NVIDIA made US$30 billion in revenue last quarter - but this analyst isn't buying

If we have learned anything over the past month during the ASX reporting season, it's that investors want excellence across the board. 

If your revenue and profit figures for FY24 materially miss analyst expectations, kiss any share price gains goodbye. If you decide to suspend your dividend without communicating clearly where you want the cash to go, shareholders will be left with a sour taste in their mouths. And if earnings guidance for FY25 doesn't stack up to investor expectations, then selling will begin in earnest. 

It's this last point that seems to have disappointed NVIDIA (NASDAQ: NVDA) shareholders. The world's most famous AI play produced a US$30 billion revenue quarter, its adjusted EPS rose by 152% and it is planning a US$50 billion share buyback. However, its forecast for Q3 revenues of around US$32 billion left even its most optimistic investors screaming for more.

For one of the last results of our August reporting season coverage, we're looking beyond the ASX and covering the latest results of the most-watched company in the world. 

Our guest to help us with this task is Nick Healy, Portfolio Manager at WAM Global (ASX: WGB). Will Nick still buy the company after this result? Read on to find out.

NVIDIA Q2 Key Results

• Revenue +15% q/q, +122% y/y to US$30 billion
• Data centre revenue +154% y/y
• Operating expenses +48% y/y to US$2.66 billion
• Diluted EPS of US$0.25/share
• Approved an additional US$50 billion in share buybacks

Outlook

• Revenue is expected to be $32.5 billion, plus or minus 2%.
• GAAP and non-GAAP gross margins are expected to be 74.4% and 75.0%, respectively, plus or minus 50 basis points. For the full year, gross margins are expected to be in the mid-70% range.
• GAAP and non-GAAP operating expenses are expected to be approximately $4.3 billion and $3 billion, respectively. Full-year operating expenses are expected to grow in the mid-to-upper 40% range.

What were the key takeaways from this result?

NVIDIA's second quarter result was fundamentally strong, with the company beating expectations both in the quarter and in forward guidance. This is further evidence that the shift towards Generative AI technologies is a real, impactful technological change that will play out over multiple years

However, for the stock, investor expectations weren’t met and it’s indicating down in post-market trading. This is the challenge facing a stock that had moved up over 25% in the last month alone and where sentiment was stretched.

Going forward, expectations from investors for earnings growth remain elevated, with circa 40% earnings growth expected in FY26 and circa 20% in FY27. Given that approximately half of NVIDIA’s Data Centre demand comes from the cloud service providers, and that they’ve openly stated they are investing CapEx in Gen AI potentially in excess of underlying demand, there is a risk to the predictability of these forward earnings expectations

When combined with the circa US$3 trillion market capitalisation ascribed to the company by the market, we think there are better opportunities in the market to benefit from the continued roll-out of generative AI.

Were there any major surprises you think investors should be aware of?

One surprise was that the 2% revenue guidance beat was the lowest since this wave of Generative AI demand began, with the prior five quarters averaging over 20% forward revenue guidance beats.

What is one thing investors are getting right about NVIDIA and what is one thing investors are getting wrong?

Investors are broadly getting that NVIDIA is a phenomenal company with a leadership position in a critically important end market. However, they’re ascribing too low a probability for the potential for demand to be overstated due to uneconomic ordering, and for the hyper-scale cloud service providers to develop alternative in-sourced GPU solutions and thus erode their demand for NVIDIA’s products – particularly for inference.

Would you buy, hold, or sell NVIDIA off the back of this result?

At over US$3 trillion in market capitalisation, we would say NVIDIA is a SELL given there are better opportunities to benefit from Generative AI elsewhere in the market. These include both direct AI software beneficiaries, like leading accounting provider Intuit (NASDAQ: INTU), as well as picks and shovels winners including Quanta (NASDAQ: PWR), which is building and maintaining the US electric grid and is a beneficiary of the energy-intensive nature of AI. Booz Allen Hamilton (NYSE: BAH) is another example. It is the leader in AI technology consulting for the US Government and will benefit as they roll out AI solutions across various departments and use cases.

What is your outlook for this stock and the sector over the year ahead? What are the biggest risks moving forward?

We’re expecting continued strong fundamental results from NVIDIA, underpinned by the cloud service providers’ stated intention to continue to over-invest in GPU hardware to ensure they remain in the lead as the computing infrastructure layer. However, we believe both sentiment and expectations for forward earnings are already elevated, and given the CFO indicated that Hopper chip availability has improved, we believe there is a risk around disappointing the expectations embedded in the stock price.

Disclaimer: The author owns NVIDIA shares.