

The first item that will determine the strength of the upcoming earnings report from Nvidia has nothing to do with the Q3 results. Rather, what the market will want to know is how much Blackwell revenue is expected in the January quarter. Morgan Stanley has estimates placed at $5 to $6 billion, with this number hitting a ceiling due to supply constraints; however, Piper Sandler sees Blackwell revenue potentially higher, at $5 billion up to $8 billion.

Given the company is lapping tough comparables, the growth rate will slow considerably even if Blackwell does ramp from $6 billion per quarter to $60 billion per quarter by late-2026 (Hopper is in its seventh quarter and Blackwell will be in its seventh quarter by late 2026). This is because excellence begets excellence, and thus, Nvidia is competing with itself with each new generation of GPUs. For example, with Hopper, the company reported peak quarterly growth of 262% and 265% earlier this year, yet is expected to slow to the mid-40% for growth as we close out 2025.

Nvidia has multiple levers it can pull and outside forces at play that will help it maintain this 40%+ growth rate. This includes a 1-year product road map, Big Tech’s large appetite for AI spending, and long-term AI GPU market growth from Enterprises and the Consumer, plus a commanding market share position.

By coming to market with upgraded, more powerful GPUs on a now-annual cadence, with Blackwell Ultra, Rubin and Rubin Ultra soon to come, Nvidia will continue to be the largest beneficiary of Big Tech’s AI capex to an unprecedented degree as the company continually raises the bar on performance and TCO upgrades with each new generation.

Additionally, Nvidia has a software moat with CUDA and the cash to reserve chip capacity in bulk at the fab level to maintain an 80% to 85% share of what executives foresee as a $500 billion AI accelerator market by 2028. I first covered these points in my free newsletter when I published: “Here’s Why Nvidia Stock Will Reach $10 Trillion Market Cap by 2030.”

Of these points, one of the most visible is that Nvidia continues to pry away tens of billions in cash – and now hundreds of billions —- from the world’s leading tech companies.

Big Tech Capex to Surpass a Quarter Trillion

All roads lead to Nvidia, and it’s no secret that Big Tech and others are competing to purchase Nvidia’s supply constrained GPUs. Our firm began tracking Big Tech capex as a proxy for Nvidia demand in 2022, and tracking it on a quarterly basis starting in early 2023 – to help gauge AI demand, I continue to track Big Tech capex quarterly closely for our readers.

Our recent checks published in the analysis “AI Spending to Exceed a Quarter Trillion Next Year” reveal that AI spending continues to accelerate, with Alphabet, Amazon, Microsoft, and Meta on track to increase their spend by ~$90 billion YoY in 2024. This does not include xAI, CoreWeave, Oracle and dozens of others who are also spending multiple billions on Nvidia’s GPUs, as well.

To better understand the trajectory of AI spending, let’s take a step back to 2023, where the rapid ascent of ChatGPT at the beginning of the year set the stage for AI to step into the spotlight.

  • In the first half of 2023, Big Tech spent ~$74 billion on capex. Through Q3, that sum had moved up to ~$109 billion.
  • In the first half of 2024, Big Tech spent nearly $104 billion, a 47% YoY increase. Through Q3, that sum had surged to $170 billion, up 56% YoY.

Big Tech could spend another $70 billion in Q4, based on guidance and comments from executives, who overwhelmingly discussed the need for more AI infrastructure, putting full year capex at ~$240 billion, or nearly 15% higher than the level they were tracking at the start of the year.

Big Tech Quarterly Capex

Big Tech’s Q4 capex could hit $70B, driven by AI infrastructure demand—pushing 2024’s total to ~$240B, up 15% from early-year estimates! Source: I/O Fund

For 2025, Big Tech has already signaled a willingness to spend substantially more on AI. There is clear ROI for Amazon, Google and Microsoft as they rush to meet the elevated demand that continues to outpace AI capacity in their cloud infrastructures. More broadly, Big Tech and large enterprises are racing to further develop and broaden AI services and models. UBS projects Big Tech will spend ~10% more YoY, placing AI-driven capex at $267 billion; however, if 2024 is any sign, this estimate is too low. This all fits in with longer-term projections from Bank of America that sees a cumulative $700 billion spent on AI through 2026.

