NVIDIA's financial report dazzles the market: has AI reached a tipping point?

Amidst the fast-paced evolution of global AI technologies permeating an array of sectors, NVIDIA has authored a new chapter in commercial history through its exceptional innovative prowess and market dominance within the realm of AI chips. In the fourth quarter of Fiscal Year 2024, NVIDIA impressively presented yet another remarkable financial report that has profoundly impacted the industry.

The quarterly financial report not only set a new all-time high in revenue, reaching an astonishing $22.1 billion, representing a year-on-year growth rate of 265%, but also achieved equally remarkable growth in net profits, surging by 769% to reach $12.285 billion. This outstanding performance far exceeded the expectations of Wall Street analysts, vividly demonstrating NVIDIA's robust strength and market leadership in global data centers, gaming, professional visualization, and generative AI sectors.

As the AI wave sweeps across the globe, from cloud computing to edge computing, and from large-scale cloud service providers to vertical industry applications, NVIDIA's data center products have secured vast market potential. The Data Center business segment has emerged as the pivotal engine driving the company's overall skyrocketing results, accounting for 83% of total revenue, with quarterly income hitting $18.4 billion, growing by 409% YoY, thereby solidifying NVIDIA's dominance in accelerated computing and AI infrastructure. Hence, the Data Center business is crucial in analyzing NVIDIA's financial performance.

Powered by its robust financials, NVIDIA continues to break its stock price records, with a year-to-date increase of 36.25%. At one point, the share price soared past $746.11. Following the release of this earnings report, the after-hours stock price briefly rose more than 10%. Moving forward, we will delve into the specific performances of each business segment and their underlying growth drivers, discussing the potential evolution of the company's stock price in the future.

Chart: Composition of NVIDIA's Revenue Streams

As NVIDIA's primary growth driver, the Data Center division set a new historical high in Q4 with $18.4 billion in revenue, representing a staggering 409% year-over-year increase. The impetus for this growth largely stems from the surging demand among cloud service providers, dedicated GPU vendors, enterprise software companies, and consumer internet firms for data processing, training, and inference capabilities. Moreover, applications within industry verticals such as automotive, financial services, and healthcare have also accelerated the expansion of the business.

Chart: Revenue for Data Center Business (in millions of US dollars)

NVIDIA's data center business encompasses multiple layers, with core products including but not limited to GPU chips designed based on architectures such as Ampere and Hopper, NVIDIA DGX systems, high-speed networking technologies and solutions, as well as a software ecosystem that includes CUDA programming environment, TensorRT inference optimization library, and RAPIDS data analytics libraries. NVIDIA's competitive advantage lies not only in hardware performance but also in its construction of a complete software-hardware ecosystem, enabling it to respond rapidly and provide customized services to meet the complex computing needs of businesses across various industries and scales.

Despite intensifying competition in AI chips, NVIDIA has maintained a dominant position in the AI field, with its market share reaching as high as 90% globally for artificial intelligence chips by the end of 2023, as per recent Gartner research data, leaving competitors like AMD and Intel far behind.

The question arises whether NVIDIA's data center business can sustain robust growth. Quoting Jensen Huang, founder and CEO of NVIDIA, "accelerated computing and generative AI have reached an inflection point."

1. Robust Demand

(1) With the acceleration of global digital transformation processes, downstream clients' demand for cloud computing, big data analytics, machine learning, and deep learning applications is surging, suggesting that NVIDIA's data center platforms are poised to be propelled by increasingly diversified demands.

(2) The world is transitioning from general-purpose computing to accelerated computing, and capital expenditures in data centers are increasingly focused on accelerated computing and generative AI. Currently, there is a trillion-dollar worth of installed data centers worldwide, distributed across cloud, enterprise, and other sectors. It is projected that investment in general-purpose servers will gradually decline while investment in AI servers will continue to grow, opening up vast market opportunities for NVIDIA's AI products, thereby driving sustained growth in their data center business.

(3) Considering enterprises' need for customized AI services, NVIDIA offers hardware-software services, including DGX Cloud, to create tailor-made artificial intelligence solutions for companies, deployed on NVIDIA DGX Cloud. The company has already initiated collaborations with firms such as SAP, ServiceNow, Dropbox, and Getty Images, adopting a subscription-based revenue model similar to that of cloud service providers.

(4) The NVIDIA AI Enterprise software stack service is anticipated to succeed, where the company manages, optimizes, patches, tunes, and installs foundational optimizations for all software stacks required for AI-accelerated computing. For each GPU, the company charges $4,500 annually.

