Nvidia delivers another monster earnings report, and forecasts big things to come

It was another monster earnings report from Nvidia for fiscal Q4. Revenues were $68.1bn, smashing estimates of $65bn. Gross profit margin was a healthy 75%, up from 73.5% in the prior quarter, and the outlook for this quarter was monstrous. Nvidia is predicting that revenues will be $78bn, estimates were for $72bn.

Nvidia touts diversification of client base

Although this is practically perfect earnings report, the share price reaction was muted in the post market. We discuss why below, for now, it’s worth digging into who is buying Nvidia’s chips? The company, usually tight-lipped about their customer base, said that 50% of revenues were generated by the hyperscalers. However, they also spoke about the spread of AI in corporations. Nvidia say that enterprise adoption of AI agents is skyrocketing, which could help Nvidia to diversify its demand base. The concentration of its customer base has long been a cause of concern for some investors, for now, hyperscalers are still the main revenue generator, however, as AI use expands around the world, concentration risks could ease.  

China still out of the sales forecasts

Concerns about supply constraints should also have been soothed by this report. Nvidia said that it had secured supply to meet demand for several quarters, which partly explains the massive boost to Q1 forecasts. The astonishing part of these forecasts is that they don’t assume any demand from China and the world’s second largest economy is not expected to help Nvidia see a 13% uplift in its revenue this quarter.

Fundamentals remain solid

The company is a cash-generating machine, cash and cash equivalents have jumped $20bn in a year to $62.6bn. Nvidia has rock-solid fundamentals, and they are expected to continue to strengthen this year.

The company is expected to announce that production of its most advanced chip, the GB300, is progressing well. Also, the significant increase to its forecasts suggest that the company will reiterate the $500bn sales pipeline forecast for this year. After this quarter’s forecast beat, there is a chance that this pipeline could be increased later this year.

The China question remains tricky, the US has granted licenses for Nvidia to export its less advanced chips to China, but the question is whether Beijing will allow the chips to be imported, although Beijing did approve the purchase of 400,000 H200 GPUs for use by major Chinese tech firms like Tencent, Alibaba and ByteDance earlier this year. While China may be warming to Nvidia chips, there is still a lot of trade friction. While it is unlikely that China will become a major customer for Nvidia any time soon, its huge sales forecasts suggests that Nvidia can get on perfectly well without Beijing.

Share price reaction below average, so far

The share price initially rose on the back of this earnings release, but it gave back most of the early gains and the increase has been modest so far. It is well below the 2% average move in the share price the day after an earnings release.

Why the muted share price reaction?

The muted reaction to this A* earnings report could be down to a few factors. Nvidia and the semiconductor space has outperformed the broader tech sector so far this year. Nvidia’s results suggest that demand for AI is strong, and fears of an AI bubble are overdone. Thus, investors could pile into the less loved parts of tech, for example software, before going headfirst into Nvidia. The Nasdaq e-mini contract is higher by 1.4% after Nvidia’s earnings report.

Secondly, this report did not generate much reason for disappointment, but even so, some investors may have hoped that CEO Jensen Huang would boost sales pipeline estimates for this year above $500bn. Huang was also asked about hyperscalers’ and their future capex plans now that there was some pressure on their cash flows. This did not bother Huang, but it could sow a seed of doubt in the mind of investors.

Overall, the initial reaction to Nvidia’s results suggest that investors are still unwilling to chase a higher trend in tech stocks right now, even after Nvidia’s stunning earnings report. This report will likely be pored over in detail on Thursday, but for now it is not driving a significant rally in the share price.