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Nvidia Has Over 2X Better Margins Compared to Most Mag 7 Stocks

As we go through a lull between the Hopper generation being in its seventh quarter, and Blackwell not yet shipping in volume, our firm will be buying the dips on Nvidia for many reasons – one of them being it’s the market leader on margins. By having a near monopoly on GPUs, Nvidia has incredibly strong pricing power.

The GPUs coming in 2025, called Blackwell, are set to intensify this pricing power with DGX B200 systems reportedly going for up to a 40%+ premium to the previous DGX H100 systems, at $500,000 per server versus the low $300,000s per server, respectively.

While GB200 prices are estimated at $60,000 to $70,000 for a single chip, the NVL36 and NVL72 configurations carry much higher price tags and thus, higher average prices per GB200. For example, the NVL36 is expected to cost ~$1.8 million, and for 18 GB200s (36 B200 GPUs), that comes out to $100,000 per GB200 and additional components. For the NVL72, it works out to ~$83,333 per GB200 and additional components.

While there were concerns about Nvidia’s margins given that management guided for a sequential contraction in gross margins in Q3, the sheer pricing power of Blackwell will ultimately be a non-issue next year.

Nvidia’s operating margin of 62% exceeds second place Microsoft by 17.5 points and third place Meta by 21.9 points; Nvidia is more than double the rest of the Mag 7 including Apple and Alphabet. This is because Hopper’s pricing power versus the Ampere generation: Nvidia’s Compute and Networking operating margin expanded from 28.5% in Q3 FY23 when Hopper reached full production to 71.3% in the most recent quarter even as revenue grew 7x during that seven-quarter period.

Big Tech Operating Margins

Nvidia leads the MAG 7 with a 62% operating margin, driven by Hopper’s pricing power—more than double Apple, Alphabet, and others in the group! Source: YCharts

Nvidia is expected to report roughly 50 bps to 100 bps margin contraction this quarter compared to last quarter, and will see roughly 200 bps to 300 bps margin contraction from its peak growth quarters earlier this year. As stated, the pricing power I foresee from Blackwell will keep the margins strong well into 2025, therefore, any concerns over margins this quarter will be a moot point by next year.

The strong margins combined with the expected growth in AI accelerators has caused some analysts to increase earnings per share substantially as of late. Bank of America increased its EPS estimates for next calendar year from $3.90 to $4.47 and for calendar year 2026 from $4.72 to $5.67.

In February, I wrote an analysis describing how Nvidia’s valuation was “eerily low despite 420% rally since 2023” to help our readers prepare for a higher return in the coming months, which detailed the importance of these revisions.

Ultimately, these revisions make the stock cheaper as it leads to more room in the bottom-line valuation. Despite being fairly straight forward, the velocity of the revisions is the single most important point that short sellers and Nvidia critics cannot seem to understand.

Q3 Earnings Details:

Of all the quarters since Nvidia’s Hopper release, this is the quarter most likely to be lackluster. This is because the impact of Hopper and the H200s are well-known and the Blackwell generation won’t be shipping in volume until Q1 and ramping further into Q2.

I am looking forward to the fiscal year guide in the February call, and am even more excited about the May earnings call when Blackwell’s impact will be better understood.

Nvidia’s Q3 FY2025 Revenue:

Nvidia is expected to report revenue of $32.9 billion for growth of 81.8% at the midpoint. Analyst expectations are higher than management guidance of $32.5 billion at the midpoint, for growth of 79.4%. This is a deceleration from last quarter’s 122.4% growth, and peak growth of 262% and 265% in the April and January 2024 quarters.

As pointed out on EPS, another area where Nvidia is unique is the sheer amount of analyst revisions on the stock. It not only speaks to Nvidia’s dominance in the AI data center to continually surprise the Street, but also to the challenge that analysts face in terms of predicting Nvidia’s persistent revenue surge.

For example, this year alone, analysts originally expected Nvidia to report 33.4% revenue growth and this quarter is now expected to be 81.8% growth, for revisions that total 48.4 points in about six months’ time (more than double the original growth expectations).

This quarter, there is a wide range of expectations with UBS believing Nvidia will beat by as much as $2 billion, for revenue of $34.5 billion to $35 billion for Q3. Piper Sandler foresees a beat of $1.3 billion for Q3, and a beat of $1.5 billion for Q4.

It’s been quite clear for the past two years that analysts do not know how to gauge the growth coming from this company. In 2025, Blackwell is likely to wildly exceed analyst estimates again.

