The Trading Floor: Nvidia Earnings Explained

hello welcome back to the show we have a bit of a breaking news episode and no this isn't about Oasis reunion this is about nvidia's earnings so the second biggest piece of news we had this week and that's because Invidia earnings came out last night the headline read Nvidia reports of 122% Revenue growth but their sales Outlook disappoints their shares dropped about 8% off the market last night which is a big move for a company of that that size of magnitude what we're going to do in this episode is break down some of those numbers points of interest we'll explain not just from the earnings numbers but also for the conference call so we'll touch about data centers revenue and growth expectations outlooks and also the upcoming black World ship and how that's going then we'll put this into the context of the general MRE back and look at equities from a sector perspective so starting off with the main headline the Q2 adjusted EPS did be expectations 68 cents at 64 revenues also big but one thing that you were talking to me before we jumped on here was Data Center Revenue so perhaps you can explain what are data center revenues and then why has that specific dimetric stood out to well I mean these Nvidia earnings as we were saying on the podcast last week and you know you can read all over the Press you know are considered to be one of the absolute Premier um economic events of the quarter right it's right up there with us labor market data US inflation data the FED all that kind of stuff right and the reason is because of this data center stuff and that's because Nvidia is the absolutely the kind of forebearer of this or the poster child of the AI Revolution and the reason that's the case is because the stuff they build and and sell is what the big Tech boys so Google meta Amazon Microsoft is what they need their chips their h100s their Hopper chips are what they need to build out their their kind of data center Compu cute power which is what they are using to train their their llms right and their their their kind of AI model so it's it's it's very much this data center revenue from Nvidia is absolutely a proxy measure for uh capex expenditure in the AI space therefore it's how much are companies investing in going after this AI Revolution and so it's even though it's one number and one company and how much they're making in one of their revenue streams when you follow that trail it just becomes this absolute bellweather proxy for the AI Revolution full stop and that's why it's so important and so what was it that you interpreted from the DAT senent from last night so there's a few I think there's a few disappointing numbers in this report disappointing I need to qualify that this stock I mean it's up 160 or was up 160% year to date right in just shy 9 months it's up 160% I don't know go back over two years it's up 1,000% even though it's up by that much you're still you know it's Enterprise to revenue multiples 24 times this is a beast of a stock price it's valuation well it got to 3.1 trillion before these earnings right and this is all based off Sensational Stellar growth rates that we've seen in the rearview mirror over the last two years continuing into the future right the price of this stock is pricing in phenomenal growth still yet to come and 120% growth on the top line revenue is it's great right but it's not as good as growth rates in previous earnings reports so just to put that number it's 120% growth rate on Topline Revenue $30 billion the growth rate in last quarter's report was 262 growth so the growth rate has has more than half that's on the headline Revenue if you if you go down one level to that really key Revenue stream of data center Revenue yeah growth was was fantastic up 154% right but the growth rate in the previous quarter was 426 per. so the growth rate there is I mean well it's not far off quartered so I guess you know as as the months tick by the the the comps from the quarter before and the year before get ever more challenging to beat but when you got a stock price and a valuation like they have they've got to carry on beating it and so the decelerating growth rates for me is the kind of uh the really key part of this report and I think confirms in my mind that Invidia is no longer the leader of these broader indices to the upside the question question is does it become the leader on the downside um discuss decreasing or decelerating how is that surprising yeah it's not but okay so let's put a number on it Forward guidance always a really important part of these earnings of course right yes we want to know what's happened in the previous quarter but but from a share price point of view it's way more important right what's ahead what is your Revenue going to be in the quarter ahead of us Nvidia and so they announced this and their forecast was that it would be 32.5% oh sorry $ 32.5 billion doar all right with a plus or minus 2% kind of variance there right now the market had well average expectations were 31.9 billion so their forecast is Just a Touch Above expectation we're not you know Invidia hasn't been in the business of marginally beating expectations they're in the business of absolutely destroying and smashing expectations um the the most bullish on the street in terms of the forecast was 38 billion revenue for next quarter so they're 32.5 that's well short you know that's 20% off we're not talking small amounts here and so that was taken that certainly contributed to to the um the negative reaction in the share price that we've seen overnight and then the other part that that stood out so just to get the full picture was talking about this succession of the technology I moving into Blackwell and I know that they had said previously kind of primed the markets that there had been some problems but in this conference call they actually