Nvidia’s Q3 Earnings: A Display Of Robust Growth And Future Promise
Contributor since 2013 / 7786 Followers
Summary:
- Nvidia’s FY Q3 earnings report exceeded expectations, with a 34% increase in revenue quarter-on-quarter and a 206% growth year-on-year.
- The company’s Gaming segment saw a healthy revenue increase of 15% quarter-on-quarter, while the Data Center segment reported a revenue increase of 41% quarter-on-quarter.
- Nvidia’s management provided encouraging revenue guidance for FY4Q, indicating confidence in the company’s continued growth, particularly in the Data Center business.
Justin Sullivan
As we gather to celebrate Thanksgiving this week, expressing gratitude for our blessings and looking forward to the future with hope and optimism, Nvidia (NASDAQ:NVDA) has given its shareholders an additional reason to be thankful. In the recent FY Q3 earnings report, Nvidia has delivered an outstanding performance, exceeding expectations and providing a promising outlook for the future. Despite a slight dip in stock value post-earnings due to short-term profit-taking, the long-term trajectory remains strong and upward-facing. The tech giant reported an impressive $18.1bn in revenue, marking a 34% increase quarter-on-quarter (qoq) and a whopping 206% growth year-on-year (yoy). This comprehensive analysis of Nvidia’s earnings report and future prospects aims to shed light on the company’s performance, its strategic responses to industry challenges, and its potential for continued growth. In the spirit of Thanksgiving, let’s carve into the meaty details of Nvidia’s financial feast.
Earnings Analysis
Nvidia’s recent FY Q3 earnings exceeded expectations by a large margin. Despite this, the stock traded down by -2.5% on the day following the earnings release. We believe this is short-term profit taking, and as shareholders, are not concerned with this reaction.
In our opinion, Nvidia’s FY3Q earnings report showcases a company in robust health, presenting strong growth across all of its business segments. The company reported a remarkable revenue of $18.1bn, a 34% increase quarter-on-quarter (qoq) and a staggering 206% growth year-on-year (yoy).
The Gaming segment, often considered the backbone of Nvidia’s business, saw a healthy revenue increase of 15% qoq to reach $2.9bn. This growth was principally driven by a strong back-to-school demand and a normalization in channel inventory levels.
The Data Center segment, a key growth driver for Nvidia, reported a revenue of $14.5bn, up by an impressive 41% qoq. This was attributed to robust growth in accelerated computing and networking platforms worldwide.
Professional Visualization had a solid quarter with revenue of $416mn, a 10% qoq and 108% yoy increase. This growth was driven by a stronger demand for workstations and a normalization of channel inventory levels.
The Automotive segment, reflecting Nvidia’s efforts in self-driving platforms, reported a modest growth of 3% qoq and 4% yoy, with revenue reaching $261mn.
Lastly, the OEM and Other segment saw a revenue increase of 11% qoq to $73mn, remaining flat yoy.
Nvidia’s non-GAAP gross margin, excluding stock-based compensation (SBC), stood at 75%, up 380bps qoq and exceeded guidance by 250bps. The non-GAAP EPS, also excluding SBC, was $4.02, a figure 19% above the FactSet consensus.
Looking ahead, Nvidia’s management provided encouraging FY4Q (January) revenue guidance of $20.0bn, a 10% increase qoq and 231% rise yoy. This guidance is 11% above the Street consensus, indicating management’s confidence in the company’s continued growth. The primary driver for this growth is expected to be the Data Center business.
The company guided a non-GAAP gross margin of 75.5%, non-GAAP operating expenses of $2.2bn (a 9% increase qoq), other income and expenses to approximately $200mn, and a non-GAAP tax rate of 15%. Based on our calculations, this guidance implies a FY3Q non-GAAP EPS (excluding SBC) of approximately $4.48, which is 19% above consensus estimates heading into the print.
Insights From The Call
NVIDIA has established itself as the clear leader in accelerated computing and artificial intelligence over the past decade. However, to sustain its dominance and capture the massive opportunities of the generative AI era, the company faces substantial challenges around supply chain management, navigating geopolitical tensions, and expanding its platform. Based on the information provided by management on its earnings call, it appears NVIDIA has the strategic approach and execution capabilities needed to rise to these challenges and succeed through 2025.
One of the most impressive aspects of NVIDIA’s business is the scale and complexity of its supply chain. The Hopper-based HGX module utilized in its top-of-the-rack DGX servers involves over 35,000 precisely engineered components. Meanwhile, each Hopper GPU chip contains nearly 80 billion transistors and requires an extremely sophisticated manufacturing process. Scaling production of these advanced products to meet global demand for AI infrastructure and supercomputing is an astonishing feat. Through ongoing investments and partnerships, NVIDIA claims to have built the largest and most sophisticated supply chain in the industry. Our analysis suggests the company’s leadership in supply chain operations and supplier relationships will be integral to capturing the expanding AI opportunity for years to come.
However, geopolitical tensions threaten to disrupt NVIDIA’s growth trajectory. The recently imposed export controls targeting China in particular introduce significant uncertainty, with management acknowledging they reduce near-term visibility. While the regulations are intended to allow ongoing participation in global markets, navigating this shifting landscape will test the company’s political and diplomatic acumen. In the longer term, nationalist policies promoting development of domestic AI industries could curb demand growth for American firms abroad. That said, NVIDIA appears committed to developing compliant product solutions and new regional partnerships to mitigate these challenges. Overall revenue diversification across industries and regions may help dampen political risks to some degree in our view.
