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.
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.
This article was originally published on Forbes on Nov 27, 2024,08:45am ESTForbesForbes on Nov 27, 2024,08:45am EST
Nvidia once again posted a $2 billion beat to consensus revenue estimates in Q3, reporting YoY growth of nearly 94% to over $35 billion in revenue. Data center revenue more than doubled in the quarter to over $30 billion with Hopper driving the second largest data center beat in company history, speaking volumes as to the level of demand for its GPUs given that Blackwell will not initially ship until next quarter.
As recapped to our premium members after the earnings report, the I/O Fund is tracking supply chain signals indicating the next generation of GPUs shipping in full volume by mid-2025 (and beginning to ship in the January quarter) will far exceed the GPU sales we saw in 2023 and 2024 combined.
The I/O Fund is already tracking a 30% minimum difference between GB200 NVL72 orders and what the Street has estimated for next year. When adding that the DGX B200 systems will be priced 40% higher, and assuming pricing power affects more SKUs the way it will affect the DGX B200 systems, then it’s possible to see about 70% upside next year for Nvidia.
Nvidia Posts Largest Data Center Beat Since Hopper’s 2023 Breakout
Nvidia reported $35.08 billion in revenue versus consensus of $33.13 billion. Beating on data center revenue is becoming common place for Nvidia, yet what’s interesting is the data center segment posted the largest surprise relative to estimates since Hopper’s breakout quarter in FY24. Nvidia reported $35.08 billion in revenue versus consensus of $33.13 billion.
A bar graph illustrating Nvidia’s impressive revenue performance, showcasing a $35.08 billion revenue surpassing the consensus estimate of $33.13 billion. This marks the largest data center segment beat since Hopper’s breakout quarter in FY24, highlighting Nvidia’s consistent outperformance in the data center sector. Source: I/O Fund
Data center revenue of $30.77 billion increased 112.0% YoY and 17.1% QoQ, beating estimates by $1.95 billion. This marked the largest beat since the $2.46 billion beat in Q2 FY24, as well as the two $1.8 billion beats in Q3 FY24 and Q1 FY25. This is important as this beat was driven solely by Hopper – which is in its seventh quarter with the H100s and H200s.
Blackwell’s is expected to ramp quickly in Q4 and into next year. Analysts estimate Blackwell’s volume in Q4 could be between 150,000 and 200,000, before tripling sequentially to 550,000 in Q1 FY26 (Jan-Apr quarter of 2025). The expectation for AI clusters is to go from tens of thousands, to hundreds of thousands, to millions of GPUs, indicating a long runway for Blackwell and subsequent GPU generations.
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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.
‘According to reports from Wccftech: “Team Green is expected to ship 60,000 to 70,000 units of NVIDIA's GB200 AI servers, and given that one server is reported to cost around $2 million to $3 million per unit, this means that Team Green will bag in around a whopping $210 billion from just Blackwell servers along, that too in a year.
The weight of that report cannot be overstated as it implies 26% upside to 2025’s estimates based on one SKU alone.”
Despite Blackwell not yet shipping in full volume, there are multiple data points that support this ramp to $200+ billion in revenue.
Perhaps the most important quote was one that could easily be overlooked — Nvidia’s management explained in Q3’s earnings that they have “completed a successful mask change for Blackwell…that improved production yields. Blackwell production shipments are scheduled to begin in the fourth quarter of fiscal 2025 and will continue to ramp into fiscal 2026.”
Since both Hopper and Blackwell will be shipping in tandem beginning in Q4, there’s more emphasis on supply constraints moving forward, as management was clear in saying that both products have “certain supply constraints” with Blackwell’s demand “expected to exceed supply for several quarters in fiscal 2026.” Broadly speaking, supply constraints are nothing new as it’s been widely understood Blackwell is already sold out for next year.
By executing this mask change to improve production yields, Nvidia can theoretically get more usable chips per wafer, alleviating some supply fears and allowing it to meet higher demand levels, leading to higher revenue generation. Management already hinted at this, saying “we will deliver this quarter more Blackwells than we had previously estimated.” CEO Jensen Huang also explained that GPU clusters with Blackwell will be starting where Hopper left off: “You see now that at the tail-end of the last generation of foundation models were at about 100,000 Hoppers. The next generation starts at 100,000 Blackwells.”
Even though Nvidia guided Q4 nearly in-line with analysts' expectations at $37.5 billion, there is still significant room for Blackwell to grow through 2025. Current forecasts point to revenue surpassing the $50 billion-mark one year from now, with revenue growth in excess of 40% for the next five quarters.
A table displaying the wide range of analyst revenue estimates for Nvidia in FY26, highlighting a $40 billion range for Q3 and a $70 billion range for Q4. The potential for Nvidia to achieve over $50 billion in quarterly data center revenue is also noted. Source: I/O Fund
Interestingly, there is still a massive disconnect in analyst estimates as FY26 progresses – estimates for Q3 have a nearly $40 billion range from the low to high estimates. When looking at Q4 of next year, there is a ridiculous $70 billion range, with some analysts predicting $31 billion at the low end while others have estimates as high as $101 billion. Should Nvidia maintain its quarterly cadence of beating by $2 billion from the midpoint of these estimates, and assuming data center mix remains at ~90%, Nvidia could easily exit FY26 with data center revenue at >$50 billion/quarter, or $200+ billion annualized compared to data center revenue of $140 billion this year.
Big Tech’s capex supports this revenue growth story, as Microsoft, Amazon, Meta and Alphabet have all accelerated capex significantly in the past couple of quarters and reaffirmed the need to continue investing aggressively in AI infrastructure moving through 2025.
Additionally, Big Tech is already spending tens of billions on Nvidia’s Blackwell lineup:
Alphabet has reportedly ordered 400,000 GB200s worth $10 billion.
Microsoft has reportedly ordered 60,000 GB200s worth $2 billion.
Meta has reportedly ordered 360,000 GB200s worth $8 billion.
This is but a fraction of 2025’s estimated capex– 2024’s capex could come in at ~$240 billion with an estimated $70 billion spent in Q4, with the four currently tracking for over $270 billion in capex predominantly for AI infrastructure in 2025.
Nvidia has been capturing a lion’s share of AI spending from Big Tech, at ~80% to 85%, and assuming little change in its AI GPU market share with competition primarily arising from AMD and no one else, Big Tech’s spending implies a clear path towards $200 billion in GPU revenue in 2025.
The importance of Big Tech’s capex was also echoed with the CEO stating we will see $1 trillion in data infrastructure rebuild before he expects to see digestion from the hyperscalers. Per Huang: “I believe that there will be no digestion until we modernize a trillion dollars with the data centers.” That would imply another 3X from here for the remaining three-quarter trillion – not in stock price, but in capex. Presumably, it would mean a higher trajectory for the stock price in terms of valuing that revenue.
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.
A graph illustrating Nvidia’s year-over-year growth rates, showing a deceleration from peak growth of 265% to current growth of 94%. The graph highlights Nvidia’s consistent beats against analyst estimates, driven by Hopper, and the anticipated future impact of Blackwell. Source; I/O Fund
For Q4, management guided for revenue of $37.5 billion, +/- 2%, just slightly ahead of consensus estimates for $37.02 billion at the midpoint. Analysts are now expecting $38.01 billion in revenue for Q4, just a week after the report, at the upper end of the guided range. Both Hopper and Blackwell will be shipping in tandem moving forward as Blackwell ramps significantly through fiscal 2026.
Margins Issues are Overblown
Analysts were nitpicking margins, yet this concern is overblown. Q3’s margins were relatively in line with guidance despite the $2 billion top-line beat, and for Q4, management forecast margins to contract nearly 2 points sequentially. However, CFO Colette Kress was clear that following Blackwell, gross margin will eventually return to its current percentage: “As Blackwell ramps, we expect gross margins to moderate to the low-70s. When fully ramped, we expect Blackwell margins to be in the mid-70s.”
Investors should never underestimate Wall Street’s ability to miss the bigger picture. Analysts on the call cross-examined this 200 bp sequential decline despite Nvidia having an operating margin of over 60% compared to most of the Mag 7 having operating margins at half that. It’s also completely normal for semiconductors to feel margin pressures in the initial stages of ramping a new product, especially at this scale and pace.
A chart showing Nvidia’s operating margins, highlighting the anticipated 2-point sequential decline in Q4 and the projected return to mid-70s gross margins with the ramp-up of Blackwell. The chart emphasizes Nvidia’s strong current margins compared to industry peers. Source: I/O Fund
GAAP gross margin was 74.6% in Q3, just ahead of guidance for 74.4%. Adjusted gross margin was 75%, in line with guidance. This reiterated my view from last quarter that Q1 was the peak for gross margins, as margins have contracted about 380 bp since then.
For Q4, management guided for GAAP gross margin of 73%, +/- 0.5%, and adjusted gross margin of 73.5%, +/- 0.5%, for a sequential contraction of ~150-160 bp.
GAAP operating margin was 62.3% in Q3, increasing slightly from 62.1% in the prior quarter but up from 53.1% in the year ago quarter. Adjusted operating margin of 66.3% dipped slightly from 66.4% in Q2, but increased from 64.8% in the year ago quarter.
For Q4, similar to gross margins, management guided for sequential contraction based on operating expense forecasts. GAAP operating margin is implied to be 60.2%, while adjusted operating margin is implied to be 64.4%, or about a 200 bp sequential contraction.
Conclusion
The bigger picture for Nvidia moving forward is that Blackwell holds the potential to dwarf Hopper’s revenue generation in fewer quarters. Breaking it down further on CNBC, I stated Nvidia's trajectory will continue due to two words: pricing power I had been quite vocal prior to earnings that Q3’s report was nothing but a blip in the longer-term picture, with 2025 being much more important than this quarterly report.
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.
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’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.
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.
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 formore 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.
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!
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!
AMD beat estimates by $110 million on the top line and was in line on adjusted EPS expectations of $0.92. Despite the beat in Q3, AMD guided for Q4 revenue slightly below consensus estimates at midpoint.
AMD is a fundamentally strong company with data center revenue growth accelerating for many quarters now, client revenue rebounded sequentially, and margins are improving. As Jean Hsu stated toward the end of the Q&A: “But when you look at our Data Center segment performance, we more than doubled the revenue year-over-year, but we tripled the operating income year-over-year.”
Regarding the Client segment, AMD and analysts acknowledged there may be consumer weakness in PCs from other companies, yet AMD stated they have the strongest PC line up in company history on the market today. This is evident considering Intel guided Q3 to be flat to down in their Client segment yet AMD’s growth was up 29% YoY and 26% QoQ to $1.88 billion.
