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Nvidia (NVDA -2.46%) posted its latest earnings report on Nov. 21. For the third quarter of fiscal 2024, which ended on Oct. 29, the chipmaker’s revenue surged 206% year over year to $18.12 billion and exceeded analysts’ expectations by $2.01 billion. Its adjusted EPS skyrocketed 593% to $4.02 and cleared the consensus forecast by $0.63 per share.
Nvidia’s growth rates were astounding, but its stock price dipped after the report. Is Nvidia running out of steam after rallying more than 240% this year? Or does its post-earnings pullback represent a good buying opportunity for long-term investors?
Nvidia generated 80% of its revenue from its data center business in the third quarter. This segment sells high-end GPUs to data centers for processing artificial intelligence (AI) tasks at a faster rate than stand-alone CPUs.
All of the world’s top generative AI platforms — including OpenAI’s ChatGPT — are powered by Nvidia’s GPUs. The explosive growth of the market is driving more data center operators to upgrade their servers with Nvidia’s GPUs.
Another 16% of its revenue came from its gaming business, which develops gaming GPUs for PCs. This segment suffered a slowdown throughout fiscal 2023 as new PC sales cooled off in a post-pandemic market. However, its revenue rose again in the second quarter of fiscal 2024 and accelerated throughout Q3 as sales of new PCs and GPUs picked up during the back-to-school shopping season.
Nvidia also allayed concerns about the recent export curbs against China that left about $5 billion of its chip orders to China in limbo. During the conference call, CFO Colette Kress said while its sales to China and other sanctioned markets would “decline significantly in the fourth quarter,” that slowdown would be “more than offset by strong growth in other regions.”
Here’s how Nvidia’s core data center and gaming segments fared over the past year.
Data source: Nvidia. YOY = year-over-year. Fiscal 2024 started in January 2023.
Its 206% revenue growth in the third quarter crushed its previous outlook for a 170% increase. For Q4, it expects its revenue to rise 231%, which also beats analysts’ expectations for 195% growth. That outlook implies its revenue will jump 118% for the full year compared to flat growth in fiscal 2023. It also blows past analysts’ projections for an 87% increase in revenue for the full year and indicates the consensus forecast for 52% growth in fiscal 2025 is too low.
Nvidia’s management also remains bullish on the long-term potential of its data center business. During the conference call, CEO Jensen Huang said he “absolutely” believed its data center business could “grow through 2025.” Kress also noted “most major consumer internet companies are racing to ramp up generative AI deployment” and that the “enterprise wave of AI adoption is now beginning.”
Nvidia’s first-mover advantage in the data center GPU market and leadership of the gaming GPU market give it plenty of pricing power. As a result, its adjusted gross margin rose year over year from 57% to 72% in the first nine months of fiscal 2024. Its adjusted operating margin also expanded from 33% to 58%.
For the fourth quarter, Nvidia expects its adjusted gross margin to climb to about 75%. Analysts forecast its adjusted EPS to rise 199% in fiscal 2024 and 60% in fiscal 2025 — but those estimates might be too low in light of its recent earnings beat.
But at $490, Nvidia shares still don’t look terribly expensive at 31 times next year’s earnings. That multiple could also drop quickly if analysts raise their estimates for fiscal 2025. Smaller competitor Advanced Micro Devices — which is growing at a much slower rate — still trades at 32 times forward earnings.
However, investors should still be aware of Nvidia’s longer-term challenges. Many of its top customers, including Microsoft and OpenAI, have been developing their own AI chips to reduce their dependence on Nvidia’s chips. The demand for its data center chips could also fizzle out if the AI bubble pops.
If you believe the generative AI market will continue to expand and that Nvidia’s chips will remain the industry standard for processing AI tasks, then it’s still worth buying as a long-term investment.
But if you believe the AI bubble will pop and Nvidia’s chips will eventually be replaced by other types of internally developed AI chips, then it might be smarter to stick with more diversified tech stocks instead. I personally believe the former scenario seems more likely to play out than the latter, so I’m still willing to buy Nvidia as a long-term investment.