When looking at Nvidia’s forward estimates, what stands out is that revenue growth will peak this quarter at 239%. This can be a tricky place for a tech investor when what’s ahead is slowing growth.
Nvidia could raise and beat, as it’s had a penchant for doing lately, but the slowing growth will eventually catch up to the stock and analysts are pegging H2 for this to happen. To contrast, Nvidia will top over the next two quarters according to revenue growth rates whereas AMD is bottoming.
It’s unclear how much of Nvidia’s expected $100 billion for the data center in FY2025 is priced in. This has been discussed since at least the last quarter’s earnings report, yet the valuation is still very reasonable. We look at this and more below to prepare you for the most anticipated earnings report of the quarter.
Revenue and Earnings:
Nvidia is expected to report revenue growth of 239.4% for revenue of $20.54 billion for fiscal Q4 ending in January. These estimates have been steadily rising since the H100-related historic quarter last May. Last spring, the January quarter was expected to report 40% growth, and by November, the January quarter estimates were at 195%. I want to paint a picture for why Nvidia’s price action has been so strong – these revised estimates create ample room in the valuation.
For next quarter, estimates are for 204.94% growth for revenue of $21.93 billion.
- Fiscal year 2024 ending in January is expected to report revenue of $59.3 billion for growth of 119.7%.
- For fiscal year 2025, the company is expected to report revenue of $94.1 billion for growth of 58.9% with the growth overweight in the first half of calendar year 2024.
Even if we see a beat and raise, the slowing growth in the second half will be hard to overcome due to high comps. As mentioned in the introduction, Nvidia will begin to lap some stellar quarters come the October CY2024 quarter as the growth in October of CY2023 was 205.5% YoY.
Note: See below for bullish scenarios from analysts where these estimates may be too low.
Earnings growth is similar to revenue growth where the current quarter and also next quarter are expected to be stellar.
- Q4 FY2024 January quarter is expected to report growth of 426.4% for EPS of $4.63
- Q1 FY2025 April quarter is expected to report growth of 354.8% for EPS of $4.96
- From there, the July quarter is also strong at 95.4% growth yet tapers off as the company laps the high comps in the October quarter at 41.4%.
EPS growth of 40%+ is nothing to scoff at, yet the exuberance that pushed Nvidia to achieve a market cap of $1.8 trillion to where it is now the world’s second most valuable company blowing past Meta, Tesla and edging out Amazon, Alphabet is what must sustain. Fundamentals that decelerate are when the exuberance tends to wear off, and that is right around Fall of 2024 as of now.
For EPS the growth decelerates in line with revenue growth:
- FY2024 ending in January is expected to report full year EPS of $12.40 for growth of 271.1%
- FY2025 has estimates of $21.36 EPS for growth of 72.32% — as stated, right now, this is front half weighted
- FY2026 has estimates of $26.54 EPS for growth of 24.24%
We broke our portfolio management rules of having a position above 10% allocation, and therefore, we have to take it seriously that both the top line and bottom line will decelerate from >200% to 40% over the span of six months. Most analysts are in agreement that a beat/raise is likely after hours tomorrow and perhaps for next quarter. What we are keeping an eye on is further out when Nvidia laps the strong quarters in October of this year. That is a long way off, but the market is forward-looking by about 9 months.
According to current estimates, there is no acceleration on the horizon through 2026. We think those estimates will ultimately be wrong especially once AI software ramps, but for now, this is the estimates investors are working with for pricing the stock.
Margins:
- Gross margin of 74.5% expected this quarter compares to GAAP GM of 63.3% in the year ago quarter. This equals $14.9 billion in gross profit. The adjusted gross margin is expected to be 75.5% this quarter.
- Operating margin of 58.7% is expected this quarter for operating profit of $11.7 billion. The adjusted operating margin is expected to be 64.5%.
- Last quarter, net margin was 51% for net profit of $9.25 billion and adjusted net margin was 55.3% for adjusted profit of $10.02 billion.
Cash Flow:
When we compare the world’s most valuable companies, Apple stands out for its cash. This is where Nvidia will have to improve to ultimately surpass Apple. During the hype cycle of AI software is where that is most likely to occur.
Nvidia’s cash flow is still strong, yet it doesn’t hurt to compare it to other Mag 7 stocks:
Nvidia is the third strongest cash flow generator in the Mag 7, with an operating cash flow margin above 40%, but its smaller scale puts it in sixth place in terms of cash flow generation on a dollar basis. Nvidia’s $17.5 billion in TTM free cash flow pales in comparison to Microsoft’s and Alphabet’s nearly $70 billion – and while it’s not necessarily fair to compare companies in different tech verticals, Nvidia’s rapid ascent to a valuation above Alphabet and Amazon at some point will need to be reflected in the scope of its cash flows, especially when growth begins to decelerate.