The slight miss at the midpoint is likely due to Embedded, as Jean Hu, the CFO, stated next quarter would be: “driven by strong growth in our Data Center and Client segment, more than offset decline in the Gaming and Embedded segments.” It was further stated that embedded “demand continues recovering gradually, led by strength in test and emulation offset by ongoing softness in the industrial market.”
Revenue
AMD reported revenue of $6.82 billion in the third quarter, for YoY growth of 17.6%, a ~770 bp sequential acceleration from 8.9% YoY growth in the prior quarter. Data center drove Q3’s growth, while Client revenue rebounded significantly, offsetting continued weakness in gaming and embedded.
CEO Lisa Su said that AMD delivered “record revenue led by higher sales of EPYC and Instinct data center products and robust demand for our Ryzen PC processors,” with “significant growth opportunities across our data center, client and embedded” moving forward.
Looking ahead, AMD guided for revenue of $7.5 billion, +/- $300 million, for Q4, correlating to YoY growth of ~21.6% at midpoint, or a 400 bp sequential acceleration. While this fell just shy of the consensus estimate for 22.3% YoY growth to $7.55 billion, revenue growth is still expected to accelerate to the low-30% range in the first half of fiscal 2025.
Margins
As noted in our pre-earnings report, AMD’s margins continue to benefit from the increasing mix of data center products, primarily from EPYC CPUs as GPUs are currently dilutive to margins but will eventually be accretive to margins over time.
Q3 gross margin was 50%, up from 49% last quarter and 47% in the year ago quarter. Adjusted gross margin was 54%, slightly ahead of the 53.5% guide, and increasing from 53% last quarter and 51% in the year ago quarter.
For Q4, management guided for adjusted gross margin of 54%, flat sequentially.
Q3 operating margin expanded to the double-digit range, at 11%, driven by increased data center mix – this compares to a 5% operating margin last quarter and a 4% margin in the year ago quarter.
Operating income surged sequentially, with Q3’s operating income of $724 million up ~169% QoQ from $269 million. This was driven primarily by data center growth and margin expansion (covered below in Segments).
Adjusted operating margin came in at 25%, in line with expectations, while management’s guidance implies Q4’s adjusted operating margin rises to nearly 27%.
Q3 net income was $771 million, an increase of 191% QoQ and 158% YoY. Net margin was 11% in the quarter, up from 5% last quarter and last year. Adjusted net income was $1.50 billion, up 34% QoQ and 33% YoY, for a 22% margin.
EPS
GAAP EPS significantly improved in the quarter due to margin substantially improving, with operating and net margin both in the double digit range in the quarter.
GAAP EPS of $0.47 beat estimates for $0.41, and represented YoY growth of 161% and QoQ growth of 194%.
Adjusted EPS of $0.92 met estimates, and represented YoY growth of 31% and QoQ growth of 33%.
Given the revenue acceleration through Q4 and the first half of 2025 along with improved operating leverage from increased data center mix driving higher operating margins, adjusted EPS growth is expected to accelerate more than 40 percentage points to the mid- to high-70% range by Q2 2025.
Cash and Balance Sheet
Cash flows still have room to improve, as margins contracted in Q3, with AMD reporting operating and free cash flow margins falling by 100 bp QoQ. However, other line items, particularly accounts receivable and inventories, surged sequentially, hinting at potential strong growth ahead.
Operating cash flow was $628 million in Q3, or a 9% margin. This compares to a 10% margin in both Q1 and Q2.
Free cash flow was $496 million, or a 7% margin, versus an 8% margin in Q2.
Cash and equivalents totaled $4.54 billion, while debt totaled $1.72 billion.
Inventories totaled $5.37 billion, rising nearly 8% QoQ as AMD continues to ramp data center GPUs and move towards an annual release cadence.
Accounts receivable surged 26% QoQ to $7.24 billion, after hovering in the $5 billion range for the last four quarters.
Segments
Data Center
AMD’s data center segment once again drove growth in the quarter, with management boosting FY24’s AI revenue target once more, now seeing AI revenue exceeding $5 billion, versus a prior view for $4.5 billion-plus in AI revenue. Management stated AI revenue is at $1.5 billion per quarter, or 22% of revenue.
Data center revenue accelerated 7 percentage points to 122% YoY, with AMD reporting $3.55 billion in revenue in the segment. QoQ growth was 25%, accelerating from 21% QoQ in Q2. AMD once again witnessed strong demand for AMD Instinct GPUs and EPYC server CPUs.
Data center’s operating margin continues to expand, with segment operating income rising 240% YoY and 40% QoQ to $1.04 billion. This was an operating margin of 29%, expanding from 26% last quarter and 19% in the year ago quarter.
Zen 5 Turin launched this month and will help support data center sales next year. Regarding the AMD versus Intel battle, Lisa Su made it clear that AMD continues to take market share: “We believe we gained server CPU share in the quarter as enterprise wins accelerated. Cloud providers expanded their use of EPYC CPUs across their infrastructure, and we began the initial ramp of fifth-gen EPYC processors” and that “Meta alone has deployed more than 1.5 million EPYC CPUs across their global data center fleet to power their social media platforms.”
The MI325X launched earlier this month with increased memory capacity and bandwidth, with AMD stating it offers 20% higher inferencing than the H200. The MI325X is in production shipment this quarter and “interest for MI325X is high.” The MI350 will launch in H2 2025 and the MI400s with CDNA Next architecture will launch in 2026. We had stated in our pre-earnings writeup that CDNA 4 and also CDNA Next architecture should be a defining moment for AMD in terms of narrowing the product road map with Nvidia.
Regarding the MI300 AI accelerators, Meta and Microsoft are large customers due to TCO advantages (total cost of ownership). Management also offered statements around RocM’s progress, stating that foundational support is growing and performance gains are improving by 2.4X.
Client Segment:
Though there were some weaker data points around PCs, as stated in the pre-earnings writeup, AMD is less of a concern in that regard as the company’s lineup is loaded with stellar releases. The company recently released the Zen 5 architecture including the Ryzen AI 300 laptops with a neural processing unit (NPU) with 50 TOPS of AI performance, and the Ryzen 9000 series for desktops – making them the most powerful units on the market today. Lisa Su stated it “this is the strongest PC portfolio we’ve had in our history.”
AMD’s ‘Zen 5’ Ryzen processors were met with “strong demand,” driving Client revenue up 29% YoY and 26% QoQ to $1.88 billion.
Although it looks like quite a sharp deceleration over the past two quarters, Client revenue has reached the highest level since Q2 2022. Client operating income also increased, up 97% YoY and 210% QoQ to $276 million; this represents an operating margin of 15%, up from 6% last quarter and 10% in the year ago quarter.
Management stated that AMD has “very high” share in the desktop channel, and that AMD “saw some of our highest sell-through.”
Gaming
AMD has still not escaped the trough in gaming, with revenue declining (69%) YoY and (29%) QoQ to $427 million. AMD said that the weakness was due to a decline in semi-custom revenue. Operating income for the segment also dropped substantially, falling to just $12 million, or a 3% margin, compared to a 12% margin last quarter and a 14% margin last year.
Embedded
Embedded revenue has begun to recover, following management’s comments last quarter about order patterns improving. Revenue in the segment rebounded 8% QoQ but declined (25%) YoY to $927 million. Operating margin for the segment was 40%, flat QoQ and down from 49% last year.
Earnings Call:
AI Revenue:
There was a question on the call about how large AI revenue is on a quarterly basis, to which Lisa Su provided more information, stating it exceeds $1.5 billion. The comment that the GPU business is approaching the scale of the CPU business will be key for investors to put into perspective, as it’s a big statement as we move into 2025.
Timothy Arcuri
I had a quick 1 and then a more intensive question. So the first one is I wanted to ask about the September actuals for Data Center GPU. It seems like it was in the $1.5 billion range. And that would put December in kind of the $2 billion range. Is that about right?
Lisa Su
So it's a pretty granular question, Timothy. But maybe let me help you with this. We actually did better in the Data Center GPU business relative to our initial expectations. So you would imagine that the business was actually greater than $1.5 billion. I mean we're actually seeing now our GPU business really approaching the scale of our CPU business.
-End Quote
There was an analyst on the call attempting to clarify if AI revenue would be flat QoQ.
Stacy Rasgon:
[…] You said it was approaching the size of Your compute business which you put around what under $1.7 billion, maybe a little more. Is that right? And like if that is right, it implies that at $5 billion for the year, you'd actually be down in Q4. So I'd probably got to be $5.2 billion or $5.3 billion for the full year, just to be flat sequentially and more than that to get growth […]
Lisa Su:
Right, Stacy. So first, a couple of things. You have to remember that in our Data Center segment, we have some other revenue that is not CPUs and GPUs, right? We have some FPGAs and other things. But the question earlier was the revenue of $1.5 billion, and I said that it was greater than $1.5 billion. So take that as a fundamental. And then as — we talked about — we didn't guide an exact number for the data center GPU. We said exceed $5 billion.
-End Quote
Lisa Su also stated: “What I would say about 2025 is we feel very good about the growth opportunities I would say that it might be lumpy. In general, these are large customer acquisitions and it's not always predictable exactly which quarters you would expect the significant build out.”
My comment: Lumpy to the upside … sounds bullish for next year.
Here was another time that Lisa Su clarified that the lumpiness would be to the upside: “So these are large customers that drive deployments. Like for example, the third quarter was a bit higher than we expected. That was driven by some additional customer demand, and we may see that type of lumpiness.”
There was a pointed question about how AMD plans to catch up to Nvidia’s product road map, to which it was stated: “I think MI300, when we launched it was behind H100, H100 was in the market for a much longer time. And we have with our accelerated road map actually closed a good part of that gap. I think MI325 is a great product. It's going to compete very well with H200 and the MI350 series will compete very well with Blackwell.”
It was also insinuated that Blackwell’s AI systems, which are more complex, could be a tailwind for AMD. “In the overarching view of the world, frankly, the market continues to be constrained, particularly in the newer product generations. It takes a long time to go from, let's call it, shipping your first samples to actually ramping in volume production workloads. And I think one of the advantages that we have with the — with our portfolio is that from a data center retrofit standpoint, it's actually a much easier ramp, just the infrastructure is the same.”
If we read between the lines, Lisa Su is stating that AMD is positioned to answer the overflowing demand from Blackwell, and in a way the supply chain can handle, as it’s well-known that Blackwell is running into wafer capacity limits compounded by a larger die size.
Lisa Su also echoed my understanding of roughly when AMD should narrow the product road map with Nvidia: “We feel very good about the progress I think next year is going to be about expanding both customer set as well as workload. And as we get into the MI400 series, we think it's an exceptional product. So — all in all, the ramp is going well, and we will continue to earn and — earn the trust and the partnership of these large customers.” The MI400 is on the new CDNA architecture and is ramping in 2026.