acknowledged that there was problem and I like the spin that they put on it U so just to give it a bit of an idea they they said they had to change a mask production step importantly that's going to improve its yield and what is a mask the mask is the template used to burn the circuit pattern into material materials deposited on the disc of silicon so what they saying is sounds to me like they found a problem and the way to make positive out that is that that this is going to radically increase the potential Revenue output and production of this thing but yeah what what did you think of that when you when you heard about the Blackwell situation well well actually just before I touch on that related just the final set of numbers their gross margins which is kind of related to to what you're talking about here it's like that how efficient is the manufacturing process and that disappoint that actually missed expectations their gross margins for the quarter just gone was 75.1% the expected was 75.5% so that was a straight up Miss so most of the numbers slight beat and then that one miss and that's just not good enough for their share price so I you know on that gross margin thing well so look Blackwell is their next gen chip and it's supposed to be multiple times more powerful right and back in the thing is back earlier in the year they said it would be ramping up to full production in the second half of the year right we're too full months into the second half of the year now and still it's not being shipped now they've said they expect to make several billion dollars in revenue from Blackwell chips in the coming quarter but that's very very vague guidance right now we've talked about in the past there's this sort of um I can't remember the terminology they use now but basically there's a a gap if you've got the next gen chip in the pipeline it's coming and you you know you're sensationalizing how amazing it is compared to the hopper chip the old one then your Googles and your metas and your Amazon and your microsofts are they going to go actually you know what let's stop buying Hopper what's the point we'll just wait for Blackwell so is now maybe some of this slightly underwhelming Revenue beat maybe it's the beginning of these big boys starting to go you know what we're going to stop buying Hopper now let's just wait for Blackwell now if Blackwell gets delayed further then that Gap widens and it can become a much larger you know Revenue risk for NVIDIA on these forecasts that they're putting out so obviously there's a lot of unknowns there do do these big Tech Giants do they have to carry on buying Hopper chips you know do because they don't want to there's a there's a race on here so it's the biggest race in history in many respects in terms of the money that's being thrown at it and do meta want to sit out of the race for two months whilst they wait for Blackwell or do they go oh God we're just going to have to carry on buying Hopper right up to the day that Blackwell actually gets shipped so we don't know if there's going to be this this Gap or not but it's certainly an unknown uh and a risk and just one of those elements that that adds to a bit of nervousness around video share price up at these levels the final piece within this was the addition nor $50 billion of share buyback so is that a little cushion little buffer to the market to soften the blood so of these things you've described yeah possibly I don't know what to make of that I mean there ah they're kind of I think their cash um their cash balance right now is $25 billion right um that they're not making the profits the likes of those other big mag 7 I mean apart from Tesla or maybe Amazon who've got super tight margins but they're not making profits like Google and meta and Microsoft CU they they're they're not as big yet from a revenue dollars and a profit dollars point of view and yet they're getting the bat out with $ 50 billion this is the second um share buyback announcement and in you know in consecutive quarters so I mean yes it can help but when you think their market cap is three trillion um you know 50 billion it's not a lot of money it's a very weird phrase I've just said 50 billion is not a lot of money but it's not I mean it's like 2% of the market cap and so yes it can help but I think all the other stuff we've spoken about is way more important for influencing the share price than that stock buyback line item you said you said looking forward is is ultimately really critical in terms of an investment perspective direction of where the stock is going and I I totally agree with that and I actually think there's two phases to this first phase being um everything you describe data center underwhelming bad Outlet problems of Blackwell margin squeeze these are all far from the like rockar performance that we've seen for the for the last year and a half or so however long it's been however I think that this is a really healthy transition for the next L for NVIDIA in a sense of it was always inevitable they're going to have to normalize you mentioned about comps it's going to get that's bound to happen and so I think they're right in a sense I mean the numbers are the numbers but the guance where it's okay do you know what I'm not going to stick a figure on Blackwell I'm going to be vag I'm going to say several billion the are going to Pro me and push me I'm not going to give you specifics cuz I don't want to set the bar all I want to do is manage I want to manage the deceleration of the metrics you described and actually I think that they you know you say context the stock was up what 300% last year up another 150 plus this year they come off 8% and the market bounced all of the move in the Nast futures from last night so I think they play the Blinder hit yeah okay so I guess that their challenge is ma yes it's managing the deceleration to