AI boom continues to fuel Nvidia's growth

Nvidia’s smashed their quarterly earnings!

Revenue grew at an astonishing rate of 262% YoY reaching $26 Billion in Q1 FY 25 (i.e. Feb-Apr 2024). Most of this growth is driven by Nvidia’s Data Center segment, reaching quarterly revenue of $22.6 Billion (87% of total), growing 427% YoY.

If you haven’t been paying attention, Data Center revenue is the segment that accounts for the GPUs that Nvidia sells for use in AI applications. This is the stuff that companies like Meta are buying and using to run their GenAI LLM models. Its foundational tech.

What’s even more astonishing than the revenue jump is the increase in Net income, which grew 628% to reach $14.9 Billion in Q1 (Source). That’s a profit margin of 58.5%! 🤯 

You’d be hard pressed to find a company that is growing this fast, at such scale, while delivering such insane profit margins. I can’t think of any. Nvidia is leaving even the mighty Big Tech’s Cloud earnings in the dust.

Expectedly, after the stock jumped ~10% jump on Thurs morning, Nvidia is now worth ~$2.57 Trillion (at the time of writing this post, around 11am ET on 23rd May)

To put that in perspective, even amongst the so called “Magnificent 7”, Nvidia is now worth more than Amazon and Tesla combined. As seen in the chart above, Tesla isn’t covering itself in glory but Nvidia’s outperformance is remarkable.

Stock prices are fickle and the story might look different tomorrow - nevertheless - it underscores how big of an impact AI is having on the tech industry and how much companies are willing to invest to win this generational platform shift.

Is Nvidia in Bubble territory?

This is an important question that usually gets asked when a stock runs up so much. However, the story here is unlike the dot com bubble, where the earnings and revenue of many companies didn’t match the stock price increases.

To give you some perspective, Cisco - one of the poster child of the Dot Com Bubble - had a P/E (Valuation ratio) of 196x back in March 2020. In contrast, Nvidia’s P/E ratio is much smaller at ~61x and has dropped significantly over the last year (see below). This basically means that Nvidia is delivering on earnings growth to match its stock price increase.

So what are the risks then?

• Concentration risk: I don’t have the exact figures but its likely that a big chunk of Nvidia’s Data Center revenue comes from Big Tech companies. I made a chart showing that the 5 Big Tech companies invested $146 Billion in Capex in 2023, higher than even the Big Oil companies. If these companies don’t see an ROI from AI, they will cut down spending.

• New competition from Big Tech itself: Reportedly, Big Tech wants to reduce its dependence on Nvidia, and hence wants to design its own AI chips. How feasible that is remains to seen - but it will take time. High Tech hardware manufacturing isn’t easy but no one is better placed to attempt it than the Big Tech companies themselves.

• Geopolitical risk: I covered this in one of my previous post, but there is serious geopolitical risks in chip manufacturing. Nvidia only designs its GPUs. However, it relies on TSMC and others like them, for manufacturing. And most of those facilities are in Taiwan (which has ~47% market share in manufacturing). Conflict situations in Taiwan, involving China, can and will impact supply - harming sales. And wars don’t start with announcements.

However, for now, Jensen Huang, CEO of Nvidia, remains very bullish.