Margins:
As stated in the pre-earnings writeup, margins are an area where AMD and Nvidia offer quite a contrast. AMD’s data center margin is 29% with a company operating margin of 11% compared to Nvidia’s 60%. The guide is for flat margins next quarter. The CFO was encouraging in terms of what to expect for 2025: “When we scale the company next year, you can see we're going to benefit from economies of scale to continue to drive our operational efficiency to improve gross margin.”
Conclusion:
As we get more earnings reports this quarter, it should become evident that AMD’s Client growth is unusually strong and is truthfully a defining moment. Remember, we had pulled PC data that showed flat to negative PC growth YoY for Q3 industry wide. In the pre-earnings report, I had stated AMD is incrementally stronger and could go unscathed, but this is quite the growth in a quarter where unit sales were flat to declining industry wide. We will not lose sight of this incremental strength as we plan for 2025.
Regarding AMD’s GPU story … slowly but surely, AMD will show the market it should take the company seriously. These things take time. It was our understanding going into this report that the 2025 MI350s and 2026 MI400s is when the product release cycle will start to narrow with Nvidia, and this was echoed on the call.
On the AH price action, we had pointed out on the Q4 webinar that SMH was looking unusually weak. Whether it’s due to potential tariffs or potential consumer-facing weakness in the semiconductor industry, or a combination of both, I’m not sure. But the point is that I do not believe AMD is selling off for reasons that are specific to the stock. The earnings report was strong, and we will look to keep this as a leading position for next year.
AMD will release its Q3 2024 results tomorrow. Analysts expect Q3 revenue to grow 15.8% YoY to $6.71 billion and adjusted EPS to grow 30.8% YoY to $0.92.
There are three primary growth segments for AMD. In data center CPUs, AMD has been a force to reckon with and continues to stomp on Intel. The most recent numbers for data center market share is at 34%, up from 4% in March of 2020 when our firm first predicted AMD was setting up for an epic comeback. The Turin EPYC processors were previewed in June and are expected to ramp with broad availability into the second half of the year.
Secondly, given Nvidia sparked an AI boom, the market is hyper focused on AI accelerators, and thus, there is outsized pressure on AMD to raise its revenue on MI300 GPUs. The Street whisper is that AMD will raise this number to $5 billion for this year (up from $4.5 billion), with some analysts predicting AMD will report $10 billion in GPU revenue next year. Regarding analyst expectations of $5 billion this year, this aligns with AMD’s commentary: “When you look at the second half we will continue to see Data Center to be the major driver of our top-line revenue growth” and expectations data center will grow sequentially. Last quarter, data center grew 115% year-over-year in Q2.
If we assume the $5 billion will be guided in tomorrow’s call, this equates to 19.5% of revenue this year, and if we assume the $10 billion materializes, it means AMD will end 2025 with 30% of the company’s revenue from AI. Management has already pointed out the MI300 series marks the fastest ramp in company history, and given they are sitting on tech’s second-best comeback of all time with EPYC processors, this is not a casual statement to make. For perspective, Broadcom will end this year with 23% in AI revenue, if we take their current fiscal year guide. Recently, AMD moved to an annual cadence for its GPUs with the MI325X expected to ship in Q4 2024 and MI350 expected in H2 2025.
Investors who own AMD are contending with market psychology around what it means to be second place in the highly competitive industry of tech. Additionally, AMD is known for undercutting on price, and thus, the MI300s are expected to be dilutive to margins, whereas Nvidia’s H100s and H200s have provide historic margins. Long-term, management has emphasized that GPUs will be accretive and above the corporate average (see paragraph below). With that said, for this report, AMD is expected to report an expansion in adjusted operating margins from 22% last quarter to 25% this quarter due to EPYC CPUs helping product mix. If reported, it will mark the highest adjusted operating margin in two years.
The third point to consider going into tomorrow’s report, is that it’s widely expected that client-facing semiconductor segments will be softer than expected this quarter. We’ve seen evidence of this in ASML, Texas Instruments and ON Semi. For AMD, this refers to the company’s PC exposure. We covered in the webinar the PC data the I/O Fund is closely tracking, which shows Q3 being meaningfully softer than expected, and that ultimately PCs will miss the 2024 estimates that industry analysts had going into this year. Last quarter, Client revenue was $1.492 billion, up 49% YoY and up 9% QoQ. Management stated at the time: “In summary, we delivered strong second quarter results and are well positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments.”
There is QoQ growth in PCs from Q2, yet within the industry estimates for Q3 across the PC industry, YoY is negative. AMD has a strong CFO (which helps with guiding correctly) and the company incrementally stronger than its peers on PCs. There is a scenario where AMD squeaks by unscathed by PC softness and its peers do not, as the company recently released the Zen 5 architecture including the Ryzen AI 300 laptops with a neural processing unit (NPU) with 50 TOPS of AI performance, and the Ryzen 9000 series for desktops. Management was positive about this upcoming quarter, stating to expect “above-typical seasonality given the strength of our product launches.”
Canalys has the most optimistic estimates for PCs, whereas IDC and Gartner are negative on a YoY basis at (-2.4%) and (-1.3%) respectively.
Revenue
Revenue is expected to accelerate in the coming quarters, driven by strong demand for data center CPUs and GPUs, coupled with the expected rebound in the Client segment.
Analysts expect Q3 revenue to grow 15.8% YoY to $6.71 billion and accelerate to 22.3% in Q4. Revenue is expected to further accelerate to 33.5% in Q1 2025.
Management revenue guide is $6.7 billion, representing YoY growth of 15.5% at the midpoint. This represents a 6.6-point acceleration from 8.9% growth to $5.84 billion in Q2.
Lisa Su said in the Q2 earnings call, “We delivered strong second quarter results and are well positioned to grow revenue significantly in the second half of the year, driven by our data center and client segments. Our data center GPU business is on a steep growth trajectory as shipments ramp across an expanding set of customers. We're also seeing strong demand for our next generation Zen 5 EPYC and Ryzen processors that deliver leadership performance and efficiency in both data center and client workloads.”
Analysts expect 2024 revenue to grow 12.9% YoY to $25.61 billion and accelerate to 28.3% growth in 2025.
2026 revenue is expected to grow 19.9% YoY to $39.38 billion.
Margins:
AMD’s margins are benefiting from a higher mix of data center revenue. This quarter is expected to report the highest adjusted operating margin in two years.
Q2 gross margin was 49%, compared to 46% last year. Adjusted gross margin improved to 53% from 50% in the same period last year, helped by a higher portion of data center revenue. Management guide for Q3 is 53.5%, up from 51% in Q3 2023.
Q2 adjusted operating margin was 22%, compared to 20% in the same period last year. Operating expenses increased 15% YoY to $1.8 billion due to higher R&D expenses required to address AI growth. Management guide for Q3 is 25%, up from 22% in Q3 2023.
Q2 net income was $265 million or 5% of revenue compared to $27 million or 1% of revenue in Q2 2023. Adjusted net income was $1.13 billion or 19% of revenue compared to $948 million or 18% of revenue in the same period last year.
EPS
EPS is expected to grow significantly in the coming quarters.
Analysts expect Q3 adjusted EPS to grow 30.8% YoY to $0.92, by 50.2% to $1.16 in Q4, and by 76.6% to $1.09 in Q1 2025.
Analysts expect 2024 adjusted EPS to grow 27.9% YoY to $3.39 and accelerate to 59.7% growth to $5.41 in 2025.
Analysts expect 2026 adjusted EPS to grow 36% YoY to $7.36.
Cash Flow and Balance Sheet
The company has increasing cash flows with room for improvement. At its peak in 2021, AMD reported over 25% cash flow margins.
Q2 operating cash flow was $593 million or 10% of revenue compared to 7% in Q2 2023.
Free cash flow was $439 million or 8% of revenue compared to 5% in Q2 2023.
Inventories were $4.99 billion, compared to $4.65 billion in Q1. They were up primarily due to the continued ramp-up of a data center GPU product.
Cash and short-term investments were $5.34 billion, and debt of $1.72 billion, compared to $6.04 billion and $2.47 billion in Q1. The company repaid $750 million in debt that matured in June with existing cash. It repurchased shares worth $352 million, with $5.2 billion of share authorization remaining.
The company completed the Silo AI acquisition in August for about $665 million in cash. AMD also announced the acquisition of ZT Systems for $4.9 billion, which will close in the second half.
Segments
Data Center revenue grew 115% YoY and 21% QoQ to $2.83 billion. The company reported record data center revenue in Q2, accounting for 49% of revenue. The company witnessed strong demand for AMD Instinct GPUs and double-digit EPYC server revenue growth. Data Center is expected to continue to be a major driver of top-line growth in the second half of the year. Data Center’s operating margin was 26% compared to 11% in the same period last year.
Client segment revenue grew by 49% YoY and 9% QoQ to $1.49 billion. It was primarily helped by strong demand for Ryzen processors and initial shipments of the next-generation Zen 5 processors. The client segment is expected to grow sequentially in Q3, and management said in the Q2 earnings call that the customer response for the new Ryzen processors was strong, and it is expected to capture additional revenue market share (see below). Operating margin was 6% compared to (-7%) in the same period last year.
The gaming segment continues to struggle due to soft demand. Revenue declined by (-59%) YoY and (-30%) sequentially to $648 million. Management expects gaming segment revenue to decline double digits sequentially in Q3. “Semi-custom demand remains soft, as we are now in the fifth-year of the console cycle and we expect sales to be lower in the second half of the year compared to the first half.” The operating margin was 12% compared to 14% in Q2 2023.
Embedded segment revenue declined by (-41%) YoY and was up 2% sequentially to $861 million. Management observed initial signs of improving order trends and expect embedded revenue to gradually recover in the second half of the year, with revenue expected to be up sequentially in Q3. Operating margin was 40% compared to 52% in the same period last year.
Other Key Points
AI Revenue
AMD’s AI accelerator, the MI300, is the fastest-ramping product in AMD’s history. The company reported over $1 billion in MI300 revenue in Q2. Management expects MI300 revenue to ramp in Q3 and Q4. During Q2 results, the company raised the data center GPU guide from $4 billion to $4.5 billion for the year 2024. The company also cited in the earnings call that Microsoft was the first hyperscaler to announce the general availability of MI300X instances.
“Turning to our data center AI business, we delivered our third straight quarter of record data center GPU revenue with MI300 quarterly revenue exceeding $1 billion for the first time. Microsoft expanded their use of MI300X Accelerators to power GPT-4 Turbo and multiple co-pilot services including Microsoft 365 Chat, Word, and Teams. Microsoft also became the first large hyperscaler to announce general availability of public MI300X instances in the quarter.”
