Nvidia Quarterly Revenue up 265% in a Year! Where Does the Stock Go From Here?

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Market News and Short-Term Predictions

Soon the stock market will have only one stock, and that stock is Nvidia. Let's talk about their insane earnings results.

High-Level Earnings Results:

• Revenue +22% Q/Q to $22.1B ($1.6B beat).

• Full-year revenue rose 217% to a record $47.5 billion.

• Data center revenue surged by 409% from a year ago, up 27% sequentially.

• Gross margin 76% (+2pp Q/Q). 

• Operating margin 62% (+4pp Q/Q). 

• Non-GAAP EPS $5.16 ($0.52 beat).  

• Generated $11.2B in FCF for the quarter

• Q1 FY25 guidance: Revenue ~$24.0B ($2.0B beat).

Overall they met the hype and delivered on top of those high expectations with a beat and raise across the board.

The graphic below shows a nice breakdown of the earnings. I thought it was interesting that the data center now represents 83% of revenue while it only represented 60% just a year ago.

It's also insane that the company holds a 56% net profit margin! 

Alright, I'll stop talking about how amazing the results are and look to the future and how I see it playing out.

While there may be market participants screaming that this $1.9 trillion company is overvalued or in a mega bubble, I would have to disagree. You have rapid revenue expansion and with the wide application of AI across essentially every industry in the world, the total addressable market is massive.

Speaking of revenue expansion, they expected around $24B in the next quarter which was on the higher end of what analysts had thought previous to the call.

Now will the 200% YoY growth continue...no. Law of large numbers.

But in their fiscal year 2025, they will most likely break the $100B/year mark and have the potential to push it to $150B. With margins at 56%, that would be income of anywhere from $56B-$84B compared to $30B in fiscal year 2024.

That puts their forward P/E around 23-34, which is pretty reasonable. Now it's harder to predict what will happen in a few years and the biggest risk I see is that the companies splurging on infrastructure spending around AI cool off their capex spending as they focus on building out the applications of AI instead of continually needing more hardware.

This means there could be a slowdown in a few years based on the cyclicality of the industry. 

Of course that is usually the case, but with AI (the unknown frontier) who knows how fast it develops? 

It is the one sector I look at and have a hard to quantifying how fast it will grow. So even though I think there may be a slowdown in a few years, I don't think we see a crash. And then there is always the outside chance that AI explodes and people will look back at NVDA trading at a $1.9 trillion market cap as a steal.

Shorter term (over the next 12 months), I think NVDA grinds higher but I don't think it will 2x to $4 trillion. I think NVDA still outperform the general market over the next 12 months.

That's why I plan on holding my NVDA position which is around 3% of the portfolio. Also have to humble brag about my cost basis around $80. Granted I haven't made as much as I could have because I have trimmed it over the years haha

Switching over to the general market sentiment, it felt like the entire stock market breathed a sigh of relief when they saw NVDA earnings. You had a broad market rally of 2% on the S&P 500 and sympathy rallies from other AI plays (META/TSM/AMD/SMCI). 

I do believe this earnings beat will allow the market to feel comfortable buying any 5% dip that occurs over this next quarter with confidence (outside of a black swan event).

So for now if you own AI stocks, cheers! If you are feeling the FOMO, that is probably a sign you shouldn't sell all your T-Bills and go all in on OTM $1300 call options for NVDA that expire a couple of months out :)

Lessons to Be Learned

In the spirit of going over earnings, let's talk about the difference between gross margin and net profit margin. I saw a post on wallstreetbets talking about how Rivian would have a positive gross margin and they thought that was net income lol

Gross Margin:

• Gross margin, also known as gross profit margin, is a measure of a company's manufacturing or production process efficiency. It is calculated by subtracting the cost of goods sold (COGS) from total revenue and then dividing that number by total revenue. 

The formula: (Total Revenue−COGS)/Total Revenue

• This margin reflects the percentage of revenue that exceeds the cost of goods sold, which is the direct costs attributable to the production of the goods sold by a company. It does not include indirect expenses such as sales force costs or operations costs.

• Gross margin is useful for comparing the company's core manufacturing or production efficiencies over time or against competitors. It doesn't account for other operating expenses, interest, or taxes.

Net Income Margin:

• Net income margin, or net profit margin, measures how much net income (or profit) is generated as a percentage of revenue. It takes into account all expenses, not just COGS. 

The formula: Net Income/Total Revenue

• This margin indicates the overall profitability of a company after all expenses have been deducted from revenues, including COGS, operating expenses, interest, taxes, and other income or expenses.

• Net income margin is a critical indicator of the company's overall financial health, efficiency, and ability to manage its expenses in relation to its total revenue. It provides a more comprehensive view of the company's profitability than gross margin.

Key Differences:

• Scope of Costs Included: Gross margin only considers the cost of goods sold, which are the direct costs related to the production of goods. In contrast, net income margin considers all expenses, including operating expenses, interest, taxes, and any other income or losses.

I care more about net profit margin because you can have a company that has decent gross margins but still lose money overall. The good thing about looking at gross margin is it tells you how much room there is to make profits. It of course is hard to turn a net profit if the gross margins are low to begin with.

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