NVIDIA: AI dominates, the true king of chips

On February 22, NVIDIA (NVDA.O) released its fourth-quarter earnings report for the 2024 fiscal year (ending January 2024) after the U.S. stock market closed:

Overall Performance: Revenue & Gross Margin Exceed Expectations. In this quarter, NVIDIA achieved a revenue of $22.1 billion, a year-on-year increase of 265%, surpassing market expectations ($20.4 billion). The gross margin (GAAP) for this quarter reached 76%, also exceeding market expectations (75.2%). The record-high gross margin was mainly driven by the strong performance of the data center business. The net profit for this quarter was $12.3 billion, a year-on-year increase of 769%, also reaching a historical high.

Core Business Situation: Data Center Continues to Rise. The data center business accounts for 83% of the company's revenue, making it the most core business currently.

This quarter, the gaming business grew by 56.5% year-on-year, showing signs of recovery. Dolphin Research believes that the main reasons for the gaming business recovery this quarter are: a) the recovery of the PC market, which to some extent increased the demand for GPUs; b) the recent rise in cryptocurrency values, which also boosted the demand for certain graphics cards.

The data center business grew by 409% year-on-year this quarter, reaching a new high, mainly driven by strong demand for large models, recommendation engines, and generative AI.

Key Financial Indicators: Expense Ratio Hits a Record Low. NVIDIA's operating expense ratio this quarter continued to decline to a low of 14.4%. This is mainly due to the surge in revenue, leading to a significant decrease in the expense ratio. The inventory ratio is currently at a historical low, indicating that the company's current product situation is still in high demand.

Guidance for the Next Quarter: NVIDIA expects revenue of $24 billion (±2%) for the first quarter of the 2025 fiscal year, a year-on-year increase of 234%, surpassing market expectations of $21.8 billion. The gross margin for the first quarter is expected to be 76.3% (±0.5%), also exceeding market expectations of 75.1%, reaching a new high.

Overall View: NVIDIA's earnings report once again exceeds market expectations. Both core indicators of revenue and gross margin for this quarter exceeded market expectations, with the high growth of the data center business driving the outperformance. While the inventory has increased slightly, compared to the high revenue growth, the inventory/revenue ratio continues to decline.The company's products are still in short supply.

In addition to the financial data, the company's guidance is also impressive. NVIDIA has given guidance for the next quarter with revenue of $24 billion and a gross margin of 76.3%, both reaching historical highs for the company. The next quarter's revenue of $24 billion represents a 234% increase YoY, surpassing market expectations of $21.8 billion. The gross margin of around 76.3% for the next quarter is up 11.7 percentage points YoY, also exceeding market expectations of 75.1%.

Compared to the lackluster guidance from Intel and AMD, NVIDIA's data center and AI businesses continue to show strong growth, demonstrating the true strength of AI chips. In the comparison of data center and AI revenue among the three companies, NVIDIA's revenue share has further increased to 74.6%, significantly ahead of the other two.

The impressive financial data and guidance will undoubtedly boost market confidence and benefit the stock price in the short term. Despite the stock price more than doubling since the beginning of last year, it has been supported by solid performance throughout. Even with a market value exceeding $1.6 trillion, the current PE ratio based on data center and AI is still below 40 times.

Confidence in investing in high-growth stocks mainly comes from the industry and company's consistently better-than-expected performance. However, sustained high growth in any industry is not sustainable in the long term. Although the company's performance and guidance have exceeded market expectations, the growth rate has also slowed down. Based on the guidance, the revenue growth for the next quarter may return to single digits QoQ, and the gross margin is expected to stabilize around 76%. When the growth of high-growth stocks significantly slows down, the investment risk also increases accordingly.

Overall, although NVIDIA has seen significant gains in the past, its sustained high growth performance can support the current stock price. However, as high growth is not sustainable, with the slowdown in performance growth, the stock price is unlikely to show the same doubling performance as before. The impressive financial data and guidance can bring short-term confidence to the market. But for the stock price to rise further, the company will need to deliver even stronger performance.

Dolphin Research's Detailed Analysis of NVIDIA's Earnings Report:

1. Key Performance Indicators: Revenue & Gross Margin Exceed Expectations

1.1 Revenue: In the fourth quarter of fiscal year 2024, NVIDIA achieved a revenue of $22.103 billion, a year-on-year increase of 265.3%, surpassing the company's previous guidance of $20 billion. The significant revenue growth this quarter was mainly driven by the strong performance of the downstream data center business.