Strong Product Roadmap
The company announced earlier this year its expanded AMD Instinct accelerator roadmap and annual cadence for chip release. During the recent Advancing AI Event, the company also confirmed that MI325X chips are expected to be shipped in Q4 2024 and the launch of MI350 chips in the second half of next year.
Lisa Su said in the Q2 earnings call, “Looking ahead from a roadmap perspective, we are accelerating and expanding our Instinct roadmap to deliver an annual cadence of AI accelerators, starting with the launch of MI325X later this year. MI325X leverages the same infrastructure as MI300 and extends our generative AI performance leadership by offering twice the memory capacity and 1.3 times more peak compute performance than competitive offerings. We plan to follow MI325X with the MI350 series in 2025 based on the new CDNA 4 architecture, which is on track to deliver a 35x increase in performance compared to CDNA 3. And our MI400 series powered by the CDNA “Next” architecture is making great progress in development and is scheduled to launch in 2026.”
Lisa Su predicts that AI Data Center Accelerators TAM to reach $500 billion by 2028 growing at a CAGR of 60% from $45 billion in 2023, compared to the earlier prediction last December of reaching $400 billion in 2027. She also highlighted the strong MI300X performance during the Advancing AI Event. “If you look today at MI300x performance, we have more than doubled our inferencing performance and significantly improved our training performance on the most popular models. Today, over 1 million models run seamlessly out of the box on Instinct, and that's more than 3x the number when we launched in December.”
She further pointed out, “MI300X consistently outperforms the competition, which is H100 in inferencing. So, for example, using Llama 3.1 405B, which is one of the most newest and demanding models out there, MI300 outperforms H100 with the latest optimizations by up to 30% across a wide variety of use cases.”
I/O Fund note: It would be stronger to benchmark the MI300X against the H200s but the competition in releases is likely to become tighter with each generation. The MI325 is due out this quarter, and thus AMD is about two quarters behind Nvidia’s H200.
AI Software
AMD completed the acquisition of Silo AI in August. Silo AI specializes in large language model development, which will further enhance AMD's AI inference and training tools. The acquisition will also help to tap the talent pool of engineers and scientists of Silo AI who have used AMD hardware and provide customized AI solutions to its clients.
AMD announced in August that it would acquire ZT Systems for $4.9 billion. The deal is expected to boost data center AI solutions. Once the deal closes, AMD plans to sell the ZT Systems manufacturing business. The acquisition is expected to close in the first half of 2025 and be accretive on a non-GAAP basis by the end of 2025.
AI PCs and Zen 5 EPYC Processors
At the Advancing AI Event, Lisa Su discussed the success of EYPC CPUs since their launch in 2017. She pointed out that “EYPC has become the CPU of choice for the modern data center.” The cloud providers offer more than 950 EPYC instances, and on the enterprise side, larger server OEMS offer over 350 EPYC platforms, increasing the company’s serverCPU market share to 34%.
Recently, AMD launched the 5th Gen AMD EYPC CPUs, formerly codenamed Turin. They are suited for cloud, enterprise, and AI use cases. They use the advanced 3nm/4nm process technology. The new Zen 5 core architecture, provides up to 17% better instructions per clock (IPC) for enterprise and cloud workloads and up to 37% higher IPC in AI and high-performance computing (HPC) compared to Zen 4 architecture.
During the Q2 earnings call, Lisa Su also said that the Client segment is also expected to do well in the second half of the year along with Data Center segment. It is expected to be above seasonal due to the launch of new products. The new Ryzen AI 300 laptops and the Ryzen 9000 series for desktops are powered by the 5th generation of the Zen architecture. The Ryzen AI 300 laptop has a XDNA 2 neural processing unit (NPU) that is designed for Microsoft Copilot+ AI software. This will deliver 50 TOPS of AI performance, exceeding Apple’s M4.
“We are launching Zen 5 desktops and notebooks with volume ramping in the third quarter. And that’s the primary reason that we see above-seasonal. The AI PC element is certainly 1 element of that, but there is just the overall refresh. Usually, desktop launches going into a third quarter are good for us, and we feel that the products are very well positioned. So those are the primary reasons.”
Note on GPU Margins:
It’s prudent to make a note that another area where AMD is not keeping pace with Nvidia is pricing power, leading to GPU margins that are currently below the corporate average. Here was a statement from management when questioned on the margins last quarter:
“Yes. On your second question about the profitability, first our team has done a tremendous job to ramp the product MI300. It is a very complex product. So we ramped it successfully. At the same time, the team also started to implement operational optimization to continue to improve gross margin. So we continue to see the gross margin improvement. Over time, in the longer term, we do believe gross margin will be accretive to corporate average.”
Valuation
The company trades at a P/E ratio of 185.5 and a forward P/E ratio of 44.9.
P/S ratio is 11.5 compared to the five-year average of 8.6. The forward P/S is 10 and the 1-year forward is 7.8.
Conclusion
Fundamentally, AMD is quite strong due to the continued strength in CPUs, the ongoing growth in GPUs, and the expected rebound in the Client Segment. We feel AMD is a win-win for our portfolio. Should the company beat, we will participate. If the company misses or something more broad weighs on the company (such as tariffs on semiconductors) then we will gladly buy shares lower.
We like Lisa Su reiterating the 2027 time frame for a $400B TAM, and increasing the estimate to $500B the following year for 2028. We will match that timeline and say we hope to see AMD be a leader in the market and in our portfolio by 2027-2028. CDNA 4 architecture is due out in 2025-2026, and is the most likely catalyst that I see today to narrow the product road map with Nvidia.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article. Beth Kindig, Lead Tech Analyst, contributed to this article.
While Nvidia’s dominance in AI GPUs is more clearly visible downstream in the HBM market, it’s also driving growth in a lesser-known but equally as important market, in metrology/process control equipment.
Metrology, by definition, is the study of measurement. In the semiconductor industry, metrology plays a critical role, as the ability to measure circuit dimensions, microstructures inside chips, film thickness, accuracy of layers and overlays are all necessary to ensure chipmakers can consistently produce high-quality, flaw-free chips at high yields.
While KLA dominates the metrology market, reportedly holding a more than 50% market share for over 20 years, Onto Innovation and Nova are two smaller players in the market putting up accelerating revenue growth with strong margins, with exposure to AI megatrends and long-term growth drivers.
Metrology Has Multiple Drivers
The metrology market has multiple drivers of future growth, and while it’s not limited to the AI data center mega-trends spearheaded by Big Tech, there are many levers within this AI buildout to drive demand for Onto Innovation and Nova.
This is how Nova’s management team recently described the opportunity: “Artificial intelligence is reshaping our digital world and expediting the implementation of scaling agents in integrated circuits to boost performance and power efficiency which are at the core of enabling large language models through training and infra stages. Scaling is manifested in more complex designs through three avenues, dimensions, materials and advanced packaging.
It is also manifested in the size of manufactured dies and in the number of dies required in solutions such as high bandwidth memory. These developments profoundly impact our industry in the number of the wafers needed to supply demand and in the yield ratio, you must obtain to secure profitability with a lower number of dies per wafer. Couple that with the growing complexity of architecture and materials and you have the growth drivers of process control in the coming years.”
Here’s a brief look at how AI and the data center are generating demand for metrology equipment across these different drivers:
Shift to Advanced Nodes
Advanced nodes require more process steps as node sizes shrink, so for a chipmaker or foundry like TSMC or Intel to move from primarily producing on 5nm nodes to 2nm or below over the next couple of years, there will be a greater need for metrology equipment. Currently, the 5nm and 4nm nodes are primarily being used for AI chip production, such as that for Nvidia’s Hopper and Blackwell chips, while 3nm production is ramping at TSMC with volume production at the 2nm node expected in 2025, primarily for smartphone applications.
This is because the manufacturing tolerances shrinks as nodes shrink in size – the chipmaking process now becomes increasingly more sensitive to minute deviations in the process. Moving to more advanced nodes warrants much greater precision throughout the entire manufacturing process, as the smallest of deviations could greatly affect the process’ yield.
For example, Samsung has reportedly been struggling with severe yield issues for its most advanced nodes, with unstable yields reportedly around 50% or below for its gate all-around GAA 3nm second-gen process, and yields as low as 20% for its 2nm process.
TSMC sees higher yields for the 3nm process, reportedly between 60% and 70%, allowing it to command a majority of production on advanced nodes and thus a majority of market share.
Metrology needs also rise as chip designs get increasingly complex, from the entire GPU to memory cubes.
AI accelerators are getting larger and more complex with each generation packing more transistors than the last. Nvidia’s upcoming B200 GPU packs 208 billion transistors and 192GB of HBM3e memory, versus 80 billion transistors and 80GB HBM3 memory for the H100. Though Blackwell is in a dual-die configuration, it’s still a more complicated chip to produce using TSMC’s customized N4P process (the same as for the H100).
Having a more complex chip design increases the chances of errors, as there are more steps in the manufacturing process to produce said chips. This also goes for DRAM and NAND cubes – as HBM cubes stack higher, from 8-high cubes to 12-high cubes for the current HBM3e generations from SK Hynix, Samsung and Micron, it also increases process steps. Other advanced memory chips have seen a 6x increase in layers from 64 to 400 over the past few years. 3D stacking and building more layers necessitates more sophisticated metrology equipment to ensure critical measurements are met within each stack and layer.
Gate All Around Advanced Packaging
TSMC is phasing out FinFet after the 3nm node, and its upcoming 2nm node will be the first to use gate-all-around field-effect transistors (GAA FETs). GAA will increase chip density, and increase performance-per-watt to enable higher levels of output and efficiency.
These GAA nanosheet transistors have channels surrounded by gates on all sides to reduce leakage yet it will also uniquely widen the channels to provide a performance boost (with another option to narrow the channels to optimize power cost). The 2nm node will also allow chipmakers to customize the width and height of cells. Because of the increased complexity of GAA FETs compared to FinFETs, Nova estimates that GAA requires 20% to 30% more metrology steps than FinFET.
We’ve covered gate-all-around in a TSMC analysis that stated the following in terms of timing for N2 starting production in the last quarter of 2025 and reaching “meaningful revenue” by the Q1 to Q2 of 2026.
Accelerated Chip Development Timelines
Nvidia and AMD are both shifting to annual release cadences, aiming to bring next-generation GPUs to market once per year, compared to prior cadences of every two years. This is a major technological feat – as we had said previously for Nvidia, it’s a ‘move-fast-break-things’ problem, where Nvidia is pushing the boundaries of what had previously been seen as impossible in the chip industry.
By moving to these quicker release cycles, there’s a much greater emphasis on metrology and process control to ensure that the manufacturing process remains sharp, while also ensuring a faster ramp, and high yields to meet mass production thresholds and demand.
