Nvidia Stock Soars On Blowout Guidance
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Soaring demand for the chips needed to train the latest wave of generative artificial intelligence systems such as ChatGPT led Nvidia to issue a revenue forecast far ahead of Wall Street expectations, prompting a surge in its stock price in after market trading.
The US chipmaker on Wednesday said it expected sales to reach 11bn dollar in the three months to the end of July, more than 50 per cent ahead of the 7.2bn dollar analysts had been expecting and confirming its position as the biggest short-term beneficiary of the AI race that has broken out in the technology industry.
The forecast fuelled a 27 per cent leap in Nvidia’s shares, which had already more than doubled since the start of the year, and lifted its stock market value to a record 960 bn dollar.
Jensen Huang, chief executive, said the company was “significantly increasing our supply to meet surging demand” for its entire family of data centre chips, including the H100, a product launched this year that was designed to handle the demands of so-called large language models such as OpenAI’s GPT4.
The race in the tech industry to develop larger AI models has led some customers to worry privately about a shortage of H100 chips, which only went on sale earlier this year. However, Nvidia’s 4.28bn in sales to data centre customers in its latest quarter topped even the most optimistic analysts’ forecasts, and the company said there had been strong sales of both the H100 and its A100 chips, based on its previous chip architecture.
Nvidia’s forecast noted a potential doubling of sales to data centre customers in three months, even though data centre sales were running at an annualised rate of 17bn in the opening quarter of this year. Growth is coming from customers across the board, Kress said, with consumer internet companies, cloud computing providers and enterprise customers all rushing to apply the generative AI to their businesses.
The bullish forecast came as Nvidia reported revenue and earnings in its latest quarter, to the end of April, had also topped forecasts, thanks to a jump in sales to data centre customers as demand for AI took off. Revenue reached 7.19bn, up 19 per cent from the preceding three months but down 13 per cent from the year before, as sales of chips for gaming systems dropped.
Earnings per share rose 22 per cent from a year before to 82 cents, or $1.09 on the pro forma basis Wall Street judges the company. The consensus view on Wall Street had been for revenue of 6.52bn and pro forma earnings of 92 cents a share.
now let's delve into the numbers. Nvidia's different business units did not all perform equally well during the quarter - which can be expected, of course. Nvidia's data center business grossed revenues of $4.3 billion during the first quarter, which represents a new record high. Data center demand is not very cyclical, and companies kept investing in new equipment despite a potential recession being on the horizon. This can be explained by the fact that data centers are mission critical for many companies, so they don't really have a lot of choice when it comes to allocating capital to this space. Strong data center sales also have been seen in the results of other chip companies such as Advanced Micro Devices (AMD). Both Nvidia and AMD also were able to benefit from the weak performance of their competitor Intel (INTC), as Intel has been losing market share in the data center space in recent quarters due to self-inflicted problems and an unconvincing product line-up.
Nvidia is a major graphic chip or GPU player and is thus heavily impacted by the performance of related end markets. This includes both cryptocurrency mining and gaming. While some cryptocurrencies can't be mined with GPUs economically, such as Bitcoin, others, such as Ethereum, can be mined with GPUs. Ethereum moved from a proof-of-work model to a proof-of-stake model in the fall of 2022, but some miners still use GPUs for Ethereum mining. Not surprisingly, Nvidia's sales to this end market depend on the price for cryptocurrencies - when cryptocurrencies are expensive, miners are more eager to acquire additional GPUs and they may also be willing to pay high prices for them. During times when cryptocurrencies are less expensive, mining is less profitable, and GPU demand from cryptocurrency miners wanes. This has had an impact on Nvidia's sales in the past and likely played a role in Nvidia's Q1 sales as well.
GPU sales have been under pressure in recent quarters due to lower demand by gamers as well. Many that like to play video games upgraded their hardware during the lockdown phase of the pandemic when staying at home meant that consumers had more time for video games. With many gamers having relatively new equipment, demand has declined in the recent past. At the same time, inflation pressures consumers' ability to spend on discretionary goods. On top of that, some consumers prefer to spend their money on experiences over things now as there are no lockdowns or travel restrictions in place any longer. All in all, this has resulted in a difficult macro environment for Nvidia's gaming business.
Combined, the headwinds for the gaming market and the cryptocurrency market explain why Nvidia's sales and profits kept declining during the most recent quarter, relative to the results the company was able to generate one year earlier. The strong performance in the data center space was not enough to offset the headwinds Nvidia experienced in other areas.
I personally going to take huge profit right now and wait for 250 $ levels
The US chipmaker on Wednesday said it expected sales to reach 11bn dollar in the three months to the end of July, more than 50 per cent ahead of the 7.2bn dollar analysts had been expecting and confirming its position as the biggest short-term beneficiary of the AI race that has broken out in the technology industry.
