Nvidia's (NVDA +2.59%) stock skyrocketed 24% on May 25 after the chipmaker posted its latest earnings report. For the first quarter of fiscal 2024, which ended on April 30, its revenue fell 13% year over year to $7.19 billion but exceeded analysts' estimates by $670 million. Its adjusted net income declined 21% to $2.71 billion, or $1.09 per share, but still comfortably cleared the consensus forecast by $0.17.
Nvidia still faces a lot of near-term headwinds, but its sequential growth and strong outlook for the second quarter suggest it has reached its cyclical trough. Let's see if Nvidia's stock is still worth buying after its massive post-earnings rally.
Nvidia CEO Jensen Huang with his company's RTX 4090 GPU. Image source: Nvidia.
Looking back at Nvidia's cyclical slowdown
Nvidia's GPU sales surged throughout the pandemic as consumers bought more PCs for online classes, remote work, and high-end gaming. The soaring use of cloud-based services also prompted more data centers to upgrade their servers. Its acquisition of the data-center networking company Mellanox in 2020 amplified that growth.
That's why Nvidia's revenue and adjusted earnings per share (EPS) jumped 53% and 73%, respectively, in fiscal 2021 (which ended in January 2021). In fiscal 2022, its revenue and adjusted EPS increased 61% and 78%, respectively.
However, those tailwinds abruptly dissipated over the past year as sales of new PCs cooled off in a post-pandemic market, and enterprise customers bought fewer data center chips as they grappled with the macro headwinds. Also, the crypto market -- which had prompted many miners to buy Nvidia's high-end GPUs -- was disrupted by soaring interest rates and a retreat toward conservative investments. U.S. regulators also blocked Nvidia's sales of high-end data center GPUs to China.
NASDAQ: NVDA
Key Data Points
As a result, revenue remained nearly flat in fiscal 2023 as its adjusted EPS fell 25%. Its gaming revenue (34% of its full-year total) declined year over year during the past four quarters, as its data center revenue (56% of the total) decelerated for three consecutive quarters before accelerating again in the first quarter of fiscal 2024.
|
Growth by Segment (YOY) |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Gaming revenue |
31% |
(33%) |
(51%) |
(46%) |
(38%) |
|
Data center revenue |
83% |
61% |
31% |
11% |
14% |
|
Total revenue |
46% |
3% |
(17%) |
(21%) |
(13%) |
Data source: Nvidia. YOY = year over year.
Looking toward Nvidia's cyclical recovery
Nvidia's year-over-year growth rates look dismal, but its quarter-over-quarter growth tells a completely different story of its cyclical decline and subsequent recovery.
|
Growth by Segment (QOQ) |
Q1 2023 |
Q2 2023 |
Q3 2023 |
Q4 2023 |
Q1 2024 |
|---|---|---|---|---|---|
|
Gaming revenue |
6% |
(44%) |
(23%) |
16% |
22% |
|
Data center revenue |
15% |
1% |
1% |
(6%) |
18% |
|
Total revenue |
8% |
(19%) |
(12%) |
2% |
19% |
Data source: Nvidia. QOQ = quarter over quarter.
For the second quarter of 2024, Nvidia expects its revenue to rise 53% sequentially and 64% year over year to about $11 billion. That rosy outlook, which blew past analysts' expectations for $7.1 billion, strongly suggests its cyclical slowdown is over.
During the conference call, chief financial officer Colette Kress attributed its stunning guidance to a "steep increase in demand related to generative AI and large language models" for its data center business. As for its gaming business, Kress said Nvidia was experiencing "strong sequential growth" in its sales of 40 Series GeForce RTX GPUs for notebooks and desktops.
Nvidia's adjusted gross margin dipped 30 basis points year over year to 66.8% in the first quarter, but that still represented an improvement of 70 basis points from the fourth quarter. It expects that sequential expansion to continue with an adjusted gross margin of 70% in the second quarter as a favorable mix of higher-margin chips offsets its higher costs.
Nvidia's forward valuations aren't reliable anymore
Nvidia's stock might seem pricey at more than 60 times forward earnings, especially when its GPU rival AMD (AMD +3.50%) has a forward price-to-earnings ratio of 28. But Nvidia's valuations are still pegged to Wall Street's cautious estimates -- which were effectively rendered obsolete by its first-quarter earnings beat and second-quarter guidance.
Analysts had originally expected Nvidia's revenue and adjusted EPS to grow 12% and 37%, respectively, in fiscal 2024. But its guidance suggests those estimates are too low, so the stock could actually be cheap relative to its near-term growth.
In other words, it still isn't too late to buy Nvidia. Analysts clearly underestimated the growth potential of the generative AI market as well as the resilience of its high-end gaming market in this post-pandemic world, and its stock could blow past its all-time highs again as its sales of data center and gaming GPUs accelerate again.