Fab Buildouts
Another driver for metrology equipment is chip fab buildouts, such as HBM fab construction and investments from SK Hynix, Micron and Samsung, as well as other expansion plans, such as TSMC’s planned expansion in Arizona.
Onto’s management put this in perspective from the HBM side, saying that “even if AI just stayed flat, which nobody is projecting, AI is supposed to go up, the HBM side is already doubling. … customers [are] talking about supply constraints and that they're looking at expanding factories into next year, early half of next year in order to alleviate these supply constraints.”
Currently, there are 19 global high-volume chip fabs under construction this year, with another 10 expected to be added next year to meet rising demand for semiconductors, driven by AI/HPC. Total equipment spending for these 29 fabs is expected to be approx. $140 billion. Through 2030, there are more than 100 fab projects planned, with more than $200 billion in global funding and incentives for these projects.
Building out new fabs from the ground-up will require metrology and process control equipment, providing a long-term growth runway for the industry.
Product Snapshot: Addressing Critical Challenges in Advanced Packaging, Memory, More
Onto and Nova’s management teams highlighted a few core products that are driving growth or seeing strong orders and adoption from major customers. These products address some of the more pressing challenges in advanced packaging, HBM and memory, and leading-edge nodes.
Israeli-based Nova has a diverse metrology equipment and software portfolio, from dimensional to materials to chemical metrology. One of Nova’s leading products is PRISM 2, the next-generation PRISM which offers improved sensitivity and accuracy in critical dimensions metrology.
Nova noted that its PRISM 2 product saw strong adoption last quarter, especially in GAA, with around half of its record bookings stemming from “advanced packaging processes, such as Through-Silicon Via, where PRISM has a unique advantage in filtering information from specific underlayers.”
PRISM 2 provides improved accuracy and reliability for critical component measurements in processes such as advanced logic chip fabrication and stacking nanosheets for GAA fabrication, as well as 3D NAND and DRAM.
Nova also added that “demand is also consistently high for our advanced integrated metrology and XPS material metrology platforms,” as it saw “record booking of VeraFlex XPS platforms this quarter, of which over 40% resulted from capacity growth” in FinFET advanced nodes.
Nova’s VeraFlex XPS (X-ray photoelectron spectroscopy/materials metrology) helps analyze surface structures, identifying bonding, contaminants or defects in advanced nodes for process control in high-volume manufacturing.
US-based Onto’s core products span defect inspection equipment, dimensional (optical CD) and material metrology, and lithography tools. Onto’s Dragonfly systems, which drove Q2’s performance, witnessed “better-than-expected demand” for advanced packaging for AI chips as it reached another revenue record.
Dragonfly G3 provides combo 2D and 3D inspection and process control for advanced packaging, HBM and chip-on-wafer GPUs. For example, Onto noted last August that it finalized more than $100 million in Dragonfly G3 orders for chip packages “that combine a graphics processor (GPU) and numerous high bandwidth memory (HBM) devices to create an AI GPU in a single package.”
Onto also said that Atlas and Iris demand for GAA investments were a driver of Q2’s performance, while new product launches in panel lithography, 3D bump metrology sensors for smaller interconnects in HBM, and subsurface defect inspection sensors are expected to see strong adoption through the end of the year.
By comparison, leader KLA offers a comprehensive portfolio of metrology equipment for measuring “pattern dimensions, film thicknesses, layer-to-layer alignment, pattern placement, surface topography and electro-optical properties” for chip and substrate manufacturing, from new process development, product verification, and high volume manufacturing. KLA provides advanced wafer packaging equipment, overlay metrology equipment, reticle metrology and inspection tools, OCD, shape and film metrology equipment, sheet resistance metrology equipment, and more.
Customer Concentration Extremely High
It’s common for small cap semiconductors to have high customer concentration, especially at the equipment level, as there are a limited number of fabs globally. Nova and Onto are no exception.
For Nova, its top five customers accounted for 52% of revenue in 2023, down from 57% of revenue in 2022 and 70% in 2021. Nova’s largest customer accounted for 19% of revenue, while its fifth largest customer contributed 5% of revenue. The customers are not named.
Revenue from Nova’s largest customer(s) declined from ~$130 million in 2021 and 2022 to $108 million in 2023.
Onto Innovation has provided a breakout for its top three customers, along with another figure that highlight its customer concentration.
For Onto, its three largest customers accounted for 56% of revenue in the first half of fiscal 2024. TSMC accounted for 23% of revenue, up from 13% in the same period last year. Samsung accounted for 20% of revenue, down slightly from 21% last year.
SK Hynix has risen to be Onto’s third largest customer at 13% of revenue, up from <10% last year. Onto also has shared that TSMC accounted for 21% of its net accounts receivable in the first half of 2024, with Samsung accounting for 8%.
Both Nova and Onto are reporting accelerating revenue growth in Q2 after returning to growth in Q1 this year after four consecutive quarter of declines. However, Onto guided for revenue growth to decelerate in Q3, while Nova forecast this acceleration to continue but be short-lived.
Onto reported 27.1% YoY growth to $242.3 million in revenue in Q2, accelerating from 14.9% growth in Q1. Management said that Q2’s growth and revenue above its guided $230-240 million range was “driven by additional pilot line expansions for high-performance computing using gate-all-around transistor architecture and high bandwidth memory (HBM) supporting AI market growth.” This was likely driven primarily by increased spend by TSMC and SK Hynix, seen within the customer concentration figures.
Advanced packaging and specialty device revenue reached a fourth-consecutive record at $164 million, up 49% YoY, while Onto added that it “closed over $300 million of volume purchase agreements issued by two customers for their AI advanced packaging and gate-all-around investments through 2025,” again likely to be coming from TSMC. Management expects that GAA and advanced packaging at multiple customers will be primary growth drivers through 2025.
Nova reported revenue growth of 27.8% YoY to $156.9 million in revenue in Q2, accelerating from 7.3% in Q1. Metrology product revenue was $124.6 million, accelerating to 30% YoY growth from just 6% YoY in Q1 and (16%) in Q4.
Management said that it saw “record revenue from chemical metrology, driven by demand in high-bandwidth-memory and front-end logic processes,” while demand for GAA and advanced packaging was increasing with “faster-than-expected adoption” for its PRISM 2 platform. Management added that they also saw record bookings for advanced packaging and materials metrology.
Q2 also marked both companies’ fastest YoY growth rates in two years — here’s a look at how Onto and Nova have recovered from 2023’s slowdown:
Looking ahead for Q3, Onto guided for revenue growth of 20.7% YoY to $250 million in revenue at midpoint, a more than 6 percentage point deceleration. Nova forecast a nearly 6 percentage point acceleration to 33.5% growth to $172 million in revenue at midpoint.
Through 2025, analysts expect Onto to maintain growth in the high-teens each quarter, while Nova’s higher growth rate of 30%+ is expected to decelerate into the low-teens and high-single digit range five quarters out.
Onto is expected to see quarterly revenues rise to above $300 million, while Nova is currently forecast to see revenues begin to flatline in the mid-$190 million range. Nova may be more exposed to cyclicality in the metrology industry with its focus on film metrology equipment, which may see faster growth in the ramp phase that stabilizes later on.
Onto provided a quick look into what’s driving 2025 growth: “We expect to benefit from continued investments in gate-all-around capacity, and the announced capacity expansions from several high-bandwidth memory and logic packaging manufacturers, specifically for HBM. We expect new capacity coming online in the first half of the year to support the increase of HBM content for NVIDIA's AI processors from 80 to 192 gigabytes and for AMD's AI processors from 192 gigabytes to 288 gigabytes.”
However, it’s not all AI revenue for the two. Onto clarified that AI packaging drove over half of specialty and advanced packaging revenue in Q2, implying AI packaging revenue of at least $82 million, or just over one-third of quarterly revenue. Nova is seeing demand stem from AI-driven end markets such as HBM, GAA and TSVs, though they have not broken out AI’s specific impact on revenue.
Long-Term Financial Targets:
Revenue
Both companies have set out long-term financial targets, including revenue, margins and EPS. The revenue targets will likely be achieved in 2027 to 2028 based on current expectations and historical trends. Both companies expect to have enough capacity by year end to reach these long-term revenue targets.
Nova set its long-term target of $1 billion, more than 50% higher than FY24’s projected $648 million. There are currently six analysts covering Nova with only two analysts providing estimates through Dec of 2027 with consensus at $995.7 million.
Onto has its long-term revenue target at $1.8 billion, nearly double FY24’s projected $980 million. There are eight analysts covering Onto with only three analysts covering the stock through Dec of 2027 with estimates at $1.56 billion. The Dec 2028 estimate is more in line with Onto’s projections with only one analyst providing an estimate of $1.84 billion.
Here’s Onto’s target model, which provides a more detailed view down the line as revenue increases incrementally by $200 million:
Nova is currently ahead of its long-term margin targets, currently benefiting from higher ASPs due to product mix, while Onto is behind on gross margin targets for its $1 billion model.
Here’s how Nova’s margins look relative to its long-term target (referencing non-GAAP margins):
Nova reported GAAP gross margin of 59% in Q2, flat QoQ and up 200 bp YoY. Non-GAAP gross margin was 61% in Q2, again flat QoQ and up 200 bp YoY.
For Q3, Nova guided gross margins to dip 300 bp QoQ sequentially, to a GAAP gross margin of 56% and non-GAAP gross margin of 58%. Nova said that faster adoption of higher ASP/margin products has previously boosted margins, but they remain at the high-end of targets despite this fluctuation.
GAAP operating margin was 29% in Q2, expanding 300 bp QoQ and 600 bp YoY. Non-GAAP operating margin was 34%, up 200 bp QoQ and 600 bp YoY. Management pointed out that non-GAAP operating margin was ahead of targets of 27% to 31%, and while Q3’s non-GAAP margin was guided to decline sequentially to 32%, this is in line with previous quarters with Q2 being a strong outlier.
Onto sits behind gross margin targets, though it sees margins expanding in the coming quarter.
Onto reported GAAP and non-GAAP gross margin of 53% in Q2, up 100 bp QoQ and flat YoY. Though current FY revenue estimates are just 2% below the $1 billion target model, gross margins are shy of its range, with Onto targeting non-GAAP gross margins of 56% to 57%.
For Q3, management guided to gross margins between 53% to 55%, flat to up 200 bp QoQ, driven by growth in advanced nodes and optimization in manufacturing. Though it’s a step in the right direction, it’s still short of targets by ~200 bp at midpoint.
GAAP operating margin was 20% in Q2, up 100 bp QoQ and 700 bp YoY. Non-GAAP operating margin was 27%, up 200 bp QoQ and 600 by YoY.
Excluding amortization (to align with long-term targets), non-GAAP operating margin was 32%, in line with the high end of the $1 billion model despite the gross margin shortfall.
