NVIDIA sells first, what are the reasons? Is there a possibility of reversal? AI semiconductor Blackwell has a positive outlook! [Summary of earnings]

(For information on sector rotation, please refer to the report below. August 20th)
The following three factors are believed to have led to profit-taking selling.
1) Falling short of explosive growth expectations
Q2 results exceeded market expectations. 3Q revenue guidance of 32.5 billion dollars ± 2%, surpassed the market average estimate of 31.9 billion dollars, but did not reach the bullish estimate of 37.9 billion dollars.

2) Evaluation of the impact of Blackwell delay
Demand for AI semiconductor Hopper (current product) and Blackwell (next generation product) was strong. However, the company admitted delays by changing Blackwell GPU masks to improve yield. Blackwell's revenue is expected to reach hundreds of millions of dollars in 4Q, but investors seem puzzled about how to evaluate the impact of the delay and the scale of 'hundreds of millions of dollars'. After the earnings announcement, analysts revised their performance outlook upwards.

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 fundamentals of NVIDIA and the business environment surrounding AI semiconductors. Below, we will confirm the details from NVIDIA's earnings and also check the stock price valuation.

Earnings Highlights
◇ Q2 (May-July) FY25 Actual Results: Above Expectations
Q2 achieved record revenue while the world's data centers were in full throttle to modernize the entire computing stack with accelerated computing and AI generation (company data).
Revenue: $30.04 billion, a 122% increase from the same period last year, a 15% increase from Q1, market forecast was $28.86 billion
　Datacenter division revenue: $26.27 billion, a 154% increase compared to the same period last year, a 16% increase from 1Q, and market expectations are $25.08 billion
Adjusted EPS (earnings per share): $0.68, a 152% increase compared to the same period last year, and market expectations are $0.65
◇3Q (October-December) guidance: expected to exceed expectations
Revenue: $32.5 billion ±2%, and market expectations are $31.85 billion
(Note: All market estimates are compiled by Bloomberg.)

The gross margin for Q2 is expected to exceed expectations and is expected to maintain around 70% in the future.
As NVIDIA's CEO Jensen Huang mentioned in this earnings call, "NVIDIA's GPU is the only accelerator on Earth that processes data and speeds it up." Due to its exclusive share in the AI semiconductor market, NVIDIA maintains high profit margins and revenue growth while introducing new products.

Although some have pointed out that the gross margin may have peaked, the slight decrease in gross margin in Q2 compared to Q1 was within expectations. More importantly, NVIDIA has achieved profit margins that exceed market estimates while introducing new products (which usually leads to increased costs), and is expected to maintain a gross margin of around 70% in the future.

Trends in demand and supply for Hopper and Blackwell
For NVIDIA's performance, it is important to monitor the demand and supply trends for its current product, Hopper, and the next-generation product, Blackwell. In this earnings call, it was demonstrated that the demand and supply for both products are robust. The main comments from CEO Huang during the earnings call are as follows:
●Shipments of Hopper are expected to expand in the second half of the 25.1 fiscal year. People are desperate to migrate existing infrastructure worth trillions of dollars to the state-of-the-art infrastructure of the latest Hopper.
●Hopper's demand remains strong, with unbelievably high expectations for Blackwell. Customers continue to accelerate purchases of Hopper architecture while preparing for Blackwell adoption.
●Samples of Blackwell will be shipped to partners and customers in 2Q. To improve production yield (reason for delays), the Blackwell GPU mask was modified. There are expectations for increased production of Blackwell in 4Q, with production expansion scheduled to continue until the next fiscal year (until 26.1 period).
●Expected Blackwell revenue to reach tens of billions of dollars in 4Q.
●Blackwell's demand far exceeds supply, and this trend is expected to continue into the next year.

Other comments from CEO Huan.
●Data centers around the world are fully committed to updating the entire computing stack through accelerated computing and AI generation. The demand for Hopper remains high, and expectations for Blackwell are unbelievably high.

●We are at the beginning of a journey to modernize the $1 trillion data center from general-purpose computing to high-speed computing. Blackwell is an AI infrastructure platform, not just a GPU. As we reveal more details about the Blackwell sample system to our partners and customers, Blackwell's leadership will become evident.

●And now, the wave of enterprise AI is beginning. We are ready to support business transformation in enterprises. The NVIDIA AI Enterprise platform consists of Nemo, NIMS, NIM Agent Blueprint, and AI Foundry, and top IT companies in our ecosystem are helping customer companies customize their AI models and build tailor-made 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 reach an annual revenue run rate of $2 billion.

Future Performance Outlook
Following the earnings release, analysts have revised their outlook for NVIDIA's performance in the next several quarters upwards. This is believed to reflect stronger demand for AI semiconductors Hopper and Blackwell than previously expected. However, the increase in target stock price was limited. Many analysts had already raised their target stock prices before the earnings announcement.

Checking the earnings reports of major customers
● Major Customers
In this earnings call, NVIDIA revealed that cloud service providers account for approximately 45% of datacenter revenue, with over 50% coming from consumers, internet, and enterprise companies.

Excluding Super Micro, the big tech four companies have been deploying large-scale datacenters and driving investment in AI-related infrastructure. Therefore, the investment plans of the big tech four companies are important for nvidia's earnings outlook.It should be noted that the investment plans of the big tech four companies are crucial for the performance outlook of nvidia.Moreover, at present, there are hardly any analysts pointing out the impact of Super Micro's 24th fiscal year annual report (Form 10K) submission delay, but it will be necessary to be mindful of the future trends.

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

◇Monetizing AI services
●Regarding the monetization of AI-related services, this earnings season has seen two companies exceed expectations and two companies fall short, resulting in slightly weaker results compared to the previous season (three companies exceed expectations and one company fall short). There are also concerns that this could be a negative for Nvidia. The concern arises from the possibility that if monetization falls below expectations, the big tech companies may reduce their budget for facility investment.

●However, for big tech companies, what is more important than current profitability is customer reactions to AI services and the outlook for future profitability. Microsoft stated that "In the case of Azure (cloud), our market share expansion accelerated this year through the promotion of AI," and "The number of Azure AI customers has exceeded 0.06 million companies, an increase of about 60% compared to the previous year." Meta Platforms also demonstrated promising results in the adoption of AI services.

From a comprehensive perspective, the AI race for big tech companies is a medium- to long-term endeavor, and what is important to win in the competition is not hesitating to invest in AI at the initial stage. What has become clear in this earnings season is that big tech's investment in AI is expected to continue at least until next year.

Stock price valuation
The estimated PER (price-earnings ratio) at the moment isapproximately 37.7 timescompared to the average of the past 5 years,which is 40.5 timesIt is not overvalued. Considering the adjusted EPS growth rates for this fiscal year and next year (127% and 40% respectively), there is no sense of overvaluation.