Nvidia’s Q1 FY25 earnings exceeded expectations, driven by strong Data Center growth and optimistic guidance, though pricing challenges due to market cyclicality remain a concern for investors.
- Nvidia’s Q1 FY25 earnings surpassed estimates with $26 billion in revenue and $6.12 EPS, beating projections and showcasing strong financial performance and market leadership.
- The Data Center segment saw exceptional growth, with $22.5 billion in revenue, a 427% YoY increase, driven by high demand for AI infrastructure and Nvidia’s Hopper GPUs.
- Nvidia’s optimistic guidance and continued AI demand indicate growth potential. However, the difficulty in pricing the company accurately due to market cyclicality remains a concern.
Nvidia stock just crushed Q1 earnings estimates, surpassing $1,000 per share in post-earnings calls. The fundamentals not only exceeded market expectations but also delivered guidance above consensus. Additionally, the company announced a 10-for-1 stock split.
The CEO’s remarks instilled confidence in the market regarding the industry’s evolution, particularly the transition to the next-gen Blackwell product. Let’s explore whether Nvidia remains a good buy.
Q1 Earnings Boosted Optimism
Nvidia’s first-quarter earnings for Fiscal Year 2025 exceeded market expectations, demonstrating robust performance across key financial metrics. The company reported a revenue of $26 billion, surpassing the anticipated $24.6 billion. Earnings per share (EPS) also outpaced projections, reaching $6.12 compared to the expected $5.58. These figures underscore Nvidia’s strong market position and its ability to deliver impressive financial results, significantly above analyst forecasts.
A notable highlight of Nvidia’s earnings was the exceptional growth in its Data Center segment, which recorded a revenue of $22.5 billion. This segment’s revenue alone surpassed Nvidia’s entire revenue for the fourth quarter of FY24, which stood at $22 billion. The Data Center revenue represents a 427% year-over-year increase and a 23% sequential rise, marking a new record for the company. This surge was driven by higher shipments of the NVIDIA Hopper GPU computing platform, widely used for training and inferencing with large language models, recommendation engines, and generative AI applications.
Looking ahead, Nvidia has provided an optimistic outlook for the second quarter of FY25. The company expects revenue to be approximately $28 billion, with a margin of plus or minus 2%. Both GAAP and non-GAAP gross margins are anticipated to be around 74.8% and 75.5%, respectively, reflecting a stable and profitable operating environment.
This guidance exceeds market expectations, which had predicted a revenue of $26.6 billion and an EPS of approximately $5.96 for the second quarter. The strong outlook is bolstered by Nvidia’s CFO, Colette Kress, who highlighted the full production of Blackwell GPUs and ongoing software optimizations that enhance the performance of Nvidia AI infrastructure. While supply for the H100 GPU has improved, the H200 remains constrained, yet the demand for both H200 and Blackwell GPUs is expected to surpass supply well into the next year.
CEO Jensen Huang reinforced Nvidia’s optimistic future, particularly in the realm of AI. He emphasized that companies and countries are collaborating with Nvidia to transition traditional data centers to accelerated computing environments, effectively building “AI factories” to produce artificial intelligence. Huang highlighted that AI will drive significant productivity gains across industries, helping companies to be more cost-efficient and energy-efficient while expanding revenue opportunities.
Nvidia Stock: Still bullish, but little margin of safety
A fitting phrase that encapsulates Nvidia’s thesis over the past quarters is a quote from Peter Lynch:
“Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” Peter Lynch
In most recent quarters, expectations for Nvidia have been high, yet the company has managed to surpass expectations and deliver even more. Thus, despite a narrow margin of safety, Nvidia has consistently exceeded expectations, effectively expanding its margin of safety as its performance outstrips stock evolution.
To illustrate, despite recent extraordinary performance and surpassing $1,000, Nvidia’s NTM P/E ratio did not exceed 40x. While this multiple is indeed stretched, it doesn’t seem unreasonable considering the ongoing “super” AI cycle, which appears far from over. This suggests that the company could continue growing at an accelerated pace in the coming quarters.
It remains challenging to price the company accurately through DCF or multiples. For instance, what is the “fair” multiple for a company of this quality that is expected to continue leading this new trend? According to consensus, by FY 2027, the company should achieve an EPS of approximately $38.6, resulting in a P/E ratio of 27x, which again seems very reasonable. Therefore, if the company maintains its optimistic outlook and the cycle continues, it will likely keep advancing and delivering minimally interesting returns for shareholders.
Despite acknowledging the company’s quality and potential for further growth, the margin of safety remains crucial here. Although the technology will be significant in the coming years, there is uncertainty about cyclicality. In other words, I cannot guarantee that major Cloud companies and other Big Techsheir billions of dollars in CapEx will continue t for GPUs indefinitely. Thus, I maintain a more neutral stance on the company while admitting its quality.
The Bottom Line
In summary, Nvidia’s Q1 earnings showcase its strong financial health and market leadership, particularly in the Data Center and AI sectors. The company’s exceptional performance and optimistic guidance indicate a promising future (at least in the short/medium term), driven by continued innovation and growing demand for AI.
On the other hand, pricing the company remains challenging. Although current multiples are not excessively high, the market’s optimism regarding the AI cycle must persist for the stock price advances to be sustainable.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content)
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