Looking ahead to the first quarter of fiscal year 2025, the company's revenue is expected to continue growing. NVIDIA forecasts a revenue of $24 billion (±2%), a year-on-year increase of 234%, surpassing the market's expectation of $21.8 billion. Dolphin Research believes that the revenue growth in the next quarter will still be mainly driven by the data center business.

1.2 Gross Margin (GAAP): In the fourth quarter of fiscal year 2024, NVIDIA achieved a gross margin (GAAP) of 76%, exceeding the upper limit of the guidance (74%-75%), setting a new record for this quarter.

The previous sharp drop in gross margin was mainly due to inventory write-downs. With the gross margin returning to 63%-64%, inventory is no longer a concern. Combining the company's inventory situation, NVIDIA's current inventory has increased to $5.3 billion this quarter. Compared to the substantial revenue growth, NVIDIA's current inventory level remains low, indicating a situation of high demand and short supply.

NVIDIA expects a gross margin of 76.3% (±0.5%) for the first quarter of fiscal year 2025, surpassing the market expectation of 75.1%. Driven by demand in AI and other sectors, the company's gross margin has increased from around 65% to 76%, significantly boosting profitability.

1.3 Operating Indicators

1) Inventory/Revenue Ratio: 24% this quarter, down 2% QoQ. Although the company's inventory has increased to $5.3 billion this quarter, the low inventory-to-revenue ratio indicates that the company's products are still in high demand.

2) Accounts Receivable/Revenue Ratio: 45% this quarter, down 1% QoQ. The decrease in accounts receivable ratio indicates an improvement in the company's collection situation.

2. Core Business Overview: Continued Growth in Data Center Segment

Driven by the demand for AI and other technologies, in the fourth quarter of the 2024 fiscal year, NVIDIA's data center segment's share of the company's revenue continued to expand, reaching 83.3% this quarter. While the gaming business also saw growth this quarter, its proportion was still compressed to below 20% by the rapidly growing data center segment. Data centers have become the most impactful business for the company.

2.1 Data Center Business:

In the fourth quarter of the 2024 fiscal year, NVIDIA's data center segment achieved a revenue of $18.4 billion, a YoY increase of 409%. This quarter, NVIDIA's data center business reached a new high, mainly due to the increased shipments of the NVIDIA Hopper GPU computing platform for large language models, recommendation engines, and generative AI applications, as well as the InfiniBand end-to-end solutions.

In the high-growth data center business, revenue from cloud service providers accounts for more than half. Strong demand is being driven by enterprise software, consumer internet applications, and various vertical industries including automotive, financial services, and healthcare. Customers from all sectors can access NVIDIA's AI infrastructure both through the cloud and locally. Due to licensing requirements from the U.S. government, sales of the data center business in China saw a significant decline this quarter.

Looking at the capital expenditures of the four tech giants $Macys(M.US)acys(M.US)eta Platforms.US, $Agilent Tech(A.US)gilent Tech(A.US)lphabet.US, $Macys(M.US)acys(M.US)icrosoft.US, and $Agilent Tech(A.US)gilent Tech(A.US)mazon.US,Four companies had a total capital expenditure of $43.8 billion this quarter, a 12.1% increase YoY. Google and Microsoft have seen a continuous rise in their capital expenditures. With over half of NVIDIA's data center business revenue coming from cloud service providers, the company will benefit from the growth in capital expenditures by tech giants.

Considering the strong revenue guidance of $24 billion for the next quarter provided by the company, Dolphin Research believes that this is mainly driven by the demand growth in the data center business. With the current relative supply shortage, NVIDIA's data center business revenue is expected to reach $20 billion next quarter.

2.2 Gaming Business: In the fourth quarter of the 2024 fiscal year, NVIDIA's gaming business achieved a revenue of $2.865 billion, a 56.5% increase YoY. After experiencing a downturn for several quarters, the gaming business has shown signs of recovery and has emerged from the "doldrums."

Global PC shipments have started to stabilize in the fourth quarter. According to the latest data from IDC, global PC shipments in the fourth quarter of 2023 were 67 million units, almost flat YoY. Demand is beginning to recover, with PC shipments expected to exceed 65 million units.

2.3 Automotive Business: In the fourth quarter of the 2024 fiscal year, NVIDIA's automotive business achieved a revenue of $281 million, a 4.4% decrease YoY. NVIDIA's automotive business mainly comes from revenue related to autonomous driving and AI cockpit solutions. Although the autonomous driving platform continues to grow, there has been a decline due to the impact of AI Cockpit.