Revenue Segments:
- Data center revenue last quarter was $14.5 billion, up 279% YoY. This compares to 31% growth in the year ago quarter. For this upcoming quarter, Nvidia is expected to report data center revenue of $16.9 billion for growth of 367%, which we outlined here along with a few different scenarios including how Nvidia can get to data center revenue of $101 billion in fiscal year 2025. Note that some of the data center revenue is also driven by networking for AI system with InfiniBand up 500% last quarter to $10 billion annualized run rate. We will update you more on networking after Nvidia’s report tomorrow and also when Marvell reports early March.
- Gaming revenue of $2.86 billion is up 81% YoY. This compares to a decline of (-23%) YoY in the year ago quarter.
- Pro Visualization was up 108% YoY for revenue of $416 million compared to a decline of (-65%) YoY in the year ago quarter.
- Automotive revenue of $261 million was up 4% YoY compared to 86% growth in the year ago quarter.
Additional Notes:
Analysts are Bullish
Bullish is the common theme heading into the report, given that Nvidia has raced from 13% growth in Q1 to 235% expected growth in Q4, and nothing describes the exuberance that accompanies this historic acceleration better than a handful of analyst estimates.
It’s within the data center that this bullishness is visible, as some analysts are expecting a nearly 20% beat on the Street’s $16.8 billion estimate, up to 60% higher than the Street by end of fiscal 2025.
Loop Capital is Nvidia’s largest bull heading into earnings, attaching a Street-high $1,200 price target on shares as the firm believes data center and overall revenue growth through FY 2026 will be meaningfully above the Street’s estimates. Loop is modeling a 17% beat in data center revenue to $19.6 billion, the highest on the Street, driving a 14% beat in total revenue to $23.1 billion.
Loop is projecting the data center to reach a $100 billion annual run rate by fiscal Q2 2025, closing the year out with data center revenue of $117.5 billion, 41% higher than the Street’s consensus of $83 billion. Overall, Loop is modeling more than $132.3 billion in total revenue for Nvidia next year, 38% higher than consensus at $95.8 billion and representing 123% YoY growth, 65 percentage points above the Street.
It is entirely plausible that Nvidia’s growth continues to fly past expectations and mirror a scenario similar to what Loop is modeling, given the elevated levels of demand for its H100 combining with the launch of its faster H200 and B100 GPUs later this year.
KeyBanc sees that Nvidia’s AI capacity is well above the Street and can support data center revenues above $100 billion in calendar 2024, nearly 30% higher than what the Street is modeling. In that sense, there still may be room for another surprise in 2024.
UBS follows closely behind Loop with expectations for a similarly large data center beat in Q4 and impressive Q1 guide on strong demand for AI compute. Analysts are expecting Nvidia to beat on data center revenue by ~$2.5 billion to $3 billion, with their estimate at $19.5 billion for the segment and $23 billion for total revenue. UBS also believes that with “supply chain work,” Nvidia could guide to $25 billion to $26 billion in revenue for fiscal Q1, more than 16% above consensus estimates for $21.9 billion.
BofA is more tame than Loop and UBS, calling for a modest 3-5% beat, or between $500 million to $1 billion above consensus for Q4’s report and Q1’s guide. This view for a beat and raise stems from supply gains offsetting impacts from China restrictions. However, BofA cautions that a beat of this size “’would pale vs. the 10%/22% beat/raise of prior quarters and perhaps disappoint some bulls,’ the more measured pace will also be seen as creating more fertile ground for continued growth.”
Meanwhile, going back to Q3’s report in November, analysts at Barclays said that the Nvidia's large Q3 beat “may not have cleared a very high hurdle,” and "didn't quite meet sky-high expectations" at "only" $2B ahead of consensus with margins at 75% and increasing into January. That commentary serves as a clear, yet somewhat brutal, reminder that even a $2 billion beat and raise had a muted response.
Market Shifts in Anticipation of Growth Rate Changes
An interesting pattern has been playing out with Nvidia’s stock price over the past few years as its quarterly revenue growth rate has shifted.
Nvidia’s shares topped in November and December 2021, around 7 months before growth decelerated from the 50% range to just 3% growth in the July quarter. Shares bottomed in October 2022, 7 months in advance of revenues inflecting off a (21%) decline in the January quarter to a (13%) decline in the April quarter.