For Q3, management’s guidance implies non-GAAP gross margin of 28%, up 100 bp QoQ.
EPS
Both Nova and Onto are reporting strong EPS growth, with Nova reporting 48% YoY growth to $1.41 in GAAP EPS of $1.41 and Onto reporting 102% YoY growth to $1.07 in GAAP EPS. It’s rare to see such high EPS numbers from small cap stocks, and long-term targets are both strong and rather achievable.
For Nova, management is targeting non-GAAP EPS of at least $7 per share by the time it reaches $1 billion in revenue. For the first half of 2024, Nova’s non-GAAP EPS is currently $3 per share, suggesting that if margins can be maintained at the high end of its model, $7 in EPS is easily achievable. Analyst estimates currently project $9.58 in EPS on $996 million in revenue in 2027, foreseeing Nova surpassing the $7 EPS target next year on $757 million in revenue.
Onto is targeting non-GAAP EPS of $5.50 to $6.00 at $1 billion in revenue, and long-term up to $8.50 in EPS at $1.4 billion in revenue. Non-GAAP EPS for the first half of 2024 was $2.50, and with Q3 guided to $1.30 at midpoint, Onto would need to report $1.70 in non-GAAP EPS in Q4 to reach the low end of its target at $5.50.
Onto’s longer-term view emphasizes increased operating leverage to drive earnings growth as gross margin expansion is minimal. Management is eyeing just a 2% expansion in gross margin but a 4% expansion in operating margin. This is expected to drive EPS more than 40% higher, from $6 to $8.5 per share at the high end of the range. Analysts are much more optimistic on the degree of operating leverage that Onto can drive at $1.4 billion in revenue, with estimates calling for about $9.35 in EPS on $1.44 billion in revenue in 2026. Again, it’s rare to see EPS numbers this high with small cap semiconductor stocks.
Balance Sheets, Cash Flows Healthy
With operating and net margins in the high-20% to low-30% range, Onto and Nova enjoy healthy balance sheets and cash flows.
Onto has $786 million in cash, equivalents and marketable securities on hand, zero debt, and total liabilities of $174 million. Operating cash flow for 1H 2024 increased 50% YoY to $122 million, or 26% of revenue (versus 21% of revenue in same period last year). Free cash flow rose 49% YoY to $103 million, or 22% of revenue (versus 18% of revenue in the same period last year).
Nova has $759 million in cash, equivalents, and marketable securities, and $198 million in convertible senior notes, which, if converted, would equal about 3.4% dilution to existing shareholders. Nova has no outstanding debt outside of the convertible notes. Operating cash flow for 1H increased nearly 154% YoY to $120 million, or 40% of revenue (versus 19% of revenue in the year ago period). Free cash flow rose more than 178% YoY to $115 million, or 38% of revenue (versus 17% of revenue in the year ago period).
Inventories are where the two differ, with Nova increasing inventory as Onto is working to reduce inventory. Nova reported inventory of $156.6 million at the end of Q2, up more than 13% from the end of 2023. Onto is working on inventory management, reporting $319.7 million in inventory in Q2, down from $327.8 million at the end of 2023. Management expects to further reduce inventory by $10 million to $15 million in Q3 and exit 2024 with inventory below $300 million, or a $50 million YoY reduction.
Valuations Have Enjoyed a Premium
With clear exposure to AI and HPC trends in HBM and advanced packaging, as well as strong operating, net and cash flow margins — and triple digit cash flow growth for Nova – the two have recently enjoyed premium valuations to other chip equipment stocks and metrology leader KLA.
Onto currently trades at nearly 62x TTM earnings and Nova at almost 42x TTM earnings, compared to 38x TTM earnings for KLA and 22x TTM earnings for Applied Materials, which also has exposure to metrology and advanced packaging. Multiples have compressed slightly, with Onto trading above 80x earnings and Nova above 55x earnings earlier this year; however, it’s quite a large premium to their three-year average TTM earnings multiples of 37x for Onto and 31x for Nova.
On a forward basis, strong EPS growth of 40% YoY for Onto and 31% YoY for Nova has brought forward multiples lower, though still elevated relative to peers. Onto trades at nearly 40x forward earnings of $5.22 for FY24, while Nova trades at 31x forward earnings of $6.37 for FY24. KLA trades at 26x forward earnings with 25% YoY growth expected, and Applied Materials at 23x forward earnings with just 6% YoY growth expected.
On a top-line basis, Onto, Nova and KLAC are currently trading in the high 10x, to mid 11x PS range. Multiples for the trio have been in lockstep for more than a year, following each other quite closely since the 5-6x range around Nvidia’s blowout earnings report in May 2023, the first signs of the present AI and HBM boom.
Looking longer-term, it’s quite clear that these are some of the highest top-line multiples Onto and Nova have traded at in the past decade. Both companies’ 10-year average PS multiple hovers around 4.5x to 5x, so the two are currently trading at more than double their 10-year average. If earnings or revenue growth falters, multiple compression is a possibility given the premium valuations of the two.
Technical Analysis
By Knox Ridley
What caught our eye about the technical patterns in both NVMI and ONTO was how similar their long-term trends appear to be unfolding. Like many AI names that we track, they appear to be setting up for a correction within a larger uptrend that should go on for several years.
Most stocks and markets appear to have either topped in 2021 or are in their final swing higher in 2024/2025. So, while the broad market makes a series of lower highs into the coming years, these names would trend higher.
Onto Innovation (ONTO)
The below chart is a weekly chart. In other words, every candle is one week’s worth of price data. This better helps us decipher the long-term trend. Note the vertical move off the 2009 low, which was followed by a multi-year, messy and overlapping correction into 2015. This best resembles waves 1 and 2 in a very large 5 wave uptrend.
This is further supported by the price action into today’s developing top. The below Elliott Wave count has us in the final swing of wave 3 within the larger 3rd wave. We ccould see a final push into the $257 – $339 region. However, this is not a move that we would chase, considering the warning signs.
For one, we have a completed 5 wave pattern off thew COVID low. What follows 5 waves higher is usually a 3 wave retrace. Secondly, since mid-2023, we have seen price make higher highs while momentum is making lower highs. This is characteristic of 5 wave pattern, where peak momentum typically is seen in wave 3, as we wave 5 is met with less volume and less momentum.
Nova (NVMI)
NVMI has a similar long-term chart as ONTO. We can see a near vertical 5 wave move off of the 2009 low, followed by a pullback into 2011. This lines up well as waves 1 and 2 of a very large 5 wave pattern.
Like ONTO, Nova is in the final swing of wave 3 of the larger 3rd wave. If this count is accurate, the 4th wave pullback should take us back to around projected the halfway point of this larger 5 wave pattern, which is where we would look to potentially enter both stocks.
If we zoom in on the current correction, it appears that NOVA is setting up for the final drop in this correction. A move below $186 will confirm this as we target $152 – $138 for our first entry. If NOVA can instead hold $186 and then breakout above $230, we will be in the final swing of this 3rd wave. This stock has a lot to prove before we’d consider it a longer-term buy rather than a momentum stock.
Conclusion
Nvidia, TSMC, and Micron are bellwethers for AI accelerator, advanced packaging and HBM demand, with the three showing no signs of slowing any time soon. This will continue to create opportunities for growth in the metrology equipment market, as AI accelerator-related HBM and advanced packaging demand continues to grow and outstrip supply.
Metrology equipment is positioned well to capture the increase in complexity from advanced nodes, memory stacking and other chipmaking processes where demand is outstripping supply into the foreseeable future.
Onto and Nova share in these tailwinds, evidenced by accelerating quarterly revenue in Q2 and strong margins, cash flows and healthy balance sheets. We will be watching for further evidence that these companies are participating in the Ai boom in the upcoming quarters.
This analysis is a preview of what you can expect in our upcoming Discovery tier, which will provide additional analysis on new idea generation stocks that are not currently in the I/O Fund portfolio. We look forward to launching this tier November/December. There will be no changes to our current service tiers, rather I/O Fund Discovery is a service for those who want more new stock ideas beyond what our service currently provides. Stay tuned for more information!
Damien Robbins, Equity Analyst at I/O Fund, contributed to this analysis.
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.
While Nvidia’s dominance in AI GPUs is more clearly visible downstream in the HBM market, it’s also driving growth in a lesser-known but equally as important market, in metrology/process control equipment.
Metrology, by definition, is the study of measurement. In the semiconductor industry, metrology plays a critical role, as the ability to measure circuit dimensions, microstructures inside chips, film thickness, accuracy of layers and overlays are all necessary to ensure chipmakers can consistently produce high-quality, flaw-free chips at high yields.
While KLA dominates the metrology market, reportedly holding a more than 50% market share for over 20 years, Onto Innovation and Nova are two smaller players in the market putting up accelerating revenue growth with strong margins, with exposure to AI megatrends and long-term growth drivers.
Metrology Has Multiple Drivers
The metrology market has multiple drivers of future growth, and while it’s not limited to the AI data center mega-trends spearheaded by Big Tech, there are many levers within this AI buildout to drive demand for Onto Innovation and Nova.
This is how Nova’s management team recently described the opportunity: “Artificial intelligence is reshaping our digital world and expediting the implementation of scaling agents in integrated circuits to boost performance and power efficiency which are at the core of enabling large language models through training and infra stages. Scaling is manifested in more complex designs through three avenues, dimensions, materials and advanced packaging.
It is also manifested in the size of manufactured dies and in the number of dies required in solutions such as high bandwidth memory. These developments profoundly impact our industry in the number of the wafers needed to supply demand and in the yield ratio, you must obtain to secure profitability with a lower number of dies per wafer. Couple that with the growing complexity of architecture and materials and you have the growth drivers of process control in the coming years.”
Here’s a brief look at how AI and the data center are generating demand for metrology equipment across these different drivers:
Shift to Advanced Nodes
Advanced nodes require more process steps as node sizes shrink, so for a chipmaker or foundry like TSMC or Intel to move from primarily producing on 5nm nodes to 2nm or below over the next couple of years, there will be a greater need for metrology equipment. Currently, the 5nm and 4nm nodes are primarily being used for AI chip production, such as that for Nvidia’s Hopper and Blackwell chips, while 3nm production is ramping at TSMC with volume production at the 2nm node expected in 2025, primarily for smartphone applications.
This is because the manufacturing tolerances shrinks as nodes shrink in size – the chipmaking process now becomes increasingly more sensitive to minute deviations in the process. Moving to more advanced nodes warrants much greater precision throughout the entire manufacturing process, as the smallest of deviations could greatly affect the process’ yield.
For example, Samsung has reportedly been struggling with severe yield issues for its most advanced nodes, with unstable yields reportedly around 50% or below for its gate all-around GAA 3nm second-gen process, and yields as low as 20% for its 2nm process.