Another potential roadblock is competition, yet NVIDIA’s platform approach and accelerating pace of innovation create formidable barriers to entry. Developing high-performance chips, networking equipment, system and application-level software is an immense challenge requiring tremendous expertise. Maintaining architectural compatibility across this full stack lowers costs for customers and encourages developer momentum, in our view. Competitors would struggle to replicate NVIDIA’s multibillion-dollar research expenditures and 20+ year technology lead. According to our analysis, the company’s platform model and first-mover advantages in AI leave it well positioned in even the most competitive domains like networking and CPUs.
Growth opportunities abound as well. Perhaps most significantly, management believes generative AI will induce an “industrial revolution” comparable to prior technological transformations. Capturing just a portion of this TAM through continued platform expansion and diversification could drive multiple additional years of expansion in our view. Emerging fields like AI chips, sovereign clouds, and industrial/enterprise implementations represent largely untapped greenfields. NVIDIA’s AI Foundry service also provides a strategic vehicle for proliferating proprietary workloads across major verticals like healthcare and finance. Even more tailwinds may arise from adjacent applications of immersive computing leveraging the RTX product family.
After the earnings call, we are optimistic about NVIDIA’s ability to overcome challenges and capitalize on opportunities through 2025. Stellar execution on an ambitious roadmap aiming to define full-stack accelerated computing positions the company to sustain torrid growth well into the next decade in our opinion. As a first-mover establishing the most comprehensive AI platform, risks seem balanced against the transformational rewards ahead. Although macro and geopolitical uncertainties cloud the picture, we are increasingly confident in management’s ability to navigate these headwinds. Overall, we see NVIDIA maintaining its leadership with ample visibility for shareholders despite industry complexities.
Financial & Valuation
Note: All historical data in this section comes from the company’s 10-K filings, and all consensus numbers come from FactSet.
Nvidia’s revenue displayed a compound annual growth rate (CAGR) of 35.2% over the past three fiscal years. Furthermore, the sell-side consensus forecasts revenues to grow by 104.6% this fiscal year, reaching $55.2 billion, and to grow by 49.1% the following fiscal year, reaching $82.3 billion.
However, over the past three fiscal years, Nvidia’s EBIT margin slightly decreased by 0.4 percentage points, from 33.9% to 33.4%. This is expected to change as the consensus forecasts an expansion of the EBIT margin by 2,159 basis points this fiscal year to 55.0%, and further expansion by 343 basis points the following fiscal year to 58.5%.
Over the past three years, NVDA spent 8.7% of its revenue on share-based compensation (SBC). Diluted outstanding common shares decreased by 0.2% over the same period, indicating that management effectively used share repurchases to offset shareholder dilution. As a result, EPS grew at a CAGR of 32.1% over the past 3 fiscal years, lagging its revenue growth. The consensus is forecasting EPS to increase by 225.4% to $10.87 this fiscal year, and increase by 60.0% to $17.39 the following fiscal year.
The consensus estimates forecast free cash flow this current fiscal year will reach $23,669 million, a 42.9% FCF margin. This is an improvement compared to four fiscal years ago when the FCF margin was 38.1%. Over the past four completed fiscal years, the company generated an average FCF margin of 32.5%. The capex as a percentage of revenue averaged 6.3%, indicating a moderate capital intensity for the business.
On the financial health side, with a net cash of $9,200 million, NVDA maintains a strong balance sheet.
In terms of market performance, NVDA trades at $487.16 per share, reflecting a market value of $1,203 billion and an enterprise value of $1,194 billion. Over the past year, NVDA outperformed the S&P 500 by 210 percentage points, returning 226.3% in absolute terms. The stock is trading 30.6% above its 200-day moving average and 251% above its 52-week low. It is, however, 4% below its 52-week high of $505.48 per share.
The current short interest stands at a low 1.1%. Using forward estimates for next fiscal year’s results, NVDA is trading at an EV/Sales multiple of 14.5, an EV/EBIT multiple of 24.8, a P/E multiple of 28.0, and a FCF multiple of 30.3. Relative to the S&P 500, NVDA is trading at a premium across all these metrics. However, we would argue that NVDA is extremely cheap given its expected growth rate.
In terms of historical valuation, the stock is trading at a forward 12-month P/E of 31.0, compared to its 5-year mean of 39.4 and a 2-standard deviation range of 18.9 to 59.9. This suggests a moderate valuation relative to its historical range. When compared to its peer AMD (AMD), which is trading at a forward 12-month P/E of 32.6, NVDA appears competitively priced.
In our view, Nvidia’s strong revenue growth, expanding margins, and robust cash flows position it well for future growth. Although the company trades at a premium to the broader market, this is justified by its superior growth prospects. The company’s strong balance sheet and effective share repurchase strategy further enhance its investment proposition.
Conclusion
Nvidia’s FY Q3 earnings report and its outlook for the future demonstrate the company’s strong performance and robust health. The consistent growth across all business segments, impressive gross margins, and encouraging revenue guidance all point towards a company that is well-positioned to continue its growth trajectory. While challenges like geopolitical tensions and competition exist, Nvidia’s robust supply chain, platform approach, and pace of innovation create formidable barriers to entry and offer a roadmap for continued dominance in the market.
Looking at the financial and valuation aspects, Nvidia’s strong revenue growth, expanding margins, and robust cash flows are indicative of a promising future. The company’s effective share repurchase strategy and strong balance sheet further cement its investment proposition. Although Nvidia trades at a premium to the broader market, this is justified given its superior growth prospects. In conclusion, the future looks bright for Nvidia, and it remains an attractive proposition for investors seeking robust growth and strong future prospects.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of NVDA, AMD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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