Current estimates are calling for a significant deceleration to just 38% growth in the October quarter, and if this pattern continues, then we are at the brink of setting a top above the $700 range as the market anticipates this deceleration.
H200 and B100 to Launch in Q2 and Q4
Nvidia has an ambitious AI GPU roadmap, and is expected to release the next-gen H200 and B100 GPUs later this year, just over one year after releasing the H100.
The GPUs are expected to offer another leap in performance for AI training and inference, and the H200 is already in demand by the leading CSPs – AWS will be the first to deploy the new GPU, but Microsoft, Google and Oracle will also be deploying the chips.
It’s easy to see why the cloud giants are eager to upgrade quickly — Nvidia says the H200 will boast reduced energy usage and thus a lower TCO, while the introduction of HBM3e memory will essentially supercharge the GPU’s performance. For GPT-3 175B, the H200 is expected to offer 1.4x to 1.9x faster LLM inference on the leading GPT and Llama models compared to the H100, and an 18x performance upgrade compared to the A100.
While it will be too soon to gauge what level of demand there is for the two new GPUs from a Q1 guide, a fiscal year guide could provide insight into whether demand for the H200 and B100 can match the H100, or if Nvidia will face initial supply constraints while ramping production of the two at the same time. Additionally, Nvidia will face competition this year from AMD’s MI300s.
A Note on China:
We detailed in our Q3 report the risks surrounding China given its importance to Nvidia as well as the export restrictions impacting Nvidia’s ability to sell the A100 and H100. Nvidia’s CFO said last quarter that “export controls will have a negative effect on our China business, and we do not have good visibility into the magnitude of that impact even over the long term.”
Any China commentary will be critical, given the $80 billion to $100 billion data center segment that may be impacted. Keybanc has the $101 billion estimate for the data center segment this year yet believes that $20 billion is dependent on China. Per our write-up: “Keybanc sees a $5 impact to Nvidia’s $25.62 EPS estimate, and up to a $20B impact to its data center segment with current estimates at $101B for the data center in FY2025.”
Valuation:
Fundamentally, Nvidia’s valuation is still quite cheap compared to historical benchmarks, given the sheer leverage and earnings power that the H100 is driving.
Shares are trading at a 91x PE and 32x forward PE ratio, and though it may look elevated, it’s not a range that Nvidia is unaccustomed to – shares traded between a 75x to 100x PE ratio for a majority of the time from the second half of 2020 to early 2022. However, Nvidia’s forward PE of 32x is where the valuation has room to run. Shares bottomed in October 2022 at a 34x forward PE with declining revenue and EPS, compared to today, where EPS is expected to grow at least 73% YoY to $21.36.
On a PS basis, Nvidia still looks reasonably valued, with more potential upside if it can surprise again in 2024. Shares are trading at a forward PS of just over 18x, around the same level it held through the second half of 2023 and a steep discount to the 32x forward PS it peaked at in late 2021. Prior to 2023, Nvidia last traded at around an 18x forward PS in July and August 2022, despite the challenging macro headwinds and declining revenue growth.
Conclusion:
Our process is such that we have no issues placing Nvidia at a lower allocation if needed, or increasing that allocation back to the #1 position if needed. We want to remain flexible while acknowledging two things – the first, is the company will eventually lap high comps and the sky-high growth will not sustain forever. Secondly, that this company is the defacto leader in the multi-generational investment opportunity of AI and is trading at a reasonable valuation.
It’s entirely plausible we get a beat/raise tomorrow and a beat/raise for the next quarter. What needs to be watched is the H2 estimates as they lap high comps of 200%+. The first graph above best illustrates this.
With that said, we are in the first, early powerful move for AIfirst, early powerful move for AI. We have two more powerful moves to go — AI software and AI at the edge, and then automotive will be the grand finale. Nvidia is a leader in both, and I’ve been quite clear that our stance is that AI software for Nvidia specifically will drive more revenue than AI accelerators. We are seeing early indication that Nvidia can and will compete with Big Tech on AI software and AI at the edge with the Chat with RTX application.
Stay tuned for our post-ER writeup to hit your inboxes tomorrow night.
Premium Members, you can look forward to a deep dive on a stock that is new to the IOF portfolio that we plan to accumulate this year – we called Meta the one that got away in our year end webinar. This stock is the runner-up and we think it has more room to go (fingers crossed). Look for this in your inboxes next week.
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