The forecast fuelled a 27 per cent leap in Nvidia’s shares, which had already more than doubled since the start of the year, and lifted its stock market value to a record 960 bn dollar.
Jensen Huang, chief executive, said the company was “significantly increasing our supply to meet surging demand” for its entire family of data centre chips, including the H100, a product launched this year that was designed to handle the demands of so-called large language models such as OpenAI’s GPT4.
The race in the tech industry to develop larger AI models has led some customers to worry privately about a shortage of H100 chips, which only went on sale earlier this year. However, Nvidia’s 4.28bn in sales to data centre customers in its latest quarter topped even the most optimistic analysts’ forecasts, and the company said there had been strong sales of both the H100 and its A100 chips, based on its previous chip architecture.
Nvidia’s forecast noted a potential doubling of sales to data centre customers in three months, even though data centre sales were running at an annualised rate of 17bn in the opening quarter of this year. Growth is coming from customers across the board, Kress said, with consumer internet companies, cloud computing providers and enterprise customers all rushing to apply the generative AI to their businesses.
The bullish forecast came as Nvidia reported revenue and earnings in its latest quarter, to the end of April, had also topped forecasts, thanks to a jump in sales to data centre customers as demand for AI took off. Revenue reached 7.19bn, up 19 per cent from the preceding three months but down 13 per cent from the year before, as sales of chips for gaming systems dropped.
Earnings per share rose 22 per cent from a year before to 82 cents, or $1.09 on the pro forma basis Wall Street judges the company. The consensus view on Wall Street had been for revenue of 6.52bn and pro forma earnings of 92 cents a share.
now let's delve into the numbers. Nvidia's different business units did not all perform equally well during the quarter - which can be expected, of course. Nvidia's data center business grossed revenues of $4.3 billion during the first quarter, which represents a new record high. Data center demand is not very cyclical, and companies kept investing in new equipment despite a potential recession being on the horizon. This can be explained by the fact that data centers are mission critical for many companies, so they don't really have a lot of choice when it comes to allocating capital to this space. Strong data center sales also have been seen in the results of other chip companies such as Advanced Micro Devices (AMD). Both Nvidia and AMD also were able to benefit from the weak performance of their competitor Intel (INTC), as Intel has been losing market share in the data center space in recent quarters due to self-inflicted problems and an unconvincing product line-up.
Nvidia is a major graphic chip or GPU player and is thus heavily impacted by the performance of related end markets. This includes both cryptocurrency mining and gaming. While some cryptocurrencies can't be mined with GPUs economically, such as Bitcoin, others, such as Ethereum, can be mined with GPUs. Ethereum moved from a proof-of-work model to a proof-of-stake model in the fall of 2022, but some miners still use GPUs for Ethereum mining. Not surprisingly, Nvidia's sales to this end market depend on the price for cryptocurrencies - when cryptocurrencies are expensive, miners are more eager to acquire additional GPUs and they may also be willing to pay high prices for them. During times when cryptocurrencies are less expensive, mining is less profitable, and GPU demand from cryptocurrency miners wanes. This has had an impact on Nvidia's sales in the past and likely played a role in Nvidia's Q1 sales as well.
GPU sales have been under pressure in recent quarters due to lower demand by gamers as well. Many that like to play video games upgraded their hardware during the lockdown phase of the pandemic when staying at home meant that consumers had more time for video games. With many gamers having relatively new equipment, demand has declined in the recent past. At the same time, inflation pressures consumers' ability to spend on discretionary goods. On top of that, some consumers prefer to spend their money on experiences over things now as there are no lockdowns or travel restrictions in place any longer. All in all, this has resulted in a difficult macro environment for Nvidia's gaming business.
Combined, the headwinds for the gaming market and the cryptocurrency market explain why Nvidia's sales and profits kept declining during the most recent quarter, relative to the results the company was able to generate one year earlier. The strong performance in the data center space was not enough to offset the headwinds Nvidia experienced in other areas.
I personally going to take huge profit right now and wait for 250 $ levels
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It’s clear that this tech giant is facing significant challenges. This week, NVIDIA Corporation experienced three major setbacks affecting its stock price. First, a stock price correction followed a “bubble land” comment from Elliot Management. Second, there was news of a potential antitrust investigation related to the Run:ai acquisition and Nvidia’s strong position in the high-end chip market. Lastly, an insider report revealed delays in shipping its Blackwell product line to major clients like Microsoft, Alphabet, and Meta Platforms due to a possible design flaw, which has forced the company to conduct new test production runs with Taiwan Semiconductor Manufacturing Company.
I believe this represents an excellent opportunity for patient investors who have been waiting for the right time to buy this stock.I identified three lesser-known catalysts that I believed will allow the company to keep growing at a faster pace than its peers: one, its R&D profile, which I outlined in some detail; two, its operational efficiency and pricing power; and three, its unique human capital structure.
