After delivering a jaw-dropping outlook three months ago, all eyes were on Nvidia (NVDA 0.10%) when the company reported the results of its fiscal 2024 second quarter (ended Jul. 30). Management was calling for revenue of $11 billion, an increase of 64% year over year and 53% sequentially. The company cited strong demand for the processors used for artificial intelligence (AI), driven by the accelerating adoption of generative AI.
The company's guidance was unquestionably bullish, but after a more than 200% run-up in the stock price so far this year, a lot was riding on the results.
And Nvidia did not disappoint.
Exploding demand for AI
It's difficult to convey the magnitude of the company's outperformance. Nvidia generated revenue of $13.5 billion, up 101% year over year and up 88% since Q1. It also far exceeded the $11 billion management had forecast. This resulted in non-GAAP (generally accepted accounting principles) earnings per share (EPS) of $2.70, which soared 429%.
To give these numbers additional context, analysts' consensus estimates called for revenue of $11.22 billion and adjusted EPS of $2.09, so Nvidia cleared both bars by a wide margin.
Driven by AI
Nvidia graphics processing units (GPUs) have become the dominant force fueling the generative AI revolution, and that was on full display in the company's results. Revenue from the data center segment surged to a record $10.3 billion, up 171% year over year. CFO Colette Kress said, "Strong demand for the Nvidia HGX platform based on our Hopper and Ampere GPU architectures was primarily driven by the development of large language models and generative AI."
CEO Jensen Huang provided further insight: "During the quarter, major cloud service providers announced massive Nvidia H100 AI infrastructures." Further stating, "The race is on to adopt generative AI."
Nvidia DGX Grace Hopper 200 AI Supercomputer. Image source: Nvidia.
4 billion (more) reasons
The unprecedented increase in revenue also helped fuel the staggering profit increase. Consider this: On a GAAP basis, Nvidia's net income margin in the first quarter was an impressive 28%. However, the surge in additional revenue in Q2 drove its margin to nearly 46%. That means almost half of every dollar of revenue dropped to the bottom line. This, in turn, drove Nvidia's net income from $2 billion in Q1 to $6.2 billion in Q2 -- increasing profits by more than $4 billion.
It's also worth mentioning that Nvidia's gaming segment, which was punished during the downturn, is showing green shoots of growth. Revenue of $2.49 billion grew 22% year over year and up 11% sequentially as the long dry spell began to lift and gamers started upgrading their outdated processors. The gaming segment had long been Nvidia's primary breadwinner until it was overtaken by the data center segment early last year.
The future's so bright, I gotta wear shades
Despite Nvidia's blockbuster quarter, its outlook is equally stunning, and the company is forecasting another record-breaking performance. For the third quarter, management is guiding for revenue of $16 billion, an increase of 170% year over year.
That would represent back-to-back record quarters for Nvidia, and investors are undoubtedly wondering whether it's too late to buy the stock. The company's trailing-12-month sales jumped from $25.9 billion to $32.7 billion.
All things being equal -- and if the stock price were to remain the same in the wake of its results -- its price-to-sales ratio would drop from 46 to about 39, it's highly unlikely the stock price won't move. Value investors will likely still balk at Nvidia's lofty valuation. Still, given the magnitude of its revenue gains, the stock will be a better buy after earnings.
Investors have thus far underestimated the impact of AI and the potential market. While estimates vary, Cathie Wood's Ark Investment Management offered one of the most eye-catching prognostications: "AI should increase the productivity of knowledge workers more than 4-fold by 2030 ... If vendors were to capture 10% of value created by their products, AI software could generate up to $14 trillion in revenue."
Thus far, none of its rivals has come close to creating the state-of-the-art performance of Nvidia's AI chips. As such, investors should buy the industry leader and hang on for the wild ride ahead. That's not to say that Nvidia's stock price won't suffer a significant correction at some point -- it almost certainly will. But that could be months or years from now, and who knows how much Nvidia's stock will have risen by then.
