Nvidia earnings: Generative AI has reached “tipping point”

Key points:

• Nvidia beat expectations: Revenue grew 265% YoY in Q4 FY24, exceeding analyst estimates. Q1 FY25 guidance is also 10% above consensus.
  
  
• Generative AI seen as key driver: Nvidia's CFO highlighted generative AI as a major growth factor, potentially leading to continued model upgrades and higher returns.
  
  
• High concentration and profitability: One customer accounted for 13% of Nvidia's revenue, and the company boasts a net profit margin of 55.6%, the highest among large tech companies.
  
  
• Market implications: Nvidia's strong results could fuel a rally in AI stocks and the broader tech sector, but also raise concerns about future earnings beats and potential bubble formation.
  
  
• Investment strategies: Investors seeking to reduce exposure to US technology and Nvidia can consider sectors like energy, utilities, and consumer staples, which have low correlation with Nvidia.

Nvidia is almost defying the laws of financial markets

Nvidia earnings last night was this week’s most important event and one we highlighted in our earnings preview on Monday. Despite excessive expectations going into the earnings release Nvidia delivered incredible earnings results. We have never seen anything like this before in the equity market in terms of 265% YoY revenue growth rate for a company expected to report around $100bn in revenue over the next four quarters. It should almost not be possible.

Here are our key takeaways:

• Solid beat in FY24 Q4 with revenue growing 265% YoY and FY25 Q1 revenue guidance at $24bn is 10% above consensus estimate.

   

• The CFO comment that generative AI has reached a "tipping point" is the most firm long-term prediction on demand we have got from Nvidia since the generative AI era started. This is the key driver of model upgrades on Nvidia and what drives the higher returns. Nvidia shares are up 13% in pre-market trading.

   

• One customer represented 13% of revenue in FY24. That is $7.9bn worth of computer chips from a single customer in just one year. Based on Microsoft’s aggressive ramp-up of capital expenditures in the previous quarters our best guess is that it is Microsoft.

   

• Net profit margin was 55.6% for the quarter. No other company in the technology sector with a market value above $100bn has this kind of net profit margin. It seems that OpenAI co-founder Sam Altman has taken Amazon founder Jeff Bezos’ famous words “your margin is my opportunity” at face value as he is planning to start a chip venture to compete with Nvidia in AI chips.

   

• Equity sentiment will thrive on this result for weeks to come and we cannot rule out a melt-up scenario in AI related stocks. The broader US technology sector will likely extend its momentum.

   

• This was the 8 straight earnings beat from Nvidia. It creates a positive feedback loop in expectations which will make it increasingly difficult for Nvidia continuously beat estimates.

As the technology momentum continues investors should begin thinking about reducing exposure to US technology more broadly. Investors that want to be fully invested in equities but taking advantage of recent exceptionally strong gains in US technology can reduce their portfolio risk in an easy way. There are three sectors that have shown a low correlation with Nvidia and those are energy, utilities, and consumer staples. Investors can easily diversify their US technology risk exposure by using ETFs providing exposure to those three sectors.

Out of the 20 stocks in our AI theme list 15 companies have now reported earnings. The last company to report earnings is Adobe which is scheduled to release earnings results on 14 March. The generative AI growth wave and generally business investments coming back in all part of the technology supply chain are showing up in revenue growth rates. As the chart below shows the average revenue growth rate is rebounding for these AI related stocks.