Nvidia is Selling Off After Earnings

Nvidia stock just reported their earnings if you are an investor in the stock market you need to pay attention to these results why Nvidia is now A3 trillion company along with both apple and Microsoft it represents 6.67% of the S&P 500 and 8.14% of the NASDAQ 100 both of which are the two most popular index funds which investors own so nvidia's earnings have the potential to move the stock market it can go up or down depending on their results prior to the release of earnings today the stock was down 2.10% and after the earnings release the stock is down an additional 7.6% and as I'm recording it continues to go down more and more so is the massive Bull Run of Nvidia stock finally over well it's not that simple they actually reported great earnings and continued high growth rates including strong outlook for next quarter they also approved an additional $50 billion of share repurchases for Nvidia stock in today's video I'm going to provide an updated analysis on nvidia's stock and break down their latest earnings report I list listen to the earnings call and read the report so that you don't have to Let's dive into it my name is Zach this is dividend data and you should leave a like And subscribe to the channel if you enjoy the video please sign up for my free email newsletter so you can stay up to date on stock market news and find better Investments Nvidia terer symbol nvda has been an amazing investment over the past few years the stock is up over 750 from the beginning of 2023 and the reason for this is they have seen an explosion in earnings and revenue growth it's incredibly impressive the company went from $3 billion in free cash flow in fiscal 2023 to $27 billion in fiscal 2024 and it's on Pace to continue growing from that base and the reason for that has to do with their Data Center business and this is where all of the major AI spending is happening in fiscal 2024 that represented 78% of the revenue and if we look at nvidia's quarterly Revenue by market you can see how this growth is entirely due to the data center Q3 2023 data center Revenue was $3.8 billion and now in Q2 2025 that has grown to $26.2 billion that is insane growth and it's not stopping yet and this is such a high growth rate for such a large business just to add some context here q1 and the newly reported Q2 revenue is more than the entire of fiscal 2024 of their data center Revenue so they are on Pace to more than double again in fiscal 2025 but the real reason why this matters for the purpose of stock analysis is that you have to attribute 100% of nvidia's valuation to that data center business it's the only thing you need to focus on and these charts are not yet accounting for Q2 but you can just see the dramatic ramp up in Revenue per share net income per share free cash flow per share Nvidia is just raking in money right now it is a beautiful business they have mid to high 70% gross margins 65% operating margins 55% net margins it is the best semiconductor business in the history of the world and one of the main reasons for that is that they don't manufacture the chips themselves Nvidia is the designer and the reason why this is important is they don't have to invest massive sums into building semiconductor manufacturing plants and new Fabs in q1 they only spent $369 million in capital expenditures and they raked in $15.35 billion in cash from operations this gives them nearly $15 billion in just that quarter of pure free cash flow and you can see this by their growing cash reserves every quarter they use that money to make strategic Acquisitions and then they return that Capital to shareholders via stock repurchases and dividends now the Nvidia dividend is very small but they're starting to ramp up their share repurchases significantly and as I mentioned earlier they just announced an additional $50 billion of share repurchases so now I'm going to break down their latest Q2 results take a look at their Q3 Outlook discuss analyst price targets and future earn estimates for NVIDIA and finally share some risks that could potentially Drive the stock down for Q2 Revenue came in at $30 billion that was at a 75% gross margin and if we look at non-gaap that was $1 19.9 billion of operating income and 16.9 billion of net income at diluted earnings per share of 68 and this just shows continued growth from that base of 61 cents in the prior quarter and again all of this growth is in the data center business and the only negative I actually found was that cash flow from operating activities was only $14.5 billion which is down from the last quarter of $15.3 billion despite higher revenue and the reason they give for this was higher cash taxes paid in the quarter they Ed $7.4 billion of that operating cash flow towards shareholder returns and yes they did announce a 150% dividend increase in the last quarter however that is a 1 cent per share quarterly dividend only bringing the annual dividend payment to 4 cents per share which is a 1% payout ratio and given nvidia's high growth rates that is a declining 1% payout ratio so you're definitely not buying Nvidia stock for the dividend income for the third quarter they're expecting $32.5 billion of Revenue with a plus or minus 2% that's projecting about 8% growth quarter over quarter I wouldn't be surprised if they beat that given that they beat their prior Outlook this quarter Gap and non-gaap gross margins are expected to be 74.4 and 75% respectively and for the full year gross margins are expected to be in the mid 70% range Gap and non-gaap operating expenses are expected to be around $4.3 billion to 3 billion respectively and they're expecting their operating expenses to grow in the mid to Upper 40% range now we do have to keep in mind this is an incredibly high margin company so they have plenty of room to have slight increases in expenses but the big problem with Nvidia stock is that most of this actual good news is already priced into the valuation it's a $3 trillion company and before falling after hours it was priced at $125 per share