TSMC sees higher yields for the 3nm process, reportedly between 60% and 70%, allowing it to command a majority of production on advanced nodes and thus a majority of market share.
Metrology needs also rise as chip designs get increasingly complex, from the entire GPU to memory cubes.
AI accelerators are getting larger and more complex with each generation packing more transistors than the last. Nvidia’s upcoming B200 GPU packs 208 billion transistors and 192GB of HBM3e memory, versus 80 billion transistors and 80GB HBM3 memory for the H100. Though Blackwell is in a dual-die configuration, it’s still a more complicated chip to produce using TSMC’s customized N4P process (the same as for the H100).
Having a more complex chip design increases the chances of errors, as there are more steps in the manufacturing process to produce said chips. This also goes for DRAM and NAND cubes – as HBM cubes stack higher, from 8-high cubes to 12-high cubes for the current HBM3e generations from SK Hynix, Samsung and Micron, it also increases process steps. Other advanced memory chips have seen a 6x increase in layers from 64 to 400 over the past few years. 3D stacking and building more layers necessitates more sophisticated metrology equipment to ensure critical measurements are met within each stack and layer.
Gate All Around Advanced Packaging
TSMC is phasing out FinFet after the 3nm node, and its upcoming 2nm node will be the first to use gate-all-around field-effect transistors (GAA FETs). GAA will increase chip density, and increase performance-per-watt to enable higher levels of output and efficiency.
These GAA nanosheet transistors have channels surrounded by gates on all sides to reduce leakage yet it will also uniquely widen the channels to provide a performance boost (with another option to narrow the channels to optimize power cost). The 2nm node will also allow chipmakers to customize the width and height of cells. Because of the increased complexity of GAA FETs compared to FinFETs, Nova estimates that GAA requires 20% to 30% more metrology steps than FinFET.
We’ve covered gate-all-around in a TSMC analysis that stated the following in terms of timing for N2 starting production in the last quarter of 2025 and reaching “meaningful revenue” by the Q1 to Q2 of 2026.
Accelerated Chip Development Timelines
Nvidia and AMD are both shifting to annual release cadences, aiming to bring next-generation GPUs to market once per year, compared to prior cadences of every two years. This is a major technological feat – as we had said previously for Nvidia, it’s a ‘move-fast-break-things’ problem, where Nvidia is pushing the boundaries of what had previously been seen as impossible in the chip industry.
By moving to these quicker release cycles, there’s a much greater emphasis on metrology and process control to ensure that the manufacturing process remains sharp, while also ensuring a faster ramp, and high yields to meet mass production thresholds and demand.
Fab Buildouts
Another driver for metrology equipment is chip fab buildouts, such as HBM fab construction and investments from SK Hynix, Micron and Samsung, as well as other expansion plans, such as TSMC’s planned expansion in Arizona.
Onto’s management put this in perspective from the HBM side, saying that “even if AI just stayed flat, which nobody is projecting, AI is supposed to go up, the HBM side is already doubling. … customers [are] talking about supply constraints and that they're looking at expanding factories into next year, early half of next year in order to alleviate these supply constraints.”
Currently, there are 19 global high-volume chip fabs under construction this year, with another 10 expected to be added next year to meet rising demand for semiconductors, driven by AI/HPC. Total equipment spending for these 29 fabs is expected to be approx. $140 billion. Through 2030, there are more than 100 fab projects planned, with more than $200 billion in global funding and incentives for these projects.
Building out new fabs from the ground-up will require metrology and process control equipment, providing a long-term growth runway for the industry.
Product Snapshot: Addressing Critical Challenges in Advanced Packaging, Memory, More
Onto and Nova’s management teams highlighted a few core products that are driving growth or seeing strong orders and adoption from major customers. These products address some of the more pressing challenges in advanced packaging, HBM and memory, and leading-edge nodes.
Israeli-based Nova has a diverse metrology equipment and software portfolio, from dimensional to materials to chemical metrology. One of Nova’s leading products is PRISM 2, the next-generation PRISM which offers improved sensitivity and accuracy in critical dimensions metrology.
Nova noted that its PRISM 2 product saw strong adoption last quarter, especially in GAA, with around half of its record bookings stemming from “advanced packaging processes, such as Through-Silicon Via, where PRISM has a unique advantage in filtering information from specific underlayers.”
PRISM 2 provides improved accuracy and reliability for critical component measurements in processes such as advanced logic chip fabrication and stacking nanosheets for GAA fabrication, as well as 3D NAND and DRAM.
Nova also added that “demand is also consistently high for our advanced integrated metrology and XPS material metrology platforms,” as it saw “record booking of VeraFlex XPS platforms this quarter, of which over 40% resulted from capacity growth” in FinFET advanced nodes.
Nova’s VeraFlex XPS (X-ray photoelectron spectroscopy/materials metrology) helps analyze surface structures, identifying bonding, contaminants or defects in advanced nodes for process control in high-volume manufacturing.
US-based Onto’s core products span defect inspection equipment, dimensional (optical CD) and material metrology, and lithography tools. Onto’s Dragonfly systems, which drove Q2’s performance, witnessed “better-than-expected demand” for advanced packaging for AI chips as it reached another revenue record.
Dragonfly G3 provides combo 2D and 3D inspection and process control for advanced packaging, HBM and chip-on-wafer GPUs. For example, Onto noted last August that it finalized more than $100 million in Dragonfly G3 orders for chip packages “that combine a graphics processor (GPU) and numerous high bandwidth memory (HBM) devices to create an AI GPU in a single package.”
Onto also said that Atlas and Iris demand for GAA investments were a driver of Q2’s performance, while new product launches in panel lithography, 3D bump metrology sensors for smaller interconnects in HBM, and subsurface defect inspection sensors are expected to see strong adoption through the end of the year.
By comparison, leader KLA offers a comprehensive portfolio of metrology equipment for measuring “pattern dimensions, film thicknesses, layer-to-layer alignment, pattern placement, surface topography and electro-optical properties” for chip and substrate manufacturing, from new process development, product verification, and high volume manufacturing. KLA provides advanced wafer packaging equipment, overlay metrology equipment, reticle metrology and inspection tools, OCD, shape and film metrology equipment, sheet resistance metrology equipment, and more.
Customer Concentration Extremely High
It’s common for small cap semiconductors to have high customer concentration, especially at the equipment level, as there are a limited number of fabs globally. Nova and Onto are no exception.
For Nova, its top five customers accounted for 52% of revenue in 2023, down from 57% of revenue in 2022 and 70% in 2021. Nova’s largest customer accounted for 19% of revenue, while its fifth largest customer contributed 5% of revenue. The customers are not named.
Revenue from Nova’s largest customer(s) declined from ~$130 million in 2021 and 2022 to $108 million in 2023.
Onto Innovation has provided a breakout for its top three customers, along with another figure that highlight its customer concentration.
For Onto, its three largest customers accounted for 56% of revenue in the first half of fiscal 2024. TSMC accounted for 23% of revenue, up from 13% in the same period last year. Samsung accounted for 20% of revenue, down slightly from 21% last year.
SK Hynix has risen to be Onto’s third largest customer at 13% of revenue, up from <10% last year. Onto also has shared that TSMC accounted for 21% of its net accounts receivable in the first half of 2024, with Samsung accounting for 8%.
Both Nova and Onto are reporting accelerating revenue growth in Q2 after returning to growth in Q1 this year after four consecutive quarter of declines. However, Onto guided for revenue growth to decelerate in Q3, while Nova forecast this acceleration to continue but be short-lived.
Onto reported 27.1% YoY growth to $242.3 million in revenue in Q2, accelerating from 14.9% growth in Q1. Management said that Q2’s growth and revenue above its guided $230-240 million range was “driven by additional pilot line expansions for high-performance computing using gate-all-around transistor architecture and high bandwidth memory (HBM) supporting AI market growth.” This was likely driven primarily by increased spend by TSMC and SK Hynix, seen within the customer concentration figures.
Advanced packaging and specialty device revenue reached a fourth-consecutive record at $164 million, up 49% YoY, while Onto added that it “closed over $300 million of volume purchase agreements issued by two customers for their AI advanced packaging and gate-all-around investments through 2025,” again likely to be coming from TSMC. Management expects that GAA and advanced packaging at multiple customers will be primary growth drivers through 2025.
Nova reported revenue growth of 27.8% YoY to $156.9 million in revenue in Q2, accelerating from 7.3% in Q1. Metrology product revenue was $124.6 million, accelerating to 30% YoY growth from just 6% YoY in Q1 and (16%) in Q4.
Management said that it saw “record revenue from chemical metrology, driven by demand in high-bandwidth-memory and front-end logic processes,” while demand for GAA and advanced packaging was increasing with “faster-than-expected adoption” for its PRISM 2 platform. Management added that they also saw record bookings for advanced packaging and materials metrology.
Q2 also marked both companies’ fastest YoY growth rates in two years — here’s a look at how Onto and Nova have recovered from 2023’s slowdown:
Looking ahead for Q3, Onto guided for revenue growth of 20.7% YoY to $250 million in revenue at midpoint, a more than 6 percentage point deceleration. Nova forecast a nearly 6 percentage point acceleration to 33.5% growth to $172 million in revenue at midpoint.
Through 2025, analysts expect Onto to maintain growth in the high-teens each quarter, while Nova’s higher growth rate of 30%+ is expected to decelerate into the low-teens and high-single digit range five quarters out.
Onto is expected to see quarterly revenues rise to above $300 million, while Nova is currently forecast to see revenues begin to flatline in the mid-$190 million range. Nova may be more exposed to cyclicality in the metrology industry with its focus on film metrology equipment, which may see faster growth in the ramp phase that stabilizes later on.
Onto provided a quick look into what’s driving 2025 growth: “We expect to benefit from continued investments in gate-all-around capacity, and the announced capacity expansions from several high-bandwidth memory and logic packaging manufacturers, specifically for HBM. We expect new capacity coming online in the first half of the year to support the increase of HBM content for NVIDIA's AI processors from 80 to 192 gigabytes and for AMD's AI processors from 192 gigabytes to 288 gigabytes.”
However, it’s not all AI revenue for the two. Onto clarified that AI packaging drove over half of specialty and advanced packaging revenue in Q2, implying AI packaging revenue of at least $82 million, or just over one-third of quarterly revenue. Nova is seeing demand stem from AI-driven end markets such as HBM, GAA and TSVs, though they have not broken out AI’s specific impact on revenue.
Long-Term Financial Targets:
Revenue
Both companies have set out long-term financial targets, including revenue, margins and EPS. The revenue targets will likely be achieved in 2027 to 2028 based on current expectations and historical trends. Both companies expect to have enough capacity by year end to reach these long-term revenue targets.
