Shares of Nvidia (NVDA) might not have responded the way investors hoped they would after the semiconductor giant delivered yet another blowout earnings report, but the company answered the most important question that has been on the minds of investors: The euphoria surrounding artificial intelligence (AI) and generative AI is more than hype.
Nvidia’s second quarter numbers and Q3 guidance suggests there is a sort of relentless demand for AI, especially in the datacenter, where the company’s revenue surged three-fold on a year-over-year basis. Nvidia's stock initially surged near 10% in the after-hour session, breaching the $500 benchmark for the first time. But through no fault of Nvidia, the gains couldn’t hold, pulling back to $460 amid more interest rate hike fears.
Let’s look through the numbers. For the second quarter, Nvidia reported adjusted EPS of $2.70, which breezed past analysts expectations by a whopping 30%. For some context, Nvidia not only blew away its own guidance of $2.07, the consensus estimate for this quarter a year ago was a modest $1.07 per share. Q2 revenue also crushed Street estimates by a staggering 22%, coming in at $13.51 billion while the Street was looking for $11.1 billion. Overall consensus of analysts were expecting the company to earn $2.09 per share on $11.1 billion in revenue.
The datacenter segment revenue soared by 171% year over year, soaring to a staggering $10.3 billion. In terms of profitability, Q2 adjusted gross margins came to 71.2%, above the 70.1% estimate. Looking ahead, for Q34 Nvidia said it expects third-quarter revenue at $16 billion, plus or minus 2%, well above the $12.5 billion that analysts were expecting. With a guidance that projects almost doubling the revenue growth for the third quarter, Nvidia signaled that the AI party is far from over.
In a note to clients, Wedbush Securities analyst Dan Ives said the results are a "historical moment for the broader tech sector," likening the guidance and commentary to that of a "drop the mic" moment. There is likely to be continued datacenter revenue acceleration for many quarters to come, underscoring the opportunity within AI is still at a nascent stage. "The October quarter guidance of $16 billion was well above $12.6 billion estimates and quickly rising whisper numbers on the Street and will be fuel in the engine to ignite a tech rally we see continuing into the rest of the year despite the recent pullback and Fed jitters (Jackson Hole meeting) in the air," Ives wrote.
The good news didn’t stop there. The revenue and earnings guidance are in context to the company's capital expenditures targets which remain virtually the same, holding steady in the range of $1.1 billion to $1.3 billion. What’s more, The company annoyed the approval of $25 billion in share buybacks, saying it would continue to buy back stock this fiscal year.
Without question, Nvidia’s valuation has surpassed what the company’s current fundamentals suggests it should be worth. Investors and the enterprise customers have recognized the importance of Nvidia’s GPU datacenter accelerators which can potentially serve as the backbone for generative AI infrastructure. Nvidia continues to enjoy not only tons of AI tailwinds, but also the company’s fundamentals continues to improve evidenced by its margin improvement.
As such, despite the stock pulling back below $500 amid recent Fed jitters, the best play here is to stay invested in Nvidia and add on any continued pullback. Given the company’s strong Q2 results and confident guidance for Q3 and fiscal year 2024, I’m raising the year-end stock price from $500 to $560.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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