ii view: Nvidia sales boom as datacentre demand soars

First-quarter results to 27 April

• Revenue up 69% year-over-year to $44.1 billion
• Adjusted earnings up 27% to $0.76 per share
• Gross profit margin of 60.5%, down from 73% in previous fourth quarter
• Cash dividend unchanged from the previous quarter at $0.01 per share

Guidance:

• Expects second-quarter sales of around $45 billion 
• Expects Q2 gross profit margin of around 72%

Chief executive Jensen Huang said:

“Global demand for NVIDIA’s AI infrastructure is incredibly strong. AI inference token generation has surged tenfold in just one year, and as AI agents become mainstream, the demand for AI computing will accelerate. 

"Countries around the world are recognizing AI as essential infrastructure — just like electricity and the internet — and NVIDIA stands at the centre of this profound transformation.”

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ii round-up:

Booming demand for high performance computer chips used in datacentres to run AI software helped NVIDIA Corp (NASDAQ:NVDA) beat Wall Street sales forecasts. 

Datacentre related sales soared 73% from a year ago to $39.1 billion, driving first-quarter group revenue up 69% to $44.1 billion. Analysts had been forecasting sales of $43.3 billion for the three months to late April. 

Shares in the Nasdaq 100 semiconductor company climbed 6% in afterhours US trading having come into this latest news up by close to fifth in the last year. That’s ahead of a 13% gain for the Nasdaq 100 index itself. Datacentre provider and user of Nvidia chips, Microsoft Corp (NASDAQ:MSFT), is up 6% over that time. 

As well as hosting powerful software in datacentres, Nvidia chips are also used in other areas such as gaming consoles and autonomous, or self-driving cars.

Adjusted earnings for the quarter rose 27% from a year ago to $0.76 per share, although that was down 15% from the previous quarter’s $0.89 per share. Earnings were hit by costs taken in relation to surplus product and which came as a result of the US government’s decision to impose export limitations on chip’s sold to China. 

Nvidia forecasts sales for the current second quarter of $45 billion, a figure which management believes would have been about $8 billion higher if not for government-imposed export rules. Nvidia now believes that the $50 billion market in China for AI chips is effectively closed to US companies. 

Cost provisions made against failed H20 chip sales to China during the quarter drove Nvidia’s profit margin down to 60.5% from 73% the previous quarter. Now focused on sales globally and away from China, Nvidia expects its profit margin for the second quarter to recover to around 72%.  

Sales for gaming and PC related chips climbed 42% from a year ago to a record $3.8 billion. Automotive and robot related chip sales increased 72% from Q1 2024 to $567 million. 

Broker Morgan Stanley reiterated its ‘overweight’ stance on Nvidia shares post the results, highlighting Nvidia as its top semiconductor pick and raising its price target to $170 from $160 per share.  

ii view:

Started in 1993 and headquartered in Santa Clara, California, Nvidia today employs over 30,000 people. Nvidia credits its invention of the Graphics Processor Unit (GPU) in 1999 for fuelling the boom in the PC gaming market. Today, wide use of Nvidia’s computer chips and own supporting Cuda software in data centres globally, leaves it describing itself as the world leader in accelerated computing. 

For investors, export limitations imposed by the US government on chips to China are now crimping sales. Competition from Chinese high performance chips and companies such as Huawei is not to be overlooked. Power consumption concerns for the wider datacentre industry sit alongside climate change threats, while the worries of many governments regarding the potential power of AI and its impact on human society continue to require further contemplation.

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On the upside, demand for its datacentre related high performance chips continues to boom, with demand now supported by its next generation Blackwell chips. US government reversals, or U-turns on rules about exports to China, could yet be seen. The potential for AI innovation including expected self-driving vehicles and potentially ground breaking medicines, should not be ignored, while founder Jensen Huang with all his many years of experience, continues to lead the company.

In all, valuing Nvidia, given its status as the eminent play by investors on the future of AI, remains highly difficult and leaves the shares volatile. That said, sales momentum for its now core datacentre chips persists, with investors likely to remain optimistic on this innovative US tech titan over the long term. 

Positives: 

• Exposure to growth in data centres and AI
• Selling new generation Blackwell product

Negatives:

• Uncertain economic outlook
• US and China tensions

The average rating of stock market analysts:

Strong buy