(5) Sovereign AI infrastructure projects are underway in countries such as Japan, Canada, France, and many others, with expectations of a multi-billion dollar demand emerging over the next few years to serve sovereign nation AI infrastructure markets, predominantly built around NVIDIA's Grace Hopper product line for supercomputers.

(6) In the fourth quarter, the company's inventory levels remained low, indicating strong demand outpacing supply. The inventory turnover days for the quarter were 90.49, decreasing continuously compared to the previous quarter at 92.14.

Chart: Inventory Turnover Days

2. Supply Improvement

(1) NVIDIA's continuous technological innovation and new product launches also stimulate market demand. In response to competitive pressures, the H200 chip launched by NVIDIA last year is expected to hit the market in Q2 of 24. Leveraging its first-mover advantage, NVIDIA is poised to maintain its lead amidst ongoing technological iterations.

(2) The supply chain continues to improve, with projected demand outpacing supply throughout the year.

Looking ahead, given the long-term growth trends in the AI and high-performance computing markets, as well as NVIDIA's strengthening competitive barriers and planned introductions of new products, its data center business is expected to maintain a robust growth trajectory.

1. Gaming Business Exhibits Steady Growth, AI PCs Expected to Drive Performance Boost

The gaming business maintains a steady growth pattern. In the fourth quarter, gaming revenue reached $2.9 billion, up 56% compared to the same period last year, while annual gaming revenue grew by 15% to reach $10.4 billion. The introduction of new products such as the GeForce RTX 40 SUPER series GPUs, coupled with enhancements to large language model and generative AI capabilities for existing RTX AI PC users, are continually driving the expansion of the gaming business.

Chart: Gaming Business Revenue (in millions of US dollars)

The future development trend in the PC industry lies in AI PCs, with NVIDIA's powerful AI computing capabilities driven by its AI Tensor Cores and GPUs expected to continuously enhance PC product performance, potentially catalyzing a new wave of product upgrade demands. Currently, there are already over 100 million RTX PCs globally, along with more than 500 PC applications and games supporting AI, indicating NVIDIA's extensive user base and strong market penetration in both gaming and AI sectors. As NVIDIA continues to push next-generation generative AI applications into the PC market, it is anticipated that this will further drive long-term growth in its gaming and related businesses.

2. Significant Growth in Professional Visualization Business Reflects Robust Demand for RTX Ada Architecture GPUs

The professional visualization business experienced significant growth during the quarter, achieving revenues of $463 million, up 11% quarter-over-quarter and soaring by an impressive 105% year-over-year, which underscores the robust demand for RTX Ada architecture GPUs in the market. This growth is mainly attributed to the escalated demand from enterprises for enhanced computational power capable of handling generative AI workloads, particularly within industries such as manufacturing, automotive, and robotics technology.

Chart: Revenue for the Professional Visualization Business (in millions of US dollars)

With the ongoing expansion and technological iteration of generative AI applications, it is expected that the professional visualization business will continue to benefit from the refresh demand in the high-end workstation market, particularly among industries focused on innovative design and simulation work utilizing AI. As more enterprises and industries adopt NVIDIA's technology solutions, such as the Omniverse platform, this business segment is poised for a steady upward trend.

In addition, the automotive business recorded revenues of $281 million in this quarter, marking an 8% increase quarter-over-quarter but a 4% decrease year-over-year. Recently, several automotive clients have announced the adoption of NVIDIA's solutions in their new vehicle models, with Li Auto announcing the use of the next-generation centralized automotive computing platform, NVIDIA DRIVE Thor, while Great Wall Motors, ZEEKR, and Xiaomi Electric Vehicles, among others, have declared plans to deploy the NVIDIA DRIVE Orin platform. This suggests that the automotive business could see new growth drivers in the short term.

Chart: Automotive Business Revenues

The gross profit margin saw a remarkable increase. In this quarter, the company's GAAP gross margin expanded consistently to reach 76%, with the non-GAAP gross margin hitting an even higher level of 76.7%. This improvement was primarily attributed to the reduction in upstream component product costs and the company's success in cost control measures as well as its effective product pricing strategies. The high gross margins reflect the strong market competitiveness of NVIDIA's products and the efficacy of its supply chain management.

Chart: Profit Margin Overview

Net profits accelerated their release. This quarter, GAAP diluted earnings per share were $4.93, a 33% increase from the previous quarter and an astronomical rise of 765% compared to the same period last year; non-GAAP diluted earnings per share stood at $5.16, growing 28% over the preceding quarter and soaring by 486% year-over-year. For the entire fiscal year, both GAAP and non-GAAP diluted earnings per share showed substantial growth, indicating that NVIDIA has effectively improved its profitability while maintaining revenue growth.

