Nvidia again proves it’s an ‘own it, don’t trade it’ stock after delivering another blowout quarter

Nvidia (NVDA) shined once again with the release Wednesday of its second-quarter fiscal year 2024 results. Similar to its blowout first quarter, the artificial-intelligence chipmaker handily exceeded Wall Street’s expectations and offered a forecast that was well above already-lofty expectations — driving shares to another new all-time high in afterhours trading. Revenue for the three months ended July 30 climbed 101% year-over year, to $13.51 billion, well ahead of analysts’ forecasts of $11.24 billion, according to Refinitiv. Adjusted earnings-per-share (EPS) grew 429% from last year, to $2.70, exceeding forecasts of $2.09 a share, Refinitiv data showed. Adjusted gross margin of 71.2% beat out Wall Street’s 70.1% estimate, according to FactSet. Shares of the Club holding soared roughly 6% in post-market trading, to nearly $500 apiece. Bottom line Coming into the print after the closing bell Wednesday, expectations were about as high as they could be, with the stock up more than 200% year-to-date and up more than 50% since last reporting earnings in May . Analysts covering the stock were increasing price targets hand over fist, competing with each other about who would deliver the new ‘Street High.’ And yet, there was also plenty of unconfirmed chatter that Nvidia wouldn’t have enough supply capacity to offer another revenue forecast materially above expectations — a camp that believed Nvidia’s upside would be capped by its suppliers. But we said to block out the noise and reiterated Nvidia as a rare “own it, don’t trade stock” because its graphics processing units (GPUs) and software stack make up the computing infrastructure of generative AI . As one analyst from UBS put it last week, Nvidia is the “kingmaker” in AI. “During the quarter, major cloud service providers announced massive NVIDIA H100 AI infrastructures. Leading enterprise IT system and software providers announced partnerships to bring NVIDIA AI to every industry. The race is on to adopt generative AI,” founder and CEO Jensen Huang said in the company’s earnings press release. “The world has something along the lines of about $1 trillion worth of data centers installed, in the cloud, in enterprise and otherwise. And that $1 trillion of data centers is in the process of transitioning into accelerated computing and generative AI. We’re seeing two simultaneous platform shifts at the same time,” Jensen added during Nvidia’s post-earnings conference call. He later explained that when it comes to high demand for the company’s products, “the world is transitioning from general-purpose computing to accelerated computing [and] the best way for companies to increase their throughput, improve their energy efficiency, improve their cost efficiency, is to divert their capital budget to accelerated computing and generative AI.” These trends support our conviction in Nvidia. While a high valuation has always been a sticking point for the Nvidia bears, one of the main reasons why we said to own this stock is because it ends up looking much cheaper in retrospect when the actual earnings come out much higher than forecasts. And once again, the company delivered a massive upside surprise, guiding for $16 billion in revenue for the current quarter when Wall Street was only looking for $12.6 billion. With gross margins expected to be slightly higher than expected as well, Nvidia’s implied EPS guidance was much stronger than the consensus. And we can only surmise that the additional step-up in revenue will force analysts to raise their full-year estimates even higher Wednesday night. Needless to say, our current $450-per-share price target will be revised higher. Quarterly commentary Data-center revenue in the quarter — comprising 76% of total revenue — reached a new record, more than doubling from a year ago and on a sequential basis. Driving those gains were increased orders from cloud-service providers and large consumer-internet companies like Club names Amazon (AMZN), Microsoft (MSFT), Alphabet (GOOGL), Meta Platforms (META) and Oracle (ORCL). Driving the strong demand for the Nvidia HGX platform based on its Hopper and Ampere GPU architectures was the development of large language models and generative AI. Within its data-center unit, networking revenue almost doubled from last year thanks to strong demand for its end-to-end InfiniBand networking platform, which the company called “the gold standard for AI.” InfiniBand offers more than double the performance of traditional ethernet for AI, according to the company. While there had been some market chatter about China doubling, or even tripling, orders to get ahead of potential new U.S. export restrictions, Nvidia said China demand was within the historical range of 20% to 25% of data-center revenue. Although there’s always a risk of future export restrictions on data-center GPUs to China, Nvidia said Wednesday evening that, if adopted, it does not anticipate an immediate material impact to its financial results because of the strength of demand for its products worldwide. Gaming revenue, at roughly, 18% of total revenue, was up year-over-year as channel inventory levels finally normalized, primarily reflecting demand for the new GeForce RTX 40 Series GPUs. Nvidia believes global end demand has finally returned to growth following last year’s significant slowdown. Given how large Nvidia’s data-center business and, to a lesser extent, gaming unit have become in the past year, there’s less investor emphasis on Nvidia’s other business lines than there was previously. But they are still worth noting. Revenue at the professional-visualization unit fell from last year, primarily due to lower sell-in to partners in an effort to normalize channel inventory levels. However, revenue was up sequentially on improved demand for Nvidia’s enterprise workstation and the ramp of Nvidia RTX products. Sales at Nvidia’s automotive unit were up from last year but fell sequentially, primarily due to lower overall auto demand, especially in China. As a cherry on top, Nvidia announced that its board of directors approved an increase to its share-repurchase program by an additional $25 billion. This adds to the $3.95 billion the company had remaining at the end of the second quarter. Nvidia said it bought back $3.28 billion worth of stock during its second quarter. Guidance Looking ahead to Nvidia’s third quarter of fiscal 2024, the company once again provided massive upside relative to Wall Street’s expectations. The last time Nvidia offered a quarterly revenue outlook, the company shocked the business world by issuing guidance for roughly $11 billion, which at the time was nearly $4 billion higher than the consensus on Wall Street. This time, the company said it expects revenue for the current quarter to be $16 billion, plus or minus 2%, representing strong sequential growth of about 18% that was also about $3.4 billion above consensus estimates. Additionally, management expects adjusted gross margins to be 72.5%, plus or minus 50 basis points, nicely above estimates of 70%. One reason why gross margins have been increasing at the company level is due to higher sales from data-center products, which have a higher-margin software component Though management does not provide a forecast for EPS, analysts at Truist Wednesday calculated that the implied earnings guidance was $3.32 per share. That’s 92 cents more than what the Street was expecting. The results, combined with the outlook, demonstrate how Nvidia’s lofty price-to-earnings multiple can be deceiving when the company is firing on all cylinders and its chips are in high demand. Looking further out, we were encouraged to hear Nvidia say not only that its demand visibility extends into next year thanks to AI, but also that it expects supply for its data-center chips to increase each quarter throughout next year. This should help investors feel more comfortable about Nvidia’s ability to meet a ferocious level of demand. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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