EPS:

This quarter, analysts are expecting EPS of $0.74 compared to EPS of $0.67 last quarter. For nearly two years, the company has beaten EPS estimates by 10% or more, yet in the last quarter, the beat was more muted at 5.7%.

On the topic of Nvidia having 2X better margins than most of the Mag 7, here is a glimpse of how Nvidia compares on EPS with a 35%+ growth rate compared to the Mag 7 reporting half this growth rate through 2026:

Nvidia: 35.5% 2Y revenue CAGR, 35.1% EPS CAGR

Apple: 7.1% revenue CAGR, 14.4% EPS CAGR

Microsoft: 14.2% revenue CAGR; 14.9% EPS CAGR

Amazon: 10.7% revenue CAGR; 22.3% EPS CAGR

Meta: 13.5% revenue CAGR; 12.5% EPS CAGR

Supply Constraints:

This quarter, Nvidia’s CFO Colette Kress, will not offer a full year guide yet have to address the elephant in the room — supply constraints.

The fab that makes Nvidia’s chips, Taiwan Semiconductor (TSMC), is working overtime to boost capacity to meet demand. TSMC’s monthly CoWoS capacity was estimated at ~15,000/month at the end of 2023, and was originally expected to triple to ~45,000 to 50,000/month by the end of 2024 in order to meet such high demand from Nvidia, AMD and other advanced node clients. Now, capacity is expected to rise ~300% to 60,000/month.

TSMC remains committed to significantly boosting CoWoS capacity over the next few years in order to accommodate these accelerated AI GPU timelines from both Nvidia and AMD, with multiple different product lines expected to come to market over the next couple of years. By year-end 2025, CoWoS capacity is estimated to be 80,000 to 90,000/month, per Morgan Stanley, with Nvidia reportedly already reserving half of this capacity.

By the end of 2026, CoWoS capacity is estimated to expand to as much as 140,000 to 150,000/month, representing 10x growth in capacity from the end of 2023.

TEMC Twitter Post

Source: Beth_Kindig xAI

Foxconn and Quanta are also both signaling strong demand for Blackwell come 2025. Foxconn has said that they see “crazy” demand for Blackwell servers, and forecast AI servers to make up half of their overall server business in 2025. Foxconn has said that initial shipments are on time for Q4 before ramping much faster in Q1, with Quanta saying the same, that initial shipments are on schedule and will ramp in Q1.

Quanta sees triple-digit AI server growth through next year on the back of strong demand, with Deputy Spokesperson Carol Hsu saying that “recent capex guidance from top US hyperscalers also confirmed their aggressive spending on AI in 2025, all from a high base in 2024.”

Nvidia’s China Exposure is Low

Nvidia is the subject of some of the most severe export restrictions from the US due to its integral role in advancing AI computing. Subsequently, the company’s China exposure is among the lowest in the semiconductor sector, leaving it less exposed should we see heightened geopolitical tensions — especially tariffs.

Nvidia’s China revenue was 9.6% in Q1 and 12.2% in Q2, down from the low-20% range in the same quarters in fiscal 2024. For all of FY 2024, Nvidia’s China revenue was 16.9%, down from 21.5% the year prior. Other semi peers are much more heavily exposed to China: Broadcom’s China exposure was 32.2% in FY 2023, Intel’s exposure was above 27%, and Qualcomm and Marvell both had more than 40% of revenue stem from China in FY 2024.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.Learn more hereLearn more here.

Semiconductor Peers are Quite Weak

Although Nvidia’s fundamentals are a perfect 10, the stock is contending with weak peers, as evidenced by major semiconductor ETFs, SOXX and SMH, not making new highs with the S&P 500.

Retail investors often find out the hard way, even the most perfect stock must contend with market forces beyond its control. This is the primary reason Nvidia’s stock may pullback as Nvidia is holding up the semiconductor market, which has grown unusually weak in the past few weeks. SOXX is 20% of its all-time highs and SMH is 14% of its all-time highs despite the S&P 500 making new highs. In a 1-hour webinar for I/O Fund Members last quarter, I discussed why this is an issue for AI investors and what I’d like to see before I resume buying Nvidia.

Conclusion:

My firm has become well-known for calling Nvidia an AI stock in 2018, and later stating Nvidia would Surpass Apple, and finally that Nvidia will reach a $10 trillion market cap by 2030. Yet, perhaps lesser-known is that I nailed the October 2022 bottom by stating Nvidia was Ready to Rumble on H100 GPUs along with a real-time trade alert for $10.80 on October 13th 2022 a mere 25 months ago.