Nova set its long-term target of $1 billion, more than 50% higher than FY24’s projected $648 million. There are currently six analysts covering Nova with only two analysts providing estimates through Dec of 2027 with consensus at $995.7 million.
Onto has its long-term revenue target at $1.8 billion, nearly double FY24’s projected $980 million. There are eight analysts covering Onto with only three analysts covering the stock through Dec of 2027 with estimates at $1.56 billion. The Dec 2028 estimate is more in line with Onto’s projections with only one analyst providing an estimate of $1.84 billion.
Here’s Onto’s target model, which provides a more detailed view down the line as revenue increases incrementally by $200 million:
Nova is currently ahead of its long-term margin targets, currently benefiting from higher ASPs due to product mix, while Onto is behind on gross margin targets for its $1 billion model.
Here’s how Nova’s margins look relative to its long-term target (referencing non-GAAP margins):
Nova reported GAAP gross margin of 59% in Q2, flat QoQ and up 200 bp YoY. Non-GAAP gross margin was 61% in Q2, again flat QoQ and up 200 bp YoY.
For Q3, Nova guided gross margins to dip 300 bp QoQ sequentially, to a GAAP gross margin of 56% and non-GAAP gross margin of 58%. Nova said that faster adoption of higher ASP/margin products has previously boosted margins, but they remain at the high-end of targets despite this fluctuation.
GAAP operating margin was 29% in Q2, expanding 300 bp QoQ and 600 bp YoY. Non-GAAP operating margin was 34%, up 200 bp QoQ and 600 bp YoY. Management pointed out that non-GAAP operating margin was ahead of targets of 27% to 31%, and while Q3’s non-GAAP margin was guided to decline sequentially to 32%, this is in line with previous quarters with Q2 being a strong outlier.
Onto sits behind gross margin targets, though it sees margins expanding in the coming quarter.
Onto reported GAAP and non-GAAP gross margin of 53% in Q2, up 100 bp QoQ and flat YoY. Though current FY revenue estimates are just 2% below the $1 billion target model, gross margins are shy of its range, with Onto targeting non-GAAP gross margins of 56% to 57%.
For Q3, management guided to gross margins between 53% to 55%, flat to up 200 bp QoQ, driven by growth in advanced nodes and optimization in manufacturing. Though it’s a step in the right direction, it’s still short of targets by ~200 bp at midpoint.
GAAP operating margin was 20% in Q2, up 100 bp QoQ and 700 bp YoY. Non-GAAP operating margin was 27%, up 200 bp QoQ and 600 by YoY.
Excluding amortization (to align with long-term targets), non-GAAP operating margin was 32%, in line with the high end of the $1 billion model despite the gross margin shortfall.
For Q3, management’s guidance implies non-GAAP gross margin of 28%, up 100 bp QoQ.
EPS
Both Nova and Onto are reporting strong EPS growth, with Nova reporting 48% YoY growth to $1.41 in GAAP EPS of $1.41 and Onto reporting 102% YoY growth to $1.07 in GAAP EPS. It’s rare to see such high EPS numbers from small cap stocks, and long-term targets are both strong and rather achievable.
For Nova, management is targeting non-GAAP EPS of at least $7 per share by the time it reaches $1 billion in revenue. For the first half of 2024, Nova’s non-GAAP EPS is currently $3 per share, suggesting that if margins can be maintained at the high end of its model, $7 in EPS is easily achievable. Analyst estimates currently project $9.58 in EPS on $996 million in revenue in 2027, foreseeing Nova surpassing the $7 EPS target next year on $757 million in revenue.
Onto is targeting non-GAAP EPS of $5.50 to $6.00 at $1 billion in revenue, and long-term up to $8.50 in EPS at $1.4 billion in revenue. Non-GAAP EPS for the first half of 2024 was $2.50, and with Q3 guided to $1.30 at midpoint, Onto would need to report $1.70 in non-GAAP EPS in Q4 to reach the low end of its target at $5.50.
Onto’s longer-term view emphasizes increased operating leverage to drive earnings growth as gross margin expansion is minimal. Management is eyeing just a 2% expansion in gross margin but a 4% expansion in operating margin. This is expected to drive EPS more than 40% higher, from $6 to $8.5 per share at the high end of the range. Analysts are much more optimistic on the degree of operating leverage that Onto can drive at $1.4 billion in revenue, with estimates calling for about $9.35 in EPS on $1.44 billion in revenue in 2026. Again, it’s rare to see EPS numbers this high with small cap semiconductor stocks.
Balance Sheets, Cash Flows Healthy
With operating and net margins in the high-20% to low-30% range, Onto and Nova enjoy healthy balance sheets and cash flows.
Onto has $786 million in cash, equivalents and marketable securities on hand, zero debt, and total liabilities of $174 million. Operating cash flow for 1H 2024 increased 50% YoY to $122 million, or 26% of revenue (versus 21% of revenue in same period last year). Free cash flow rose 49% YoY to $103 million, or 22% of revenue (versus 18% of revenue in the same period last year).
Nova has $759 million in cash, equivalents, and marketable securities, and $198 million in convertible senior notes, which, if converted, would equal about 3.4% dilution to existing shareholders. Nova has no outstanding debt outside of the convertible notes. Operating cash flow for 1H increased nearly 154% YoY to $120 million, or 40% of revenue (versus 19% of revenue in the year ago period). Free cash flow rose more than 178% YoY to $115 million, or 38% of revenue (versus 17% of revenue in the year ago period).
Inventories are where the two differ, with Nova increasing inventory as Onto is working to reduce inventory. Nova reported inventory of $156.6 million at the end of Q2, up more than 13% from the end of 2023. Onto is working on inventory management, reporting $319.7 million in inventory in Q2, down from $327.8 million at the end of 2023. Management expects to further reduce inventory by $10 million to $15 million in Q3 and exit 2024 with inventory below $300 million, or a $50 million YoY reduction.
Valuations Have Enjoyed a Premium
With clear exposure to AI and HPC trends in HBM and advanced packaging, as well as strong operating, net and cash flow margins — and triple digit cash flow growth for Nova – the two have recently enjoyed premium valuations to other chip equipment stocks and metrology leader KLA.
Onto currently trades at nearly 62x TTM earnings and Nova at almost 42x TTM earnings, compared to 38x TTM earnings for KLA and 22x TTM earnings for Applied Materials, which also has exposure to metrology and advanced packaging. Multiples have compressed slightly, with Onto trading above 80x earnings and Nova above 55x earnings earlier this year; however, it’s quite a large premium to their three-year average TTM earnings multiples of 37x for Onto and 31x for Nova.
On a forward basis, strong EPS growth of 40% YoY for Onto and 31% YoY for Nova has brought forward multiples lower, though still elevated relative to peers. Onto trades at nearly 40x forward earnings of $5.22 for FY24, while Nova trades at 31x forward earnings of $6.37 for FY24. KLA trades at 26x forward earnings with 25% YoY growth expected, and Applied Materials at 23x forward earnings with just 6% YoY growth expected.
On a top-line basis, Onto, Nova and KLAC are currently trading in the high 10x, to mid 11x PS range. Multiples for the trio have been in lockstep for more than a year, following each other quite closely since the 5-6x range around Nvidia’s blowout earnings report in May 2023, the first signs of the present AI and HBM boom.
Looking longer-term, it’s quite clear that these are some of the highest top-line multiples Onto and Nova have traded at in the past decade. Both companies’ 10-year average PS multiple hovers around 4.5x to 5x, so the two are currently trading at more than double their 10-year average. If earnings or revenue growth falters, multiple compression is a possibility given the premium valuations of the two.
Technical Analysis
By Knox Ridley
What caught our eye about the technical patterns in both NVMI and ONTO was how similar their long-term trends appear to be unfolding. Like many AI names that we track, they appear to be setting up for a correction within a larger uptrend that should go on for several years.
Most stocks and markets appear to have either topped in 2021 or are in their final swing higher in 2024/2025. So, while the broad market makes a series of lower highs into the coming years, these names would trend higher.
Onto Innovation (ONTO)
The below chart is a weekly chart. In other words, every candle is one week’s worth of price data. This better helps us decipher the long-term trend. Note the vertical move off the 2009 low, which was followed by a multi-year, messy and overlapping correction into 2015. This best resembles waves 1 and 2 in a very large 5 wave uptrend.
This is further supported by the price action into today’s developing top. The below Elliott Wave count has us in the final swing of wave 3 within the larger 3rd wave. We ccould see a final push into the $257 – $339 region. However, this is not a move that we would chase, considering the warning signs.
For one, we have a completed 5 wave pattern off thew COVID low. What follows 5 waves higher is usually a 3 wave retrace. Secondly, since mid-2023, we have seen price make higher highs while momentum is making lower highs. This is characteristic of 5 wave pattern, where peak momentum typically is seen in wave 3, as we wave 5 is met with less volume and less momentum.
Nova (NVMI)
NVMI has a similar long-term chart as ONTO. We can see a near vertical 5 wave move off of the 2009 low, followed by a pullback into 2011. This lines up well as waves 1 and 2 of a very large 5 wave pattern.
Like ONTO, Nova is in the final swing of wave 3 of the larger 3rd wave. If this count is accurate, the 4th wave pullback should take us back to around projected the halfway point of this larger 5 wave pattern, which is where we would look to potentially enter both stocks.
If we zoom in on the current correction, it appears that NOVA is setting up for the final drop in this correction. A move below $186 will confirm this as we target $152 – $138 for our first entry. If NOVA can instead hold $186 and then breakout above $230, we will be in the final swing of this 3rd wave. This stock has a lot to prove before we’d consider it a longer-term buy rather than a momentum stock.
Conclusion
Nvidia, TSMC, and Micron are bellwethers for AI accelerator, advanced packaging and HBM demand, with the three showing no signs of slowing any time soon. This will continue to create opportunities for growth in the metrology equipment market, as AI accelerator-related HBM and advanced packaging demand continues to grow and outstrip supply.
Metrology equipment is positioned well to capture the increase in complexity from advanced nodes, memory stacking and other chipmaking processes where demand is outstripping supply into the foreseeable future.
Onto and Nova share in these tailwinds, evidenced by accelerating quarterly revenue in Q2 and strong margins, cash flows and healthy balance sheets. We will be watching for further evidence that these companies are participating in the Ai boom in the upcoming quarters.
This analysis is a preview of what you can expect in our upcoming Discovery tier, which will provide additional analysis on new idea generation stocks that are not currently in the I/O Fund portfolio. We look forward to launching this tier November/December. There will be no changes to our current service tiers, rather I/O Fund Discovery is a service for those who want more new stock ideas beyond what our service currently provides. Stay tuned for more information!
Damien Robbins, Equity Analyst at I/O Fund, contributed to this analysis.
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.
