NVIDIA Earnings Report Review: How Should Investors Respond to the Inevitable Slowdown in Growth Rate?

In the chessboard of investment, each release of financial reports is like a crucial move, and NVIDIA's latest financial report is undoubtedly a heavy cannon in this game. On August 28th Eastern Time, the world's leading GPU manufacturer NVIDIA, which is highly anticipated, released its financial report for the second quarter of the fiscal year 2025, showing a dazzling performance. However, the stock price fluctuated sharply after the performance, falling by more than 8% at one point.

Next, we will delve into the highlights and concerns of NVIDIA's second-quarter performance, as well as the expectations for future performance growth, and discuss investment strategies related to NVIDIA.

The company's revenue in the second quarter was $30.004 billion, a year-on-year increase of 122%, still dazzling. The data center business contributed 88% of the revenue, being the mainstay of the revenue. Therefore, the company's future performance is almost dependent on the growth of the data center business. Next, we will break down the performance of the specific businesses.

In the second quarter, data center revenue was $26.272 billion, a year-on-year increase of 154%, mainly due to the strong demand from downstream customers for NVIDIA Hopper, GPUs, and network platforms, exceeding the analysts' expected $25.1 billion. Among them, cloud service providers accounted for about 45% of the data center's revenue, and more than 50% came from consumer and internet companies.

At present, the main product of the company's data center business is the H200 chip based on the Hopper architecture, and the shipment is expected to continue to grow in the second half of the fiscal year 2025. The company expects to start mass production of Blackwell architecture chips in the fourth quarter, with revenue expected to reach tens of billions of dollars.

The explosive cycle of NVIDIA's revenue growth this round started from FY24Q2, so under the gradually increasing high base, the revenue growth rate in this quarter has obviously slowed down compared with the 427% of the previous quarter, and it is expected that subsequent quarters will inevitably face the pressure of slowing revenue growth rate.

At the same time, looking at the financial reports disclosed by NVIDIA's downstream customers, the huge AI capital expenditure has already had a negative impact on profits and cash flow, and the AI investment output ratio is low, so how long the orders from NVIDIA's downstream major customers can continue is also unknown.

In addition to the data center business, NVIDIA's other businesses are relatively small in scale and the growth is relatively stable, with no highlights. In the second quarter, the revenue from gaming and AI PC business increased by 16% year-on-year to $2.88 billion; the professional visualization business increased by 20% year-on-year to $454 million; the automotive and robotics business revenue increased by 37% year-on-year to $346 million.

Chart: NVIDIA's segmented business revenue (in millions of US dollars)

Source: Company announcement

In terms of gross margin, the company's gross margin in the second quarter was 75.7%, a decrease of 3.2 percentage points from the previous quarter's 78.9%, and the company's gross margin has basically peaked. NVIDIA's gross margin has achieved a continuous increase for two years, mainly due to the demand for products far exceeding supply, and the continuous increase in pricing has led to a continuous rise in gross margin. At present, as NVIDIA's chip supply gradually catches up, and the development of Blackwell chips increases some costs, the change in product mix is expected to make NVIDIA's gross margin further fall back to a reasonable range.

In terms of net profit, the company's adjusted net profit in the second quarter increased by 151.51% year-on-year to $16.952 billion, with a net profit margin of 56.43%, a sequential decline of about 2.08%, mainly due to the decline in gross margin, and the control of operating expenses is still excellent. The adjusted EPS in the second quarter increased by 152% year-on-year to $0.68, and the growth rate has slowed down significantly compared with the 486.36% of the previous quarter, mainly due to the sharp slowdown in revenue and the decline in gross margin.

Chart: NVIDIA's profit margin performance (%)

Data source: Company announcement

NVIDIA's high stock price is based on the expectation of high performance growth, and judging the future performance requires closely tracking the demand of downstream customers. From the current market situation, downstream customers have a low AI investment output ratio, and profits and cash flow are eroded, which has a negative impact on the visibility of future orders for NVIDIA. At the same time, due to the high performance base, the company's future revenue growth rate will inevitably face the problem of slowing down, and the decline in gross margin will lead to a significant slowdown in NVIDIA's future EPS.

In terms of valuation, due to the significant slowdown in the company's EPS growth rate in the next three years, the current valuation PE (TTM) of 59x and the PE (forward) of about 46x for the fiscal year 2025 are both high.

In terms of shareholder returns, the company has newly announced a repurchase scale of about $50 billion, but there is no expiration date. In the first half of 2025, it returned $15.4 billion to shareholders in the form of stock repurchase and cash dividends, and it is expected that the annual shareholder return rate will be 1%, which is relatively low in attractiveness.

Assuming that investors already hold NVIDIA's stocks, considering that it is difficult for NVIDIA's stock price to rise in the short term, they can consider selling high-priced call options to earn the premium. If exercised, they can also sell the stock at a satisfactory price. Considering the short-term risk of stock price adjustment, investors can also consider selling high and buying low, selling stocks first, and then buying them back at a lower stock price.

Assuming that investors do not hold NVIDIA's stocks, they can consider buying after the stock price adjusts, and below $100 is a relatively reasonable price. At the same time, they can adopt the strategy of selling put options, with an exercise price below $100, to earn the premium. If exercised, they can buy the stock at a lower cost. Since NVIDIA has high attention and the fundamentals are still strong, shorting NVIDIA alone is risky, and investors are advised to be cautious.

In this investment feast woven by numbers and strategies, NVIDIA's financial report is undoubtedly a rich main course. As investors, our task is to stay alert, capture every investment opportunity with wisdom