Nvidia Q2 - smashing

On Wednesday night, Nvidia released their quarterly results - probably the most anticipated of any company on the S&P 500. There were videos on social media of people gathering at bars in Manhattan, but instead of watching their favourite sports team, they were watching Bloomberg to hear about how much the company had grown. The stock closed at $125.61 on Tuesday, but is down about 5% since then at $119.37, which is weird because the company smashed expectations.

For the quarter, Nvidia reported $30 billion in revenue, up 122% from a year earlier. The all-important data centre division grew by a staggering 155%! Overall growth was diluted by the now much smaller gaming division. Earnings per share came in at $0.64, an increase of 152%. Nvidia is sitting on $35 billion in cash, which it plans to mostly use on share buybacks, as the board authorised a $50 billion share repurchase program.

All this impressive growth means the market has very high expectations for Nvidia. The share currently trades at a forward PE of 42, meaning the market forecasts another doubling of profits in the next few years. The tech titans have announced tens of billions in capex spending, so Nvidia won't have a demand problem over the next two years. The real question is what will happen once their customers are done with this round of capex. Will Nvidia still have the demand to justify this market cap? Will the big tech companies refresh their hardware or will other companies take up the slack?

Nvidia argues that demand won't be an issue for years to come. New AI models will need 10-40 times the current computing power, which will require the use of chips not even created yet. If Nvidia still has a massive technological lead two years from now, the company will be the only game in town.

As shown in Paul's piece below, Nvidia has tremendous profit margins. Some argue that the margin is vulnerable to competition, but Nvidia disagrees. The company's message to customers is, 'save more by spending more on Nvidia chips'. Having the fastest and most energy-efficient chips around saves money. Nvidia also estimates that the return on investment of their most expensive chips is less than 1 year - for every $1 spent on an Nvidia chip today, it can generate $5 in revenue over the next four years.

Nvidia is a high-risk holding that is currently delivering the required level of top-line growth to justify its share price.