Nvidia delivers monster earnings report

Nvidia delivers another monster earnings report

Nvidia delivered the goods when it came to its earnings report for the last quarter. It reported another quarter of record-breaking revenue, up 18% from a year earlier at $26bn. Data centre revenue is, once again, the jewel in the crown for Nvidia. Revenues in this part of the business were also higher by 23% from the prior quarter, at $22.6bn, which is a 427% increase from a year ago. Nvidia also announced a 10-for-1 stock split and a 150% increase in its dividend, although on a post-split basis, the dividend remains low.

Nvidia still leads the AI revolution

Overall, this earnings report cements Nvidia’s position as the leader of the pack when it comes to AI hardware, and it is unlikely to lose that crown anytime soon. Nvidia also gave a strong forward outlook, with revenue expected to grow to $28bn +/- 2% for the current quarter. Gross margins are expected to rise to 74.8% to 75.5% next quarter. Costs are expected to grow in the low 40% range, which is a keen reminder that Nvidia is a growth stock at heart. However, investors don’t seem to mind the operating costs as Nvidia is essentially a cash machine. It has $31bn of cash on its balance sheet, an increase of more than $5bn since January. This means that 1, the company has ample ability to invest in new products and keep it at the forefront of the next ‘industrial revolution’, and 2, it can continue to boost shareholder returns down the line.

Strong outlook drives share price rise

Overall, Nvidia’s Q2 revenue outlook is strong, which suggests that the company is confident in its investments to enhance its GPU offerings. The commentary that came with the earnings report was bullish in the extreme, as we have come to expect from Nvidia. CEO Jensen Huang, started by saying that the ‘next industrial revolution has begun’. He said that data centres are being reinvented as ‘AI factories’ to ‘produce a new commodity: artificial intelligence’. This is the type of talk you hear at the start of something big. Since AI is essentially in its infancy and Nvidia is at the forefront of providing the hardware necessary for its evolution, there is the potential for bigger and bigger revenues during this multi-year build out.

Nvidia is ‘poised for its next wave of growth’, these waves seem to be never ending, and Nvidia has, so far, been able to sail them all smoothly.

Customer growth continues

Huang mentioned that Nvidia’s customer base has expanded beyond just cloud service providers, to consumer internet companies, enterprise, sovereign entities, automotives and to healthcare companies. Nvidia is continuing to grow its customer base, which is why revenue keeps rolling in. There are many industries that are expected to use AI that are not listed by Huang. No doubt this list will keep growing, and sectors that are not on the list today are likely to be Nvidia customers of the future. Interestingly, the CFO who spoke on the earnings call did say that Nvidia is still reliant on a relatively small number of clients. This is mostly because you need to be a company of size to be able to afford to do business with Nvidia, due to the cost of its products. No doubt in the future, cheaper options may become available that would be one way to boost its customer base.

What the stock price does next

This earnings report is stellar, and we have come to expect nothing less from Nvidia in recent quarters. The question now is, will it be enough to drive another leg higher in US stocks? We think yes. The market was poised for perfection from Nvidia, and the company has delivered. The dividend might have grown 150%, however, at $0.01 after the stock split, it is not exactly generous. However, it is better than no dividend. Added to this, the stock split will make the stock more affordable for retail investors to fill their boots, which could further drive demand for the stock and trigger more gains for Nvidia’s share price.

Can the share price rise further?

On the back of this earnings report, Nvidia’s share price is higher by more than 5.5%. This is lower than the average move in the stock price posted in the last 8 earnings releases, when Nvidia’s share price has risen by more than 8% in the 24 hours after the release. We did mention in our Nvidia preview that the market is looking at stocks beyond tech and AI, which could limit the upside for Nvidia, however, trading in the post-market has seen Nvidia’s share price rise above $1000 per share. Passing this milestone could push US indices higher on Thursday. It is worth noting that the stock split will trigger a lower share price when trading commences on a split-adjusted basis on the 10^th June.

The AI narrative remains strong

Overall, there is nothing to dislike in this report. Nvidia has delivered the goods, and the market likes what it hears. It is still reaping the rewards of growing demand for AI hardware, and the outlook for growth remains strong. This report suggests that the AI narrative remains intact, which may be good news for overall risk sentiment in financial markets. If there is to be a hole blown in the narrative of AI domination, it is not going to come in this phase of its development. Risks could mount when AI becomes broadly used in the global economy, but that could be many months or even years.