The lingering questions around Nvidia’s strong quarterly report

This story originally appeared in The Technology Letter and is republished here with permission.

Late Wednesday evening, some men were sitting around the Russian baths in Wall Street’s financial district talking about Nvidia.

I overheard one of the men impressing his friends with his investing acumen and his knowledge of artificial intelligence.

“My guy got me into it,” meaning, Nvidia stock, “at $40,” the man said. “Before the split?”, his friend asked, referring to this year’s ten-for-one split. “Pre-split,” the man said with emphasis. That would be a nearly 10,000% return over the past eight years. His friends were suitably impressed.

The man in the towel told his friends how he was using OpenAI’s ChatGPT to summarize medical records. “It’s incredible,” he said. “You dump these PDFs into ChatGPT, say, Give me a summary, and in 30 seconds it’s done, what would have taken 30 hours before.”

“It’s like having a personal assistant,” said one of the others. They all nodded gravely, seized by the import of this moment in the evolving nature of things.

I thought, listening to these gentlemen talk, it could have all been either an advertisement for Nvidia stock, or an ad for ChatGPT, or both. They seem to be feeding one another these days, the product appetite and the stock investing appetite.

As for Nvidia’s quarterly report, as I noted last night, it was another fine performance, the results and outlook topping expectations, even if the forecast came in slightly below the “whisper number” of the buy-side. The shares are down a percent and a half Thursday on understandable profit-taking, as I expected.

The key exchange on Wednesday’s conference call with CEO Jensen Huang was when Goldman Sachs’s Toshiya Hari asked about the report from The Information over the weekend stating Nvidia was struggling with how to cool its “Blackwell” chips, possibly leading to delays.

Without addressing the matter of cooling, Huang replied, “Blackwell is in great shape,” noting that the company had shipped 13,000 of the chips as “samples” to customers last quarter, up from zero the prior quarter. He expects to sell billions of dollars worth of the chips, and systems using them, this quarter.

The only sticking point is that gross profit margin is being depressed by Blackwell systems, which come with higher up-front costs to make.

Analyst Vivek Arya of Merrill Lynch was one of several who asked CFO Colette Kress when those gross profit margins will pop back into about the mid-70% area.

Kress replied margins might recover “in the second half of the year,” but indicated gross profit could come down as low as 71% on the way there.

The only other concern is whether there will be the infamous “air pocket” in the current quarter, with the existing AI chips, “Hopper,” declining as Blackwell sales ramp. Kress indicated that’s not the case. When asked by Bernstein’s Stacy Rasgon if Hopper sales will rise this quarter, she replied, “It’s possible, but we’ll just have to see.”

Huang acts as an aggressive salesman for the uses of AI. He told the analysts he “used the living daylights” out of Alphabet’s Google’s NotebookLM, where you can upload documents and have the program create a summary of the documents, suggest questions to ask about them, create an audio conversation about the documents, and, of course, engage in a chat about the documents. “I put every PDF, every archived paper into it just to listen to it as well as scanning through it,” he said, sounding like the guy at the Russian baths.

In commentary Wednesday morning, price targets were up at several shops, with the highest at the time of this writing being $220, from Rosenblatt’s uber-bull Hans Mosesmann, who writes that the whole issue of Blackwell having power problems now being shown to have been “overblown.”

Estimates are rising as well, with Merrill’s Arya raising his estimate for this quarter to $38.7 billion in revenue, ahead of management’s forecast for $37.5 billion, and raising his estimate for next year’s sales to $196.4 billion from what had been $194 billion.

The question now is valuation, and, by extension, capital returns. Arya thinks sales could well come in over $200 billion dollars next year, but, he notes that expectations are high.

“Bullish investor expectations have consistently been 10-20% above analyst consensus, restraining the element of surprise,” writes Arya. The rising complexity of Blackwell systems, which Huang emphasized—they now need elaborate cooling systems, rather than a traditional fan—also gives Arya pause.

By one measure, the stock valuation is high: eighteen and a half times next year’s expected revenue. Even if Arya is right and the estimate for next year goes above $200 billion, the stock is substantially pricier than it was a year ago.

Arya, however, comes down on the side of the price-to-earnings ratio, which he sees as reasonable, noting the stock is the “Fastest growing megacap, with stock trading at 32x CY25 PE, only 0.6x its 50%+ EPS growth even as other large-cap ‘Mag-7’ peers are trading at 2.2x PEG.”

That’s fair, and, I’d note, capital returns are decent, though one could argue that they could be higher as a payout ratio, meaning, how much of cash is being returned.

Nvidia paid out $26 billion dollars in the form of stock buybacks and dividends in the past nine months. That’s 58% of the $45 billion dollars of free cash flow generated in that time. That’s not bad, though it could be higher.

With the stock at $144, the quarterly dividend of one single penny per share is tiny. Even a small move up in that payout could bring in a lot more income investors.

With today’s dip, Nvidia is up 190% this year. Nvidia is one of the TL20 stocks worth considering, and is up over 800% since it was put in the inaugural group in July of 2022.

This story originally appeared in The Technology Letter and is republished here with permission.

https://www.fastcompany.com/91234807/nvidia-blackwell-quarterly-report?partner=rss&utm_source=rss&utm_medium=feed&utm_campaign=rss+fastcompany&utm_content=rss