Here is what I stated at the exact moment Nvidia’s stock bottomed in October after selling off 60% following the August earnings report:

“Today, Nvidia’s AI products serve nearly every enterprise company’s artificial intelligence and machine learning ambitions. The company has an impressive launch schedule starting in October for two flagship products – the RTX 40 Series and the H100 GPU. The timing of these releases is no coincidence as it’s a rapid two months following the crypto/gaming revenue miss. Suffice to say, Nvidia’s management team is prepared to rumble —- putting its very best release in gaming and its most powerful AI chip to-date up against the crypto mining selloff. If history is any indication, the turnaround will only be a matter of time.”

The upcoming earnings report has a few similarities to October of 2022, which is that we are toward the end of a product cycle and the CFO cannot offer fiscal year guidance. Despite the H100s ramping and Nvidia having visibility into that ramp, the CFO was tight-lipped two years ago stating: “Our Data Center yes, we do expect it to grow. It may grow about what we just saw between Q1 and Q2. We’ll continue to look at it.” Therefore, I am not expecting much from the CFO on Blackwell in this report, but that lack of detail will be a distant memory this time next year.

Make no mistake, Nvidia is the best stock of the decade and we are only four years in. The big picture is that Nvidia's trajectory will continue due to two words: pricing power.

Our firm has an aggressive buy plan at key levels should the stock pullback, and we have a backup plan should the stock overcome the peer pressure we are seeing from SMH 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. Most importantly, the I/O Fund continues to offer buy zones for those who’d like to participate.

The I/O Fund first called out Nvidia’s AI opportunity in November 2018 with our first trade alert at $3.15 for returns of 3280%. We also provided 9 buy alerts from 2021 – 2022 to buy NVDA stock below $20. The I/O Fund has been closely analyzing lesser-known stocks in AI plus crypto with real-time trade alerts and webinars. For a limited time, get up to $250 off with one of our biggest sales of the year starting Nov 28th. Sign up for our newsletter for more information on the upcoming sale or Follow me on xAI/Twitter.more information on the upcoming sale or Follow me on xAI/Twitter.

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.

Recommended Reading:

Nvidia Q3: Lackluster Quarter until Blackwell Arrives

Posted on by io-fund

Nvidia once again posted a $2 billion beat to revenue estimates, 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, speaking volumes as to the level of demand for its GPUs given that Blackwell had not begun to ship in Q3.

Blackwell matters – a lot. As stated in the webinar, the more the team looked at the details of the release, the clearer it has become that 2025 will be Nvidia’s year – again. Some of this was covered in the pre-earnings write-up published this morning.

On the positive side:

  • Hopper drove the beat that analysts were expecting, with UBS tagging the beat at $2 billion. This did, indeed, materialize in the earnings report. This beat is clearly not lackluster but given the performance of the stock, up about 850% since two years ago when Hopper began to ship, the product cycle is lackluster and not able to reinvigorate the stock.
  • My primary message going into tonight’s results was that the I/O Fund is tracking supply chain signals indicating the new 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. This was echoed tonight when Jensen Huang stated: “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.”
  • The importance of big tech 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. As Damien on the team helped to point out last week, we are at a quarter-trillion right now. Per the CEO: “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.
  • Management debunked the supply chain rumors (which the inaccuracy is getting to be a tad annoying at this point). When asked about supply chain rumors, the CEO stated “Blackwell production is in full steam. In fact, as Colette mentioned earlier, we will deliver this quarter more Blackwells than we had previously estimated.” As expected, Colette Kress was tight lipped and no official number was provided. I have personally found Nvidia’s management style to be to our benefit as they were a closed book two years ago in the quarters that preceded the historic ramp.

