Why is nvidia selling in advance? Is there a possibility of a turnaround? Blackwell, an AI semiconductor, is expected to perform well! [Summary of Financial Results]

(For information on sector rotation, please refer to the report below. Dated August 20th)
The following three factors are believed to have led to profit-taking selling.
1) Falling short of explosive growth expectations.
2Q results exceeded market expectations. 3Q revenue guidance of 32.5 billion dollars ±2%, surpassing the market average of 31.9 billion dollars, but did not reach the bullish estimate of 37.9 billion dollars.

2) Evaluation of the impact of Blackwell delays.
Demand for AI semiconductor Hopper (current product) and Blackwell (next-generation product) have been strong. However, the company acknowledged delays by changing the Blackwell GPU mask to improve yield. The company indicated that Blackwell's revenue is expected to reach several billion dollars in 4Q, but investors seem to be confused about the impact of the delay and how to evaluate the scale of several billion dollars. After the earnings announcement, analysts revised their performance outlook upward.

From the above, profit-taking sales may continue for a while. On the other hand, what is more important in the medium to long term is the fundamental aspects of Nvidia and the business environment surrounding AI semiconductors. In the following section, we will confirm the details of Nvidia's earnings and also check the stock price valuation.

Earnings Highlights
◇2Q FY25.1 actual results: Above expectations
In 2Q, while data centers worldwide were in full throttle to modernize the entire computing stack with accelerated computing and AI generation, Nvidia achieved record-breaking revenue (company data).
- Revenue: $30.04 billion, a 122% increase YoY, a 15% increase QoQ, the market expectation was $28.86 billion.
　Datacenter division revenue: $26.27 billion, up 154% from the same period last year, up 16% from 1Q, market expectations are $25.08 billion
- Adjusted EPS (earnings per share): $0.68, up 152% from the same period last year, market expectations are $0.65
◇3Q (August-October period) guidance: better than expected
- Revenue: $32.5 billion±2%, market expectations are $31.85 billion
(Note: all market forecasts are based on Bloomberg calculations)

The expected gross margin for 2Q exceeds expectations and is expected to maintain around 70% in the future.
As NVIDIA CEO Jensen Huang mentioned in this earnings call, 'NVIDIA's GPU is the only accelerator in the world that can process and accelerate data.' Due to its exclusive share in the AI semiconductor market, NVIDIA maintains high profit margins and revenue growth while introducing new products.

While there are some suggestions that the gross margin peak is reaching its peak, the slight decrease in gross margin in 2Q compared to 1Q was within expectations. Above all, NVIDIA has achieved profit margins that exceed market expectations while introducing new products (which usually leads to increased costs), and is expected to maintain a gross margin around 70% in the future.

Trends in demand and supply for Hopper and Blackwell
What is important for NVIDIA's performance is the demand and supply trends for the current product, Hopper, and the next-generation product, Blackwell. In this earnings call, it was indicated that the demand and supply for both products are strong. The main comments from CEO Huang during the earnings call are as follows:
-It is expected that Hopper shipments will expand in fiscal 25.1. People are desperate to migrate the existing $1 trillion worth of infrastructure to the cutting-edge Hopper's latest infrastructure.
-The demand for Hopper remains strong, and expectations for Blackwell are unbelievably high. Customers continue to accelerate their purchases of Hopper architecture while preparing for the adoption of Blackwell.
-In the second quarter, samples of Blackwell were shipped to partners and customers. To improve production yield (due to delays), the Blackwell GPU mask was changed. It is expected that the increase in production of Blackwell will begin in the fourth quarter, and production expansion will continue until the next fiscal year (until 26.1 period).
-It is expected that the revenue from Blackwell will reach several billion dollars in the fourth quarter.
-The demand for Blackwell is far exceeding supply, and this trend is expected to continue next year.

Qitabankuai Fang CEO's comments
-Datacenters around the world are fully committed to modernizing the entire computing stack with accelerated computing and AI. The demand for Hopper remains high, and the expectations for Blackwell are incredibly elevated.

-We are at the beginning of a journey to modernize generic computing into high-speed computing, with a value of 1 trillion dollars worth of data centers. Blackwell is an AI infrastructure platform, not just a GPU. As partners and customers are increasingly exposed to the details of the Blackwell sample system, the leadership of Blackwell will become apparent.

-And now, the wave of enterprise AI is beginning. We are ready to support the business transformation of companies. The NVIDIA AI Enterprise platform consists of Nemo, NIMS, NIM Agent Blueprint, and AI Foundry, which world-leading IT companies in our ecosystem are using to help customer companies customize AI models and build custom AI applications.

-As the installation base of CUDA compatible GPUs increases from millions to tens of millions, NVIDIA's software TAM becomes important. NVIDIA's software is expected to achieve an annual revenue run rate of 2 billion dollars.

Future Performance Outlook
After the earnings announcement, analysts have upwardly revised NVIDIA's performance outlook for the next few quarters. This is believed to reflect stronger demand for AI semiconductors Hopper and Blackwell than previously expected. However, the increase in target share price was limited. Prior to the earnings announcement, many analysts had already raised their target share prices.

Confirmation of the earnings of major clients
● Major clients
In this earnings call, NVIDIA revealed that cloud service providers account for about 45% of datacenter revenue, with the remaining 50% or more coming from consumers, internet, and enterprise companies.

Except for Supermicro, the Big Tech 4 companies operate large-scale data centers and drive investment in AI equipment. Therefore, the investment plans of the Big Tech 4 companies are important for Nvidia's performance estimates. However, there are currently no analysts pointing out the impact of Supermicro's deferred filing of the annual report (Form 10K), but it is necessary to pay attention to future trends.

● Implications of the earnings of the big tech four companies
◇ AI investment
-All four big tech companies have announced plans to expand investment in AI during this earnings season. This is a positive development for Nvidia.
-For example, Microsoft, Nvidia's largest customer, stated that they plan to expand infrastructure investment in order to meet the growing demand for AI and cloud products. They expect the investment amount in 2025 to exceed that of 2024. Meta Platforms, the second-largest customer, has raised the lower limit of their planned investment for the full year of 2024 from $35 billion-$40 billion to $37 billion-$40 billion. They also anticipate a significant increase in investment in 2025 to support AI research and product development.

◇ Monetization of AI services
-Regarding the monetization of AI-related services, this earnings season has seen two companies exceeding expectations and two companies falling short, resulting in slightly weaker results compared to the previous season (three companies exceeding expectations and one falling short). This has also raised concerns about negative implications for Nvidia. If monetization falls below expectations, there is a possibility that big tech companies will reduce their investment budgets.

From a comprehensive perspective, the AI race for big tech companies is a medium to long-term battle, and what is important to win in the competition is not being stingy with investments in AI in the early stages. What has become clear during this earnings season is that big tech's AI investments are expected to continue at least until next year.

Stock valuation
The current forecast PE (price-to-earnings ratio) isapproximately 37.7 timescompared to the average of the past five years,40.5 times