- NVIDIA easily surpasses expectations for Q3 and raises guidance for Q4
- AI lies behind ongoing surge in demand
- Share price unmoved as investors weigh giant market cap and risks posed by Chinese market
“For the third time in a row, silicon chip specialist NVIDIA has hugely outstripped analysts’ expectations for quarterly earnings and raised guidance for the next three months to levels that also exceeded forecasts, as the Artificial Intelligence (AI) and machine learning boom continues,” says AJ Bell investment director Russ Mould. “However, the shares are not responding as strongly as they did after the bumper Q1 and Q2 results, as investors ponder the risks posed by American sanctions on Chinese buying and also NVIDIA’s already huge market valuation which, at $1.2 trillion, means it is the sixth most valuable publicly quoted firm.
“Third-quarter sales came in at $18.1 billion, up from $13.5 billion in Q1 and ahead of the consensus forecast of $16 billion.
“Net income reached $9.2 billion, up $3.1 billion from Q2 and way ahead of the equivalent period in the prior year.
“Bulls of the stock could also draw encouragement from how inventory rose only modestly by just $400 million, despite the massive jump in sales, to bolster the argument that 2022’s slowdown in sales and surge in unsold product was just a blip. Revenue growth is easily exceeding the increase in inventory once more – stockpiles rose just 7% while sales more than trebled year-on-year.
Source: Company accounts
“That helped to take inventory days down to 92 from 97 at NVIDIA, which designs its chips but then outsources the manufacturing process – primarily to Taiwan’s TSMC, the world’s leading semiconductor foundry.
Source: Company accounts
“That is much more in line with recent norms and helps to set the scene for the fourth quarter, as demand surges thanks to the shift towards generative AI and accelerated computing, whereby core control remains on the central processing unit (CPU) and data-intensive tasks are managed by a separate acceleration device.
“NVIDIA is guiding Q3 sales to $20 billion, well above the consensus of $17.6 billion and the $6.1 billion achieved in the same three-month period a year ago.
Source: Company accounts, Zack’s, NASDAQ, analysts’ consensus forecasts, company guidance
“Mr Huang’s guidance for cost of goods, operating expenses, interest expense and tax imply a net profit in the fourth quarter of some $10.2 billion, a figure that would be the third consecutive record for the company if it is achieved.
Source: Company accounts, Zack’s, NASDAQ, analysts’ consensus forecasts, company guidance
“The monster market capitalisation leaves the stock trading on 21 times forecast sales and 44 times estimated net profits for the year to January 2024 (taking into account the bumper Q3s and raised guidance for Q4) and needs this sort of momentum so it can be justified.
“And as the numbers get bigger, the upside surprises get smaller in percentage terms and the share price seems to be becoming less excited. The shares are doing little in response to the Q3 results and trade no higher now than they did after August’s blow-out Q2 results, even though the company continues to deliver the goods when it comes to AI-enabling chipsets.
“Bears have little to chew upon, although China represents one fifth of the company’s sales and the US clampdown on business with the country means NVIDIA will have to sell redesigned, lower-spec products going forward.
“This begs the question of whether NVIDIA is now unwittingly benefiting from panic buying, double-ordering and stockpiling, something the company and its shareholders have seen during previous booms. Such trends left the company open to huge earnings disappointments and big swings in profit such as during the 2007-09 downturn when the share price more than halved (a trick it repeated in 2018 and 2022), and any unexpected repeat – no matter how unlikely it looks right now – would leave that $1.2 trillion market cap very hard to justify.
Source: LSEG Datastream
“Unfortunately, it is only really possible to see double-ordering once the order book starts to unravel and the book-to-bill (new orders-to-sales) begins to drop. All die-hard sceptics have to go on right now is another in trade receivables, as this implies that NVIDIA is booking revenues on chips which it is shipping but for which it has not been paid. Even here, the increase is not extraordinary given the rapid jump in sales and days receivable fell in the third quarter, but if there is to be a warning of any trouble ahead, the balance sheet will probably show it first, through inventories and receivables.”
Source: Company accounts
