Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
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Nvidia trades lower are blasting estimates as China risks loom
Peter Garnry
Chief Investment Strategist
Summary: Nvidia FY24 Q3 earnings results blasted estimates as demand for its AI chips remains very strong. However, shares are indicated down 1% in US pre-market as Nvidia's comments about US export controls severely impacting its China business indicating that growth could slow down faster than expected in the short term. Nvidia's results also show that quarterly revenue is slowing down fast now getting closer to what will become the new underlying structural demand. Long-term trends in the technology sector are still in place and will underpin a strong outlook for Nvidia's business for years to come.
Key takeaways from Nvidia’s earnings release
Yesterday’s Nvidia earnings results were the most anticipated event in equity markets as Nvidia and the generative AI growth story have been the key drivers behind the equity market rally. As we previewed in our equity note Earnings Preview: Is the ‘Intel moment’ coming for Nvidia? there are two risk building for Nvidia’s business; 1) Microsoft is rolling out its own bespoke AI chip in order to lower dependence on Nvidia and cut costs, 2) Tencent comments suggest that Chinese technology companies have significantly front-loaded orders to have enough inventory of AI chips in case the US government restricts exports in the future.
Below are the key takeaways from Nvidia’s earnings results
- Nvidia delivered FY24 Q3 (ending 29 October) revenue of $18.1bn translating into 206% y/y growth compared to analyst estimates of 171% y/y revenue growth. In other words, a significant beat. EBITDA was $11bn vs est. $10bn. FY24 Q4 revenue guidance was $20bn +/- 2% compared to analyst estimates of $17.9bn. The revenue guidance shows that while growth is still high the growth rate is coming down fast to whatever the stable growth rate might be after the initial demand wave. Nvidia is a bit more daring this time extending its soft revenue guidance to say that it believes data center segment can grow through 2025.
- How can Nvidia shares trade 1% lower in US pre-market when earnings results were so strong. One explanation is that the market had expectations that were even higher than sell-side analyst. Another explanation, and likely the culprit, is the warnings on its China business. US export restrictions have severely impacted its China business (the foresight of Chinese technology companies resulting in the hoarding effect by Tencent) and Nvidia says that it has low visibility on the hit to its Chinese business other than revenue will come down sharply.
- Nvidia remains the purest exposure an investor can get to the generative AI push and many of the underlying trends in technology will require advanced AI chips that Nvidia provides. It might be that there will be a slump in Nvidia’s business on the other side of the initial wave of AI enthusiasm but longer term Nvidia is well positioned for long-term growth. Another positive for Nvidia is that the business is getting more revenue streams making the company more diversified compared to the past of only selling GPUs for the personal gaming market.
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