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Cramer advises against buying Nvidia shares en masse after drop in profit figures

Vaseline August 29, 2024

Nvidia’s financial results released after the close on Wednesday weren’t quite the $4 billion “Triple Lindy” of upside that many investors had been hoping for. But they were darn close, averting a feared mass sell-off in one of the three U.S. companies in the $3 trillion market cap club. The AI semiconductor giant’s second-quarter fiscal 2025 revenue jumped 122% year over year to $30.04 billion, well above analysts’ forecasts of $28.7 billion, according to data provider LSEG. While that topped about $1.3 billion, it was short of the $2 billion superlative Wall Street had talked itself into expecting. Adjusted earnings per share rose 152% to 68 cents, topping the LSEG-compiled consensus estimate of 64 cents. Revenue guidance for the current quarter was for a sequential increase of nearly $2.5 billion. Along with the fiscal Q2 beat, we got about $2 billion of the $4 billion. On top of the strong results, we got the optimistic long-term commentary that was called for in the “Triple Lindy,” with CEO Jensen Huang saying that “demand for Hopper remains strong and the expectation for Blackwell is incredible.” Add in the $50 billion buyback authorization and maybe we can call it the “Two and a half Lindy.” NVDA YTD mountain Nvidia YTD Continuing its rough patch since closing above $135 on June 18, Nvidia stock fell more than 7 percent in after-hours trading. That didn’t come as a surprise to us, though, as Jim Cramer said during Wednesday’s morning meeting that there was a lot of “hot money” in the club’s name waiting to be flushed out. We’re talking about investors who bought the stock but don’t have much conviction or concern for the long term and would sell at anything short of a blowout figure. Jim sees no need to get in first thing Thursday morning and buy the dip. Let the sellers unload. But for those interested in the long term, we think Nvidia’s future looks bright. As such, we reiterate our Buy-Equivalent 1 rating and $150/share price target. Conclusion In another example of the importance of considering buy-side expectations when thinking about how to position yourself for an earnings report, Nvidia’s strong results and solid outlook didn’t keep the sellers away. Shares fell because expectations simply got out of hand. The results, the guidance, and everything we heard on the call only reinforced our belief that Nvidia truly is the best semiconductor company in the world at the heart of the accelerating computing megatrend. With annual gains in central processing unit (CPU) computing power far more incremental today than they were when Moore’s Law was in full effect, accelerated graphics processing unit (GPU) computing, which is Nvidia’s specialty, is key to everything from autonomous driving to robotics, generative AI, digital twins, computer-aided drug discovery and more. In addition to an overall stronger fiscal Q3 quarterly guidance, CFO Colette Kress said during the company’s post-earnings call that purchases of the current Hopper chip architecture accelerated, even as customers “prepare to adopt Blackwell,” the company’s next-generation artificial intelligence chip platform. Based on Kress’ commentary, we still don’t see any air pockets in demand, despite slight delays to the Blackwell launch. The CFO added that “Blackwell production is scheduled to begin in the fourth quarter and run into fiscal 2026.” The company is already forecasting “several billion dollars in Blackwell revenue in the fourth quarter.” While management hasn’t officially provided revenue guidance beyond the current quarter, we think it’s safe to say demand will continue through calendar year 2025. That confirms a common theme we’ve heard when the cloud companies, which are big Nvidia customers, reported their latest financials, namely that the risk was underinvestment in AI hardware, not overinvestment. Cloud providers and the big tech companies are in an arms race with everyone fighting to be first or at least stay relevant. They have no chance of doing that if they don’t keep upgrading their hardware. Will customers sign up or stick with Microsoft’s Azure if it only offers the Hopper architecture, while Amazon Web Services and Google Cloud offer Blackwell when it launches? Will consumers continue to use OpenAI’s ChatGPT if it runs on Hopper, while Meta Platform’s Llama 3 uses Blackwell for inference? They have no choice but to keep moving forward, and that means turning to Nvidia for the latest and greatest data center technology in the world. Nvidia Why we own it: Nvidia’s high-performance graphics processing units (GPUs) are the primary driver of the AI revolution, powering the accelerated data centers that are being rapidly built around the world. But it’s more than just a hardware story. Through its Nvidia AI Enterprise service, Nvidia is building a potentially massive software business. Competitors: Advanced Micro Devices and Intel Most recent acquisition: August 31, 2022 Initiated: March 2019 Software revenue also appears to be on a very strong trajectory, according to Kress. “We expect our software, SaaS, and support revenue to approach a $2 billion annual run rate this year, with Nvidia AI Enterprise making a notable contribution to growth.” That’s double the $1 billion run rate at the end of the fourth quarter of fiscal 2024. That plays into our expectation that the emerging software business is a big opportunity and key to future growth, and will support the stock’s valuation given its higher-margin, recurring nature. It should also serve to reduce volatility throughout the business cycle, not unlike what we’ve seen with Apple as services sales have become a bigger share of total sales. That cushion takes some pressure off the iPhone’s quarterly performance. Kress also reiterated that healthcare “is also on track to become a multibillion-dollar business as AI revolutionizes medical imaging, surgical robots, patient care, electronic medical records, and drug discovery.” Quarterly Commentary Nvidia’s better-than-expected sales in its fiscal second quarter were driven by strength in all major segments, including record