Operating expenses grew in a controlled manner. Although GAAP and non-GAAP operating expenses increased by 6% and 9%, respectively, during this quarter, given the significant boost in operating revenues, the growth in operating expenditures did not undermine the company's overall profitability. The research and development expense ratio and sales, general, and administrative (SG&A) expense ratio declined notably. Over the course of the full year, the R&D expense ratio dropped from 27.2% to 14.2%, while the SG&A expense ratio fell from 9.1% to 4.4%. Furthermore, the extension of the depreciation period led to a further decrease in depreciation costs.

Chart: Total Operating Expenses (in millions of US dollars)

Free cash flow experienced robust growth. Alongside the company's rapid increase in net profits, its free cash flow multiplied from $3.75 billion in fiscal year 2023 to $26.947 billion in fiscal year 2024. By the end of fiscal year 2024, the company held cash and cash equivalents amounting to $25.984 billion. This strong cash reserve supports the company in providing returns to shareholders.

Chart: Free Cash Flow (in millions of US dollars)

In fiscal year 2024, the company has repurchased $9.7 billion worth of shares, with approximately $22.5 billion remaining in its buyback authorization, and its current cash reserves are more than sufficient to support large-scale share repurchases.

Overall, NVIDIA is demonstrating significant growth across various business segments, particularly in the data center business where it has achieved unprecedented scale and profitability due to the boom in artificial intelligence (AI), big data processing, and the emerging generative AI market. Leveraging its first-mover advantage in hardware, mature supply chain, and the established CUDA ecosystem, NVIDIA is expected to maintain a dominant market position amidst fierce competition.

1. Performance Aspects

The future growth of the company continues to be driven by the rapid expansion of its data center business. Capital expenditures on AI from cloud service providers and major consumer internet giants are poised to become the primary drivers of NVIDIA's performance. Bloomberg forecasts that the combined capital expenditure of Microsoft, Google, META, and Amazon in 2024 will grow by approximately 27%, which should explicitly bolster NVIDIA's data center revenue. The diversifying demands within the data center segment include but are not limited to upgrades from general-purpose computing to accelerated computing platforms, customized AI enterprise services, NVIDIA AI Enterprise software stack offerings, sovereign AI clouds, all of which contribute to growth in this area.

Moreover, advancements in virtual reality, augmented reality, gaming industry innovations, and professional design rendering technologies are expected to benefit NVIDIA's gaming and professional visualization businesses through increased demand for high-performance GPUs.

For Q1 FY25, NVIDIA's guidance remains strong, projecting mid-point revenues of $24 billion, with a +/- 2% range, representing about a 234% year-over-year increase. Profitability-wise, the non-GAAP gross margin midpoint is estimated at 77% with a +/- 0.5% range, setting a new high. Non-GAAP operating expenses for Q1 are forecasted at $2.5 billion, with non-GAAP operating income growing by 424% year-over-year. However, following the explosive growth phase in Q2 FY24, NVIDIA expects a noticeable slowdown in the rate of earnings growth in Q2 FY25. On a sequential basis, the predicted revenue growth rate for Q1 FY25 has retreated to a single-digit 9% increase.

Consequently, given the high base in FY24, NVIDIA's revenue growth in FY25 is projected at around 65%. In FY26 and FY27, the company's revenue growth rates are anticipated to moderate further to approximately 20%.

Key risks to the company's performance currently include the adverse impact of AI chip sales restrictions in the Chinese market, intensifying competition in the AI chip market, potential semiconductor cyclicality leading to weaker chip demand, and supply chain constraints.

2. Shareholder Returns

NVIDIA currently has a market capitalization of around $1.69 trillion, with roughly $22.5 billion left in its buyback authorization. If fully executed within a year, the buyback would yield a return of approximately 1.33%. Regarding dividends, the company's annualized dividend yield stands at about 0.02%. Thus, the overall shareholder return is around 1.35%.

Due to the rapid rise in the company's stock price, shareholder returns are relatively low. From NVIDIA's current financial performance and valuation standpoint, the company is experiencing a period of high growth, and its valuation enjoys broad market endorsement. Historically, however, when studying growth stocks, investors should focus not only on whether earnings are growing but also on whether they are growing at a high pace, as this growth rate directly impacts NVIDIA's valuation.

Therefore, investors should pay closer attention to the emergence of cutting-edge AI technologies and broader demand trends that could drive NVIDIA toward sustained double-digit growth in both revenue and profit margins. Should NVIDIA's growth momentum decelerate, this would negatively affect its valuation.

Thus, investing in NVIDIA is akin to participating in a global AI revolution. Rational investors in this space need to keep an eye on the overall growth rate of the industry, which will have a material impact on valuations.