which is above the consensus price Target among Wall Street analyst of $118 per share so the 6% fall after hours really only brought it down to the consensus price Target however we do have to keep in mind there is a large variation in that Target with the lowest on Wall Street being $13 which is insane and the highest being $340 which is probably also insane and they get to this with expectations of very high earnings per share growth for fiscal 2026 they're projecting 36% EPS growth year-over-year 23% in fiscal 2027 20% % in fiscal 2028 and 18.2% in fiscal 2029 that puts the 2029 PE ratio at 20 and if they can execute and hit these numbers then nvidia's valuation really is not that crazy at all but that's the if the entire question is whether this demand in data center will sustain the vast majority of nvidia's earnings and revenue is from the capital expenditures of other large big tech companies these are the hyperscale cloud companies like Microsoft with Microsoft Azure Google with Google cloud and Amazon with AWS Microsoft grew Capital expenditures by $16 billion year-over-year much of that is going into AI related spend specifically on nvidia's chips that capex spend is accelerating with $13.8 billion in the latest quarter again almost all of these increases is going to Nvidia you can see the same with alphabet having $1 13.2 billion in capital expenditures in Q2 this is doubling year-over-year and outside of the cloud businesses you have other big tech companies like meta they had $8 billion in capital expenditures during Q2 and much of that was towards AI you even have Tesla ramping up AI spend they spent $2.2 billion in the latest quarter and here you can see a video inside of the new AI training super cluster being built at Tesla headquarters and this is just a very small example these things are massive the data centers being built out and meta and Tesla are examples of companies where they're building these data centers for internal use meta is using it to train their recommend found ation algorithms on Instagram Facebook Etc additionally they're using it to train their open- Source llama model which is Big Tesla is spending like crazy on AI so that they can solve self-driving first at scale in a generalized solution and they're going to so the vast majority of nvidia's earnings is coming from these big companies now of course you have other startups like xai which raised a bunch of money and then you have things like anthropic and all these other AI businesses that raise money and of course open AI although a lot of their spending in comes via Microsoft so the entire big question is whether or not they will keep their current spending levels or increase spending levels even more now Nvidia CEO Jensen argues that not only will they keep buying chips but they will upgrade to the Next Generation platforms once they're available because they will be more economically efficient it will be faster and lower cost for computation it will also dramatically save time on training new models and I actually do buy that reasoning you also have to think that all the incentives align for these companies to want to spend the money so that they can stay on The Cutting Edge in the Q2 earnings when asked about Capital expenditures both the Microsoft and Google CEO said that there is far greater risk in under spending related to AI Elon Musk has said the exact same thing about Tesla's efforts in self-driving there's massive first mover Advantage if you're at The Cutting Edge of these advancements and if you want to be at The Cutting Edge you have to spend but ultimately this will all come down to return on investment are nvidia's customers I.E the big tech companies getting a return on the investment for spend and that question in Microsoft AWS Google Cloud these Cloud companies that question is whether their customers customers are getting a return on investment so that would be everyone using AWS and Azure for AI inference and all these different tasks and all the various startups being built around this ecosystem and that step has me a little worried that may take longer than people think I am a big believer in AI however my stance is that we're overestimating its impact over the short term but dramatically and I mean dramatically underestimating it over the long term similar to the internet in 2000 we couldn't even imagine the big internet businesses that would be built today in that same way we can't even imagine the AI businesses that will come 20 years from now we have no idea so when we go back to nvidia's stock you really have to Marvel at just what a wonderful business it is however there are risks over like the 2 to 3E Horizon about what the spend levels are going to be it seems pretty obvious it's not going to go down in fiscal 2020 5 or probably the early part of fiscal 2026 either but fiscal 2027 what if we're in a recession or these companies aren't seeing a return on their investment or they're okay with their current capacity maybe spending could dip and if you see these EPS growth targets go down or negative in video stock is going to tank so my main takeaway here is that I would never shorten video stock if I owned it and already had big gains I would not sell I would continue riding it until you start to see that cloud on the horizon however in terms of buying at this current $3 trillion valuation I'm not sure the risk reward is there you may have another year of solid gains but at any point I think there's a major risk around the stock that said if you are buying a semiconductor stock this is really the only one I would buy they are the winner Far and Away in the main growth category if you enjoyed the video leave a like comment and subscribe to the channel and if you want to be notified about future videos and get my thoughts up to date on various stocks then sign up for our free email newsletter also sign sign up for dividend dat.com if you want to use the stock research tool I've been using throughout the video links in the description and pinned comment thanks for watching [Music]