Although the company's automotive business saw a YoY decline, it currently accounts for a very small percentage of revenue (less than 2%). NVIDIA's performance is still mainly focused on the data center and gaming businesses.

3.Key Financial Indicators: Expense Ratio Hits Historic Low

3.1 Operating Profit Margin

In the fourth quarter of the 2024 fiscal year, NVIDIA's operating profit margin rose to 61.6%, reaching another historic high. The increase in operating profit margin this quarter is mainly due to the double impact of rising gross margin and declining expense ratio.

Analyzing the composition of the operating profit margin, the specific changes are as follows:"Operating Profit Margin = Gross Profit Margin - R&D Expense Ratio - Sales and Administrative Expense Ratio"

1) Gross Profit Margin: 76% this quarter, up 2 percentage points QoQ. The "supply shortage" in the data center business continued to drive the company's gross profit margin upwards after returning to the normal range;

2) R&D Expense Ratio: 11.2% this quarter, down 1.5 percentage points QoQ. Although the absolute value of the company's R&D expenditure has increased, the expense ratio has decreased significantly due to the surge in revenue;

3) Sales and Administrative Expense Ratio: 3.2% this quarter, down 0.6 percentage points QoQ. Despite an increase in absolute value, the company's sales expense ratio has reached a historical low.

The company's operating expense guidance for the first quarter of the 2025 fiscal year continues to rise to $3.5 billion, but compared to the growth on the revenue side, the operating expense ratio is expected to remain around 14.6% in the next quarter. The rapid growth in revenue will lower the expense ratio.

3.2 Net Profit (GAAP) Margin

In the fourth quarter of the 2024 fiscal year, NVIDIA's net profit was $12.285 billion, a YoY increase of 7 times, and the net profit margin for this quarter continued to rise to 55.6%. The company achieved a 265% YoY growth in revenue this quarter, reaching a historical high in gross profit margin. The operating expense ratio fell to a historical low, driving a significant increase in the profit margin.

Dolphin Research's historical articles related to NVIDIA:

In-depth

June 6, 2022, "Stock Market Tremors, Were Apple, Tesla, and NVIDIA Wrongly Judged?"

February 28, 2022, "NVIDIA: High Growth is Real, But the Value for Money is Still Lacking"

December 6, 2021, "NVIDIA: Valuation Cannot Rely Solely on Imagination"

September 16, 2021, "NVIDIA (Part 1): How Did the Chip Giant Achieve a Twentyfold Growth in Five Years?"

Earnings Report Season

On September 28, 2021, "[NVIDIA (Part 2): No Longer Driven by Dual Wheels, Will Davis Strike Again?"(https://longbridgeapp.com/topics/1170397?invite-code=032064)"

November 22, 2023, Conference Call "The First Wave of Artificial Intelligence (NVIDIA 3QFY24 Earnings Call)"

November 22, 2023, Earnings Review "NVIDIA: Computing Power Emperor at Full Throttle? The Elusive "Virtual Fire" Revealed"

August 24, 2023, Conference Call "The Computing Revolution Named 'AI' (NVIDIA FY2Q24 Earnings Call)"

August 24, 2023, Earnings Review "NVIDIA: Exploding Once Again, the 'Solo Performance' of the AI King"

May 25, 2023, Conference Call "Emerging from the Trough, Embracing the AI Era (NVIDIA FY24Q1 Earnings Call)"

May 25, 2023, Earnings Review "Explosive NVIDIA: The New Era of AI, the Future is Here"

February 23, 2023, Conference Call "Performance Bottoming Out and Rebounding, AI Becomes the New Focus (NVIDIA FY23Q4 Earnings Call)"

February 23, 2023, Earnings Review "Surviving the Cycle Crisis, Meeting ChatGPT Again, NVIDIA's Faith Returns"

November 18, 2022, Conference Call "Continuously Rising Inventory, Can It Be Absorbed in the Next Quarter? (NVIDIA FY2023Q3 Earnings Call)"

November 18, 2022, Earnings Review "NVIDIA: Profits Halved, When Will the Turning Point Come?"

Telephone Conference on August 25, 2022: How does the management explain the gross profit margin of "flash crash"? (NVIDIA FY2023Q2 Earnings Call)

Financial Report Review on August 25, 2022: Is NVIDIA stuck in the mud and going back to 2018?