Nvidia Results (Almost) Walk On Water

Nvidia Results (Almost) Walk On Water
Paul Allison, CFA

3 months ago3 mins

Mentioned in story

For anyone who needs reminding of how important Nvidia is for the AI ecosystem, here’s a scene-setter for you: this time four years ago when AI was a mere twinkle in the eye of its founder and CEO, the firm was happily plodding along at around $3 billion in revenues per quarter. Last night, that same CEO predicted the chipmaker would bring home $20 billion in the current quarter.

For the quarter that’s just ended (i.e. the fiscal third quarter), Nvidia raked in $18 billion in revenue – a bell-ringing $2 billion more than giddy Wall Street analysts had expected. And $15 billion of that came from Nvidia’s data center arm, the segment that’s home to all those AI-powering graphics processing units (GPUs). And with revenue that hefty, the rest of the income statement has a way of taking care of itself – so bottom-line earnings of just over $4 per share were also nicely ahead of expectations.

All that said, the initial stock reaction to Nvidia’s A+ earnings report has been a tad muted, and that comes down to the high hopes that are already built into its stock price. After all, when things look this good, it’s logical to wonder how much better they could get.

Where does Nvidia go from here?

Nvidia’s CEO says some $1 trillion in data center infrastructure worldwide (basically, a load of powerful computers that run cloud computing) needs to be upgraded to become AI-compatible. Now, he’s not suggesting that’s all revenue opportunity for Nvidia, but some analysts believe a quarter of it will become revenue for the firm. That’s stunning: flow that kind of revenue through a very profitable income statement, and you can dream up some pretty heavenly earnings per share (EPS) forecasts.

Bank of America is guessing Nvidia will produce almost $40 in EPS in 2027 – 12.5 times the current price. But you don’t have to look that far out: after these results, you can expect analysts to elevate their 2024 forecasts to around $20 EPS, which would put Nvidia’s stock price on a price-to-earnings ratio of 25x, a valuation on par with mere mortal stocks like Procter & Gamble and Coca-Cola.

But let’s be realistic: at some point, Nvidia is bound to hit a speed bump or two, and when it does, all those dreamy forecasts will start to seem like pies in the sky, at least for a period. There’s also the fact that China and the US are still double-headlocked in a trade spat around all things tech, and Nvidia’s chips are caught in the middle. Nvidia’s already warning that revenue from China will be materially lower this quarter. And that’s a blow, even if there is plenty of demand coming from elsewhere to offset the decline.

For investors, the Nvidia question comes down to whether you believe the technology will live up to the hype. And ironically, the breakneck speed of Nvidia’s growth somehow makes that call even harder. For now, I suspect that as long as investors have reason to dream of unearthly revenue and profit numbers, there’ll be more believers than nonbelievers.

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