These three catalysts are still very much in play, and that thesis extends today to an upgrade to Strong Buy for yet another three reasons: one, the sell-off is overdone, in my opinion; two, I believe Street analysts' concerns are based purely on what appear to be excessive valuations; and three, I think the bad news on a possible antitrust probe and the delayed shipments aren't going to impact the long-term growth trajectory of this company.
Let's begin with the obvious elephant in the room; not the largest, perhaps, but definitely something that investors have been worried about - the excessive valuation leading to an overdone correction. I'll follow that up with arguments supporting the other two extensions to my thesis, as outlined above.
1: The Correction is Understandable and Expected; Take Advantage of It
Any investor who thought NVDA's stock price is going to have a straight-line, upward-sloping trajectory is only kidding themselves. When a stock is priced at such nosebleed levels, corrections are only normal. The key point here is that NVDA might have been priced for perfection, but that's the market's own fault. It's only natural that corrections happen to bring prices back down to earth.
if you look at NVDA's valuation on a revenue basis, you'll see that the forward P/S ratio has actually been moving sideways, albeit in a wide range. On a split-adjusted basis, the stock is trading at the level it was in early 2022, before the AI craze took over. Moreover, looking at the kind of revenue generation that the company exhibited, its revenue multiple actually formed a trough between then and now. As for the price return, is 440% (including the recent drop over the past month) not good enough to warrant that kind of valuation? I think it is.
It's only reasonable to call a stock overvalued if the business can't deliver superior performance that's in line with its valuation, and NVDA has been spot on with that metric. Not only have revenues growth by astounding leaps and bounds, but the bottom line has been growing almost twice as fast.As an investor, these are the metrics you should be worried about because that's what you're paying for. Remember, you're not paying for valuation; you're paying for value, and NVDA has clearly shown that it's a value creator.
it might look like a falling knife, and I say let it fall, and fall right into your portfolio! If you want to be cautious and think it'll go down even further, dollar-cost average into a cheaper cost basis over time if you have to, but don't lose this opportunity.
2: AI is NOT a "Bubble"
As for the downgrade by Elliot Management, I see that as nothing more than a gross misunderstanding of how the AI story will play out over the next several decades. We're only beginning to scratch the surface of AI capabilities. Yes, I agree that not every AI product is going to lead to an immediate surge in revenues for hyperscalers, but that view is extremely shortsighted, in my opinion.
One argument I can get behind is that the larger players aren't going to keep ordering AI chips in such volumes. One of the reasons for that could be the cost of NVDA's chips, but then again, if they're willing to spend on such an expensive product line up, they must have a very good reason. I think the company has a very astute pricing strategy to address this demand pull; since their line-up is currently and unarguably the best-in-class available at the moment, it does deserve premium pricing.
What the detractors to this assumption are missing is that once these hyperscalers show tangible topline growth from AI initiatives, other, smaller companies are going to follow suit. They may look for cheaper alternatives that companies like Advanced Micro Devices (AMD) may offer in the future, but if they need to be at the top of their segments and well ahead of the competition, they'll need to invest in such capex premiums.
Therefore, while I do agree that Nvidia's AI revenues are currently concentrated among the top cloud providers and hyperscalers, we're eventually going to see it spread out to other cohorts that are waiting on the sidelines for cheaper alternatives that perform just as well. In truth, that might be a long wait, and as it becomes increasingly urgent to cater to end-users' demand for AI products, the pressure will be on these CEOs and CFOs to release funds to companies like NVDA and AMD. That's why I'm also bullish on the latter, as I made known in my article on Advanced Micro Devices last month.
The narrative about companies like Nvidia being "overhyped" and in "bubble land" is not new. Sell-side analysts are extremely cautious about being wrong, especially when institutional investors have high visibility into the securities in question - and what's more visible than the Magnificent 7 at the moment, which NVDA arguably rules over?
Nvidia's institutional ownership is at 65%, or about two thirds of all outstanding shares.
Investment firms often tend to look at short-term stock price movements and medium-term scenarios, and my assumption is that the general market downturn that began the day before the CPI report came out on July 11 triggered a decline that's continued until now, and this perceived triple-threat to NVDA is part of that larger narrative that Elliot Management has interpreted as a bubble situation. Logically, however, it also implies that the narrative itself is not directly related to NVDA but the broader Magnificent 7, which is why the stock has been impacted to such a degree over the past month.
This second part of my thesis, therefore, is that the company is NOT in bubble land because revenues aren't suddenly going to drop off the cliff. These investments are made well in ad
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NVIDIA is about to report earnings, and as the brightest star stock in the U.S. at the moment, major markets are focusing on the impact of the earnings report on the broader U.S. stock market. Cryptocurrencies are down recently, yesterday's sharp decline superimposed on Nvidia earnings expectations, a small increase in today's implied volatility IV
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