Nvidia's (NVDA +2.07%) report for its second quarter of fiscal 2024, which ended July 30, was phenomenal. The graphics chip specialist grew its year-over-year revenue and adjusted earnings per share (EPS) by 101% and 429%, respectively. Both results crushed Wall Street's expectations and the company's guidance.
Growth was driven by the data center platform's revenue surging 171% year over year, thanks to what top management called "tremendous" demand for the company's products that enable artificial intelligence (AI) capabilities, particularly generative AI. This is the technology behind ChatGPT, a chatbot that launched late last year and has sparked widespread excitement about the tech's potential applications.
Demand for Nvidia's data center products is even more voracious than reflected in its fantastic Q2 results. That's because the company is supply constrained.
Supply constrained
Demand for Nvidia's data center products that enable generative AI, particularly its HGX AI supercomputing platform, is so great that the company can't fulfill the entirety of this demand in a timely manner. In other words, had the company not been supply constrained, its Q2 results would have almost surely been even better.
Having demand exceed supply is a good "problem" for businesses to have -- assuming they can meet that demand before competitors steal their customers. Nearly all customers are likely to wait for the availability of Nvidia's graphics processing unit (GPU)-based data center products, in my view. These products have been considered the gold standard for AI training for some time, which is why they dominate this market. And they've also made huge strides in recent years in the data center AI inferencing market.
Moreover, if Nvidia is supply constrained, it's likely that many of its competitors are in the same boat.
NASDAQ: NVDA
Key Data Points
Suppliers are "significantly" ramping up production capacity
From CFO Colette Kress' remarks on the Q2 earnings call:
Our supply partners have been exceptional in ramping capacity to support our needs. ... We have also developed and qualified additional capacity and suppliers for key steps in the manufacturing process such as co-op packaging. We expect supply to increase each quarter through next year.
On the call, CEO Jensen Huang said supply will increase "substantially" through next year. Thus, it seems likely that Nvidia's data center revenue will continue to substantially increase quarter after quarter through at least the next fiscal year (six more quarters). And given that the data center is the company's largest platform -- it accounted for 76% of total revenue in the just-reported quarter -- it seems probable that the company's overall revenue will also continue to grow at an impressive sequential clip.
Nvidia's huge size gives it a supply chain advantage
Large companies have more leverage with their supply partners than do smaller ones. Suppliers are likely to go the extra mile to keep their top customers happy.
Moreover, Nvidia's size gives it the financial resources to take supply chain actions that less financially fit customers might be unable to do. In fiscal 2023 (ended Jan. 29), the company "placed non-cancellable inventory orders for certain product components in advance of our historical lead times, paid premiums and provided deposits to secure future supply," it said its annual report. Not all companies would have the financial strength to take these measures, particularly paying premiums for supplies.
As of the end of fiscal Q2, Nvidia's inventory purchase and long-term supply obligations were $11.15 billion and its prepaid supply agreements totaled a whopping $3.81 billion. In her CFO commentary, Kress said these "commitment increases largely reflect our long-term supply needs for our Data Center products."
