Nvidia Results Ahead

May 20, 2024
Nvidia faces tough competition, law of large numbers as it prepares to report Wednesday.

Chipmaker Nvidia (NVDA) puts the final bow on mega-cap earnings Wednesday, but the die for its results may have been cast nearly a month ago. 

During Microsoft's (MSFT) quarterly earnings call back on April 25, Chief Financial Officer Amy Hood was asked about the impact of AI on the accelerating growth of Azure, Microsoft's cloud computing service. 

"Right this minute, we do have demand that exceeds our supply by a bit," Hood told analysts, according to a transcript of the call. 

Hood's comment, along with earnings from Meta Platforms (META) the day before, provided solid evidence of other mega caps stampeding to keep up with soaring demand for AI and the chips that power it. For now, Nvidia is the industry leader in the graphics processing units (GPU) that companies like Microsoft and Meta covet. 

Nvidia's dominance might not last forever. Its closest competitor, Advanced Micro Devices (AMD), reported solid quarterly data center results driven partly by its AI chips. Also, the industry could face an outside threat from tech companies, including Apple (AAPL) and Alphabet (GOOGL), if they build their own chips. Earlier this month, The Wall Street Journal reported that Apple is developing AI chips for data centers. 

In addition, Nvidia is beginning to lap some of the parabolic growth it enjoyed beginning with Q1 earnings a year ago when the AI opportunity began showing up in its revenue. That could make it a lot tougher to impress with revenue growth in coming quarters.  

Nvidia, which is expected to report fiscal Q1 2025 earnings on Wednesday May 22 after Wall Street's close, saw its revenue triple from a year ago in the most recent earnings report. Even with AI chip demand running hot and Nvidia far ahead of the pack, the law of large numbers works against this kind of growth being sustained for long. Investors might have to begin paring their expectations a bit. 

Mixed quarter to date for semis

Semiconductor earnings to date this quarter also painted a mixed picture for the industry. AI chip demand remains mammoth thanks to demand from the Microsofts and Metas of the world as they plug AI into their cloud computing products. Demand for traditional chips used in everything from cars to personal computers to video games to phones varies, and that showed up not only in chipmaker earnings but also in outlooks from companies like Taiwan Semiconductor (TSM) and ASML (ASML) that provide the underpinning technology for global chip production.  

Shares of Taiwan Semiconductor and ASML both retreated following their earnings earlier this quarter. ASML issued quarterly guidance below analysts' expectations (full-year guidance was maintained) and missed Wall Street's revenue forecasts after orders fell more than expected. TSM sounded cautious in its remarks about the industry, though guidance was modestly above consensus estimates. This led to concern that semiconductor demand isn't tracking as strongly as analysts and investors had expected. 

Checking individual chip makers, Intel (INTC) has had two disappointing quarters in a row. AMD shares declined despite its earnings and guidance meeting expectations. On a positive note, Texas Instruments (TXN) shares rallied after earnings when the company suggested some industrial customers are nearing the end of an inventory correction cycle, research firm Briefing.com noted, and Qualcomm (QCOM)—a large supplier of cellphone chips, including technology used by Apple—climbed in early May on solid quarterly results. 

Sector strength levels off—finally

Industry earnings came after massive Q1 gains for the Philadelphia Semiconductor Index (SOX) following an epic rise that began when AI technology headlines first hit in late 2022. This came despite an industry-wide supply overhang, but now, the SOX looks a little hungover. It fell 3% in April, reflecting weakness not only in chips but throughout the tech sector and in the broader market.  

Some of the April weakness for Nvidia and other chip stocks could represent simple investor profit-taking after the long rally. In addition, the "higher for longer" U.S. interest rate climate doesn't help growth stocks like chipmakers because it tends to slow overall economic growth that powers the demand for their products. If you sell chips for automobiles and people face daunting car payments due to high rates, the resulting drop in car sales can hurt companies that supply parts, including chips, for those cars. 

That's perhaps less of a concern for Nvidia amid the mega-cap focus on AI use, but Nvidia's not completely immune to those trends either. For instance, it reported a 4% decline in revenue from its automotive chip segment in the most recent quarter. 

Other metrics the last time out, however, were generally impressive. Fiscal Q4 revenue rose 265% from a year earlier to $22.1 billion, above analysts' expectations for around $20.6 billion. Much of that growth reflected AI sales, especially chips used for AI servers.  

Expectations for Nvidia's fiscal Q1

Nvidia forecasted fiscal Q1 revenue of $24 billion, which would again represent massive growth from the same quarter a year earlier when revenue barely topped $7 billion. It was last year's fiscal Q1 earnings report that caused the stock to take off when Nvidia guided for $11 billion in Q2 2023 revenue, far above and beyond any past results and what analysts and investors had expected. That was when the AI opportunity suddenly became clear, sending Nvidia shares from around $300 to above $400 in a matter of days. 

Shares didn't really level off until the last month after crossing the $900 mark in early March. They dropped in April but climbed back above $900 last week. For Nvidia's fiscal Q1, analysts late last week expected earnings per share of $5.57, up from $0.98 a year earlier, according to consensus from Yahoo Finance. The analysts see revenue at $24.57 billion. 

Nvidia has a recent history of easily beating revenue expectations, but that establishes a high bar to keep investors impressed. Many analysts still have a price target above $1,000, and to get there, Nvidia might have to keep exceeding hopes not only in revenue but also in guidance.  

Over the last three quarters, the company's forward revenue guidance has exceeded analysts' estimates by roughly $2 billion. This may help give us a sense of what investors may be expecting when the company provides Q1 guidance. The question is whether AI demand from Microsoft, Meta, and others remains robust enough to give Nvidia the confidence to overachieve on its outlook. 

Nvidia has said that what it calls "surging demand" for AI is related to three elements. First is what it calls "deep recommender systems" essential to recommending the right content, item, or product to someone using a device or interacting with a computer using just their voice. The second has to do with large language models that have the ability to learn representations of all kinds of languages. This can go beyond human language to the language of biology or chemistry, to name a couple. Similarly, the human genome is also an area of focus. 

The third element is generative AI, which goes beyond perception to help create something or generate product. This could mean generating videos or text to enhance performance, reduce costs, or improve productivity. Listen for any updates on these separate AI facets during the call. 

China developments, split talk

While AI demand appears robust, Nvidia has warned about headwinds from China.  

Export restrictions related to tension between the United States and China over technology continue to weigh on Nvidia and the rest of the tech sector. Any word on progress of chip technology engineered for the China market would probably get Wall Street's attention when Nvidia reports. According to Reuters, Nvidia began taking pre-orders for a chip made for China earlier this year. 

Another thing to watch for is any announcement of new partnerships on AI initiatives that could potentially move the needle for Nvidia shares. Traditional gaming and automotive businesses also come under a microscope when Nvidia reports, especially following the cautious guidance for traditional (non-AI) chip demand from around the industry. 

Also listen for any updates on the initial progress for Nvidia's Blackwell platform, which launched in mid-March. Nvidia said the product will enable "organizations everywhere to build and run real-time generative AI on trillion-parameter large language models at up to 25 times less cost and energy consumption than its predecessor." 

It's a long shot, but any talk by Nvidia about a possible share split might also generate excitement around earnings. The company last split its shares back in 2021when they traded at $744 per share.  

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