put another way it's kind of managing a orderly deflation of the bubble right exactly and and yeah I mean I think one you know the first kind of part of that chapter is right let's let's make sure on the guidance side as you're saying let's let's be conservative with' got you know straight out of the Steve Jobs Playbook um let's be conservative with earnings and then let's go and and smash them um but yeah I don't know whether the unknown for me is you know this is the end and actually nvidia's share price peaked so far this year and I think in your mind we'll beat that but at the moment it's June the 18th and it was 130 bucks okay 13185 okay that's the high and and it Remains the high to this day right now what I want to know is is this share price up here does that account for NVIDIA no longer absolutely dismantling and destroying all expectations because I think they're into the next phase which is now look don't get me wrong these numbers are amazing you know growing Topline growth at 120% when you're clocking in you know $30 billion it's it's it is amazing but it's not Rockstar so I think we're into the amazing phase now the Rockstar stuff's you know the Oasis Rockstar phase has has ended so I'm just thinking well where's the share price what's the right share price for chapter 2 here and I think it needs to let me put it this way I think it needs to grow into this share price I don't think it'll take cuz look their growth rate is still fantastic but I think there's a period of calm here and it'll and we've seen that in the last two months two and a half months it hasn't gone up it's gone sideways with a lot of volatility so I think it needs to grow into this share price a bit and then maybe later in the year it can it can justify going again um but yeah I think we're definitely into phase two now to conclude then you need put this into a bit of context from a wider perspective looking at the broader Equity Market at macro and picture yeah absolutely and so cuz as we've said Nvidia really the poster child of the tech of the AI boom um you know Tech has been leading the rally if you're looking up broad indices like the S&P 500 for example then Tech has been leading the rally all year um Nvidia just on its own um has made up more than a quarter of the S&P 500's gains as come from just that one stock um and so kind of sums it up nvidia's 6% of that index and yet has delivered over one quarter of its total gains right but since nvidia's June Peak there's been a Changing of the Guard and Tech is no longer leading the index higher and in fact if you look since June the 18th um Tech is Tech in a a sector in that index is actually the O it's only one of two that are down in that 2 and a half month period and Tech is the worst performer it's down like 4% okay in the last two months two and a half months Communications is next worst it's down like 1% all other sectors are up and it's actually being led so there there's been a sector rotation play ever since Nvidia peaked June the 18th and money's coming out of big Tech and we've spoken about this before it's come out of the mag s it's going into some of these unloved sectors that have been underperforming especially the interest rate sensitive sectors now that rate cuts are coming so real estate for example that's been the best performer it's actually up nearly 15% in the last two and a half months right because rate cuts are coming so there's been this sector rotation and these numbers from Nvidia last night they don't tell me that's going to change I mean I think that Tech is going to continue to underperform and it's no longer going to be that key driver on the upside and it's just a question of whether all the rest can actually drive a big enough rally for the S&P to make new highs without Tech joining in and Tech is it's like 30% of the index right so that's my thesis is thep is going to find it hard on the upside if tech are sat out of the game is this just like a Time challenge then because if the if tech can under perform and the market doesn't seriously sell off and the rest pushing it and the market goes into a whole pattern it isn't it just a matter of time before then Tech resumes some s interest again and then if you have that already Baseline covered the downsides covered by a broader subset of sectors yeah you're missing the opposite argument though so here here is what I think will happen either you're right okay and rate Cuts start coming there's no recession or it's very mild you know the US Labor Market says stays solid then you actually start to see genuine Revenue coming into these other big Tech firms from their AI invest investment that's what really what we need to see next is the the ridiculous AI investment that's going on has to start to bear fruit um so if that can happen right no recession AI revenues start to really ramp then yeah we're our way to the races and we're going to go again on the upside and Tech will be all over it however the opposite is that the labor market weakens the FED aren't quite as aggressive cutting as people want and then you get that double negative where Tech aren't in the game anymore and actually this rally you're seeing in all the other sectors really starts to lose momentum and then you get the double whammy of of everything's bearish and then then the index can come off you know absolutely so yeah we're we're in an interesting hold pattern here whilst we first well next up is next week labor market report from the US um Friday uh end of next week will be the next key kind of uh litmus test on on the US economy and therefore where these markets going next that's the big one it feels like yeah absolutely cool well look great to grab your thoughts very early uh this morning so good to get that out fresh off the press thanks beers thanks everyone for listening and yeah see you next week cash load out thanks a lot