What the Street Asked About:

  • Despite the rather large top-line beat, margins were relatively in line with guidance, and forecast to contract nearly 2 points sequentially.
  • Never underestimate Wall Street’s ability to miss the bigger picture. Analysts on the call cross-examined this 200 bps decline despite Nvidia having an operating margin of over 60% compared to most of the Mag 7 having operating margins at half that. The CFO was clear that following Blackwell, the 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. GAAP and non-GAAP operating expenses are expected to be approximately $4.8 billion and $3.4 billion, respectively.”
  • Supply chain constraints: There has been some FUD published by The Information back in August and again this week. Management provided a strong comment to refute these claims, primarily that: “We completed a successful mask change for Blackwell, our next Data Center architecture, that improved production yields.” Yields is what matters here and this comment along with Q4 seeing more Blackwell revenue than previously estimated helps to eliminate these concerns.
  • Broadly speaking, there are supply constraints but this is nothing new as it’s been widely understood Blackwell is already sold out for next year.  
  • As we close out the year and move into 2025, investors should be prepared to hear about China and tariffs. Per the pre-earnings report, Nvidia has limited exposure at 12.5% yet it’s quite clear with weak SMH and SOXX ETF price action that the market is pricing in this impact. It’s unclear to me today how TSM will be viewed in terms of tariffs given the Arizona plant is up and running. You can view our webinar clip here regarding SMH.

Fiscal Q3 2025 Results:

As stated, Hopper drove the beat that analysts were expecting, with UBS tagging the beat 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.

As stated, the one weak link of the report was Q4’s margin guidance, with management pointing to potential contractions down the line as Blackwell ramps.

Revenue

Nvidia reported 93.6% YoY growth to $35.08 billion in revenue, well ahead of the consensus estimate for $33.13 billion (83% YoY). Nvidia is now lapping its peak growth quarters, Q3 FY24 to Q1 FY25, where revenue more than tripled each quarter as Hopper ramped tremendously fast. Management said in Q3 that the H200 “grew significantly in the quarter.”

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 a strong report to say the least.

For Q4, management guided for revenue of $37.5 billion, +/- 2%, just slightly ahead of consensus estimates for $37.02 billion at the midpoint. Management noted 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.”

Both Hopper and Blackwell will be shipping in tandem, placing 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.”

China revenue was 15.4% of revenue compared to 12.7% year-to-date. This is down from the low-20% range last year.

Key Segments

It should be of no surprise that data center revenue beat estimates in the quarter, but what’s interesting is that the segment posted the largest surprise relative to estimates since Hopper’s breakout quarter in FY24.

Data center revenue of $30.77 billion increased 112.0% YoY and 17.1% QoQ, beating estimates by $1.95 billion. Assuming a similar mix as the current quarter, Q4’s data center revenue would be implied to be nearly $32.5 billion.

In the segment, data center compute revenue was $27.64 billion, rising 132% YoY and 22% QoQ. Networking revenue increased 20% YoY but declined (15%) QoQ to $3.13 billion – this slowed sharply from 114 % YoY growth in Q2.

Management said networking growth was driven by Ethernet for AI; “NVIDIA Spectrum-X Ethernet for AI revenue increased over 3 times year-on-year and our pipeline continues to build with multiple CSPs and consumer Internet companies planning large cluster deployments.” It was also indicated that networking would resume sequential growth next quarter: “So this quarter is just a slight dip down and we're going to be right back up in terms of growing. They're getting ready for Blackwell and more and more systems that will be using not only our existing networking but also the networking that is going to be incorporated in a lot of these large systems that we are providing them to.”

  • Gaming revenue of $3.28 billion increased 15% YoY and 14% QoQ, driven by GeForce RTX series 40 GPUs and game console SoCs.
  • Pro Viz revenue of $486 million increased 17% YoY and 7% QoQ, driven by the ramp up of RTX GPU workstations.
  • Automotive revenue of $449 million increased 72% YoY and 30% QoQ, accelerating 35 bp QoQ from 37% YoY growth in Q2, driven by Nvidia’s self-driving platform.
  • OEM and other revenue of $97 million increased 33% YoY and 10% QoQ.

Margins

Despite the rather large top-line beat, margins were relatively in line with guidance, and forecast to contract nearly 2 points sequentially. This forecasted weakness as Blackwell ramps may be one of the factors behind the initial post-earnings sell-off, with GAAP operating margin seen coming back towards 60%.

  • GAAP gross margin was 74.6%, just ahead of guidance for 74.4%. Adjusted gross margin was 75%, in line with guidance. This reiterated our 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. 
  • GAAP net margin was 55.0%, down from 55.3% last quarter but up from 51.0% in the year ago quarter. Adjusted net margin was 57.0%, up from 56.4% last quarter and 55.3% in the year ago quarter.

