Nvidia, Does The Profit Party Continue?

There was a lot depending on them, but they came through. Although I have the feeling that markets are less dependent on Nvidia than they were 1 or 2 quarters ago, Nvidia is still the leader of the AI hype train and therefore incredibly important for its continuation. So let’s not waste any time and dive straight into the earnings!

- Starting off with the expectations
We can’t talk about the earnings without first talking about what was expected from Nvidia going into the earnings release. By saying that, analysts expected revenues to come in at $24.59 billion, creating EPS of $5.58. Analysts expected guidance to come in at $26.84 billion.

- So what were the actual numbers?
Nvidia reported $26.04 billion of revenues, which resulted in $6.12 in EPS. Doing some calculations means that they did bring slightly less to the bottom line than expected in a percentage basis, but absolute numbers beat expectations by a very large margin. The Q2 guidance came in at a revenue of $28 billion, plus or minus 2%. Again, well above the consensus estimate

- So was it all good?
Well, it was almost all good. But the negatives were so small that it may not really be worth mentioning.

- What wasn’t as good then?
I don’t think it’s “not good”, but what stood out to me as I was digging for negatives is that Nvidia expects full-year gross margin to be in the mid-70% range. This is of course extremely high, but in the last quarter, it was 78.9%, that’s a high 70% gross margin. That means that they don’t think they can fully sustain the current gross margin. Now I understand gross margin is not operational, or even net margin, but like I said, I was digging for negatives. Another thing is that Professional Visualization was down QoQ, just like OEM & Other.

- Was there anything else?
There was. There were two things mainly. But one was a result of the other. Allow me to quickly explain. Nvidia announced they will do a 10-for-1 stock split, effective June 10th. As a result, Nvidia had to increase its dividend by 150%. This however is less impressive than it sounds because during the entire run-up, dividends were never increased while billions were spend on buying back stock. I’m not arguing that move as I believe it’s a better use of capital than pushing all that into dividends, but now increasing it is therefor not so special. It’s also good to know why they increase it, and that is quite simply because they have to. Right now Nvidia pays a 16-cent dividend, or 4 cents per quarter, making it almost a dividend investment. I’m kidding, but they must have a dividend that is at least 1 cents per quarter, so that would mean 10 cent per quarter pre-split. It’s not like Nvidia wants to increase the dividend, they simply have to.

- So the conclusion is?
Nvidia put in another great quarter, but personally, I’m staying cautious as I’m till not convinced this level of growth and profits is sustainable. That doesn’t mean I don’t think the current level of revenues is sustainable, but what I do think is that competitors will start catching up at some point. However big of a lead Nvidia may have, it has always happened, so thinking that this time will be different might be a bit of a wrong stance. This is also the reason for not believing the profits and margins are sustainable because at some point, when competition starts catching up, Nvidia will have to compete on price again. Having said so, Nvidia does say that they saw increasing demand throughout the quarter so as long as the party keeps going, markets can happily depend on Nvidia and push the company towards the biggest company is the world. I’m not arguing anything of the move, and with the current growth also don’t think it’s overvalued, I just don’t believe it’s sustainable as much as some people make it sound.

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