Key Insights for Investors From Nvidia's Q2 Earnings Preview

Analysts Notebook joined discussion · Aug 26, 2024 18:32

$NVIDIA (NVDA.US)$ is set to report its second-quarter earnings for fiscal 2025 on Wednesday, Aug. 28. Analysts anticipate that both revenue and net income will more than double compared to the same period last year, with revenue projected at $28.64 billion and EPS at $0.6.

Nvidia, a leading supplier of AI chips and computer systems for data centers, has achieved four consecutive quarters of triple-digit percentage growth in sales and earnings year-over-year, driven by soaring demand for its AI processors. Investors will be particularly focused on the growth of Nvidia's data center segment and any updates regarding delays of the new Blackwell AI chip. Despite expected strong financial results, a sharp decline in earnings per share (EPS) is anticipated due to a recent 10-for-1 stock split.

Here Are Key Expectations to Watch:

Key Insights for Investors From Nvidia's Q2 Earnings Preview

What History Tells

Nvidia has experienced robust and profitable growth over the past five years. Revenues surged from $10.9 billion in fiscal 2020 to $60.9 billion in fiscal 2024, with $26 billion reported in the first quarter of fiscal 2025. Operating margins have also improved significantly, rising from 34% to 61%, and reaching 69% in the first quarter.

Key Revenue Segments:

• Data Center: This segment, which makes up a significant part of Nvidia's revenue, has grown at a 75% CAGR over five years, reaching $47.5 billion in fiscal 2024, with $22.6 billion in the first quarter.

• Gaming: Accounting for 17% of fiscal 2024 revenue, it grew at an 11% CAGR from $5.5 billion in fiscal 2020 to $10.4 billion in fiscal 2024.

• Professional Visualization: Representing 3% of 2024 revenues, this segment is poised for future growth, driven by Nvidia’s Omniverse platform for design, manufacturing, and digital content creation.

• Automotive: Although it constituted only 2% of revenue in fiscal 2024, this segment is seen as a future growth driver, with Nvidia's DRIVE platform and AI car computers like Drive Orin and Drive Thor gaining traction in the autonomous vehicle market.

Financial Health:

• Free Cash Flow: Nvidia's FCF grew from $4.3 billion in fiscal 2020 to $26.9 billion in fiscal 2024, with $14.9 billion in the first quarter.

• Shareholder Returns: In fiscal 2024, Nvidia spent $395 million on dividends and $9.5 billion on stock buybacks. CEO Jensen Huang, who owns over a 3% stake, sold some shares under a 10b5-1 trading plan, causing no concern for insider trading.

Nvidia's strong financial performance and strategic investments in AI, data centers, gaming, professional visualization, and automotive segments position it well for future growth.

Nvidia's Leading Customers Alleviate Capex Slowdown Concerns

Nvidia's major customers, including $Alphabet-A (GOOGL.US)$, $Microsoft (MSFT.US)$, $Meta Platforms (META.US)$, and $Amazon (AMZN.US)$, are collectively estimated to spend $200 billion on capital expenditures this year, alleviating concerns about a capex slowdown. These companies are pledging to increase their spending on AI-related infrastructure. Google’s parent, Alphabet, plans to maintain or exceed $12 billion in quarterly capex. Microsoft, Nvidia’s largest customer, will surpass its $55.7 billion capex from last fiscal year to meet AI and cloud demand. Meta anticipates significant capex growth in 2025 to support AI research and product development, which has already enhanced its advertising revenue. Amazon expects higher capital investments in the second half of the year to support AWS infrastructure, driven by strong demand for AI workloads. JPMorgan projects that the combined AI-focused capital spending by these companies will benefit Nvidia.

Blackwell's Revenue Potential to Offset Ramp Delays

Despite concerns about a potential delay in the rollout of Nvidia's next-generation Blackwell AI chips, due to the complexity of the CoWoS packaging technology used by TSMC, Nvidia remains optimistic. The company has begun sampling Blackwell chips and expects production to ramp up in the second half of the year. Partners like Foxconn and Asus have already showcased Blackwell-based servers. Investors are looking for a clearer timeline during Nvidia's upcoming earnings call.

Even if delays occur, they are not expected to significantly impact Nvidia's long-term prospects, as the company remains the leader in the data center GPU market. Revenue potential is strong, with AI server cabinets featuring Blackwell GPUs projected to be priced between $2 million and $3 million, potentially driving annual revenue to over $200 billion by 2025. Nvidia has reportedly increased its Blackwell orders with $Taiwan Semiconductor (TSM.US)$ by 25%, further boosting optimism.

Analysts' Take

• $Citigroup (C.US)$ reaffirmed its Buy rating on NVIDIA with a $150 price target, as the company prepares to unveil its Blackwell product line details at the upcoming Hot Chips conference. NVIDIA will discuss alternative Blackwell solutions like the B200A on customized MGX systems with NVL8, ahead of the mass production of the GB200 NVL72/362, which faces a three-month delay. Citi's analysis emphasizes that updates before NVIDIA's earnings call will be crucial for investor expectations regarding Blackwell's rollout.

• Evercore ISI analyst Mark Lipacis increased his price target for Nvidia stock from $145 to $150 on Thursday, while maintaining his outperform rating.

We continue to view Nvidia as our top Tectonic Shift in Computing pick, with a full-stack ecosystem that positions it to capture 70-80% of the value created in the parallel processing era," Lipacis said in a client note.

• Wedbush Securities analyst Daniel Ives heightened anticipation for Nvidia's earnings report, calling it the "most important tech earnings in years" and emphasizing Nvidia's central role in the AI revolution. He highlighted CEO Jensen Huang's unique insight into enterprise AI demand and predicted a strong performance. Additionally, Wedbush analyst Matt Bryson raised his price target for Nvidia stock from $120 to $138 while maintaining an outperform rating.

• Mark Shmulik of Bernstein, who covers major Nvidia customers such as Meta, Amazon, and Google, stated that the chip giant's results will be a crucial factor influencing the next steps for Big Tech.

Nvidia is a bellwether of the Magnificent Seven and AI trade," Shmulik explained. "If there is any softness, maybe rotation out of the Mag 7 picks up a little bit of steam, but listening to other tech earnings, core fundamentals keep delivering."

• KeyBanc analyst John Vinh noted that modest expectations for Blackwell shipments in FQ3 have been offset by increased bookings for Hopper GPUs. He expects Nvidia to report strong results driven by high demand for Hopper GPUs. Despite a recent 30% rally in Nvidia's stock, Vinh, who has a $180 price target, believes the stock remains attractive.

Being one of the best-positioned semiconductor companies, obviously levered to one of the strongest product cycles in AI right now, we think it's still attractively valued at these levels," Vinh said.

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Source: Investor's Business Daily, Forbs, Investing.com, Yahoo Finance

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