    While it may seem like a small difference, putting it to the scale of revenue growth will show that net income has more than doubled YoY – GAAP net income was $19.31 billion in Q3, up from $9.24 billion last year despite only a 4-point margin expansion.

  • GAAP EPS of $0.78 beat estimates by $0.08, and represented YoY growth of 111%. Adjusted EPS of $0.81 beat estimates by $0.06 and represented YoY growth of 103%.

Cash and Balance Sheet

Cash flows remained strong in the quarter, with operating and free cash flow margins both expanding sequentially.

  • Operating cash flow was $17.63 billion, rising 141% YoY and 22% QoQ. OCF margin was  50.3%, expanding from 48.2% last quarter and 40.5% last year; to note, this remains below the 58.9% margin from Q1.
  • Free cash flow was $16.79 billion, rising 138% YoY and 25% QoQ. FCF margin was 47.9%, up from 44.9% last quarter and 38.9% in the year ago quarter.
  • Inventories totaled $7.65 billion, increasing nearly 60% YoY and more than 14% QoQ. Purchase commitments and obligations for inventory and capacity also rose 4% QoQ to $28.9 billion. Capacity and supply pre-payments were $5.2 billion, reaffirming that Nvidia is well prepared to launch Blackwell in full-force.
  • Cash and equivalents totaled $38.49 billion, while debt totaled $8.46 billion.

Earnings Call:

To elaborate on the margin concerns, here was an exchange in the Q&A:

Timothy Arcuri:

“[…] And then Colette, you kind of talked about Blackwell bringing down gross margin to the low-70s as it ramps. So I guess if April is the crossover, is that the worst of the pressure on gross margin? So you're going to be kind of in the low-70s as soon as April. I'm just wondering if you can sort of shape that for us. Thanks.”

Colette Kress

Sure. Let me first start with your question, Tim. Thank you regarding our gross margins, and we discussed our gross margins as we are ramping Blackwell in the very beginning and the many different configurations, the many different chips that we are bringing to market, we are going to focus on making sure we have the best experience for our customers as they stand that up. We will start growing into our gross margins, but we do believe those will be in the low 70s in that first part of the ramp. So you're correct, as you look at the quarters following after that, we will start increasing our gross margins and we hope to get to the mid-70s quite quickly as part of that ramp.”

–End Quote

For More Reading:

Please reference our pre-earnings write-up which summarizes my current thoughts on the stock.

Conclusion:

I said on Fox Business News on Tuesday that I would love to get Nvidia lower, and I truly would. The nitpicking around the margins, the weaker semiconductor peers, the low volume as the stock trades near its all-time highs, the tariff concerns … one or all of these may present us that opportunity.

Nvidia’s fundamentals are a perfect 10. The pre-earnings report had stated: “Make no mistake, Nvidia is the best stock of the decade and we are only four years in. The big picture is that Nvidia's trajectory will continue due to two words: pricing power.”

We are already tracking a 30% minimum difference between GB200NVL72 orders and what Wall Street has estimated for next year. When you add that the DGX B200 systems will be priced 40% higher, and if we assume pricing power affects more SKUs the way it’s going to affect the DGX B200 systems, then we could see about 70% upside next year for Nvidia. Now, the I/O Fund likes to be aggressive, it’s why you’re here. If we can get the stock lower, that potential upside increases.

Wish us luck – and keep an eye on those trade alerts!

Recommended Reading:

Nvidia Q3: Lackluster Quarter until Blackwell Arrives

Posted on by io-fund

Nvidia once again posted a $2 billion beat to revenue estimates, 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, speaking volumes as to the level of demand for its GPUs given that Blackwell had not begun to ship in Q3.

Blackwell matters – a lot. As stated in the webinar, the more the team looked at the details of the release, the clearer it has become that 2025 will be Nvidia’s year – again. Some of this was covered in the pre-earnings write-up published this morning.

On the positive side:

  • Hopper drove the beat that analysts were expecting, with UBS tagging the beat at $2 billion. This did, indeed, materialize in the earnings report. This beat is clearly not lackluster but given the performance of the stock, up about 850% since two years ago when Hopper began to ship, the product cycle is lackluster and not able to reinvigorate the stock.
  • My primary message going into tonight’s results was that the I/O Fund is tracking supply chain signals indicating the new 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. This was echoed tonight when Jensen Huang stated: “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.”
  • The importance of big tech 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. As Damien on the team helped to point out last week, we are at a quarter-trillion right now. Per the CEO: “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.
  • Management debunked the supply chain rumors (which the inaccuracy is getting to be a tad annoying at this point). When asked about supply chain rumors, the CEO stated “Blackwell production is in full steam. In fact, as Colette mentioned earlier, we will deliver this quarter more Blackwells than we had previously estimated.” As expected, Colette Kress was tight lipped and no official number was provided. I have personally found Nvidia’s management style to be to our benefit as they were a closed book two years ago in the quarters that preceded the historic ramp.

What the Street Asked About:

  • Despite the rather large top-line beat, margins were relatively in line with guidance, and forecast to contract nearly 2 points sequentially.
  • Never underestimate Wall Street’s ability to miss the bigger picture. Analysts on the call cross-examined this 200 bps decline despite Nvidia having an operating margin of over 60% compared to most of the Mag 7 having operating margins at half that. The CFO was clear that following Blackwell, the 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. GAAP and non-GAAP operating expenses are expected to be approximately $4.8 billion and $3.4 billion, respectively.”
  • Supply chain constraints: There has been some FUD published by The Information back in August and again this week. Management provided a strong comment to refute these claims, primarily that: “We completed a successful mask change for Blackwell, our next Data Center architecture, that improved production yields.” Yields is what matters here and this comment along with Q4 seeing more Blackwell revenue than previously estimated helps to eliminate these concerns.
  • Broadly speaking, there are supply constraints but this is nothing new as it’s been widely understood Blackwell is already sold out for next year.  
  • As we close out the year and move into 2025, investors should be prepared to hear about China and tariffs. Per the pre-earnings report, Nvidia has limited exposure at 12.5% yet it’s quite clear with weak SMH and SOXX ETF price action that the market is pricing in this impact. It’s unclear to me today how TSM will be viewed in terms of tariffs given the Arizona plant is up and running. You can view our webinar clip here regarding SMH.

Fiscal Q3 2025 Results:

As stated, Hopper drove the beat that analysts were expecting, with UBS tagging the beat 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.

As stated, the one weak link of the report was Q4’s margin guidance, with management pointing to potential contractions down the line as Blackwell ramps.

Revenue

Nvidia reported 93.6% YoY growth to $35.08 billion in revenue, well ahead of the consensus estimate for $33.13 billion (83% YoY). Nvidia is now lapping its peak growth quarters, Q3 FY24 to Q1 FY25, where revenue more than tripled each quarter as Hopper ramped tremendously fast. Management said in Q3 that the H200 “grew significantly in the quarter.”

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 a strong report to say the least.

For Q4, management guided for revenue of $37.5 billion, +/- 2%, just slightly ahead of consensus estimates for $37.02 billion at the midpoint. Management noted 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.”

Both Hopper and Blackwell will be shipping in tandem, placing 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.”

China revenue was 15.4% of revenue compared to 12.7% year-to-date. This is down from the low-20% range last year.

Key Segments

It should be of no surprise that data center revenue beat estimates in the quarter, but what’s interesting is that the segment posted the largest surprise relative to estimates since Hopper’s breakout quarter in FY24.

Data center revenue of $30.77 billion increased 112.0% YoY and 17.1% QoQ, beating estimates by $1.95 billion. Assuming a similar mix as the current quarter, Q4’s data center revenue would be implied to be nearly $32.5 billion.

In the segment, data center compute revenue was $27.64 billion, rising 132% YoY and 22% QoQ. Networking revenue increased 20% YoY but declined (15%) QoQ to $3.13 billion – this slowed sharply from 114 % YoY growth in Q2.

Management said networking growth was driven by Ethernet for AI; “NVIDIA Spectrum-X Ethernet for AI revenue increased over 3 times year-on-year and our pipeline continues to build with multiple CSPs and consumer Internet companies planning large cluster deployments.” It was also indicated that networking would resume sequential growth next quarter: “So this quarter is just a slight dip down and we're going to be right back up in terms of growing. They're getting ready for Blackwell and more and more systems that will be using not only our existing networking but also the networking that is going to be incorporated in a lot of these large systems that we are providing them to.”

  • Gaming revenue of $3.28 billion increased 15% YoY and 14% QoQ, driven by GeForce RTX series 40 GPUs and game console SoCs.
  • Pro Viz revenue of $486 million increased 17% YoY and 7% QoQ, driven by the ramp up of RTX GPU workstations.
  • Automotive revenue of $449 million increased 72% YoY and 30% QoQ, accelerating 35 bp QoQ from 37% YoY growth in Q2, driven by Nvidia’s self-driving platform.
  • OEM and other revenue of $97 million increased 33% YoY and 10% QoQ.

Margins

Despite the rather large top-line beat, margins were relatively in line with guidance, and forecast to contract nearly 2 points sequentially. This forecasted weakness as Blackwell ramps may be one of the factors behind the initial post-earnings sell-off, with GAAP operating margin seen coming back towards 60%.

  • GAAP gross margin was 74.6%, just ahead of guidance for 74.4%. Adjusted gross margin was 75%, in line with guidance. This reiterated our 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. 
  • GAAP net margin was 55.0%, down from 55.3% last quarter but up from 51.0% in the year ago quarter. Adjusted net margin was 57.0%, up from 56.4% last quarter and 55.3% in the year ago quarter.

    While it may seem like a small difference, putting it to the scale of revenue growth will show that net income has more than doubled YoY – GAAP net income was $19.31 billion in Q3, up from $9.24 billion last year despite only a 4-point margin expansion.

  • GAAP EPS of $0.78 beat estimates by $0.08, and represented YoY growth of 111%. Adjusted EPS of $0.81 beat estimates by $0.06 and represented YoY growth of 103%.

Cash and Balance Sheet

Cash flows remained strong in the quarter, with operating and free cash flow margins both expanding sequentially.

  • Operating cash flow was $17.63 billion, rising 141% YoY and 22% QoQ. OCF margin was  50.3%, expanding from 48.2% last quarter and 40.5% last year; to note, this remains below the 58.9% margin from Q1.
  • Free cash flow was $16.79 billion, rising 138% YoY and 25% QoQ. FCF margin was 47.9%, up from 44.9% last quarter and 38.9% in the year ago quarter.
  • Inventories totaled $7.65 billion, increasing nearly 60% YoY and more than 14% QoQ. Purchase commitments and obligations for inventory and capacity also rose 4% QoQ to $28.9 billion. Capacity and supply pre-payments were $5.2 billion, reaffirming that Nvidia is well prepared to launch Blackwell in full-force.
  • Cash and equivalents totaled $38.49 billion, while debt totaled $8.46 billion.

Earnings Call:

To elaborate on the margin concerns, here was an exchange in the Q&A:

Timothy Arcuri:

“[…] And then Colette, you kind of talked about Blackwell bringing down gross margin to the low-70s as it ramps. So I guess if April is the crossover, is that the worst of the pressure on gross margin? So you're going to be kind of in the low-70s as soon as April. I'm just wondering if you can sort of shape that for us. Thanks.”

Colette Kress

Sure. Let me first start with your question, Tim. Thank you regarding our gross margins, and we discussed our gross margins as we are ramping Blackwell in the very beginning and the many different configurations, the many different chips that we are bringing to market, we are going to focus on making sure we have the best experience for our customers as they stand that up. We will start growing into our gross margins, but we do believe those will be in the low 70s in that first part of the ramp. So you're correct, as you look at the quarters following after that, we will start increasing our gross margins and we hope to get to the mid-70s quite quickly as part of that ramp.”

–End Quote

For More Reading:

Please reference our pre-earnings write-up which summarizes my current thoughts on the stock.

Conclusion:

I said on Fox Business News on Tuesday that I would love to get Nvidia lower, and I truly would. The nitpicking around the margins, the weaker semiconductor peers, the low volume as the stock trades near its all-time highs, the tariff concerns … one or all of these may present us that opportunity.

Nvidia’s fundamentals are a perfect 10. The pre-earnings report had stated: “Make no mistake, Nvidia is the best stock of the decade and we are only four years in. The big picture is that Nvidia's trajectory will continue due to two words: pricing power.”

We are already tracking a 30% minimum difference between GB200NVL72 orders and what Wall Street has estimated for next year. When you add that the DGX B200 systems will be priced 40% higher, and if we assume pricing power affects more SKUs the way it’s going to affect the DGX B200 systems, then we could see about 70% upside next year for Nvidia. Now, the I/O Fund likes to be aggressive, it’s why you’re here. If we can get the stock lower, that potential upside increases.

Wish us luck – and keep an eye on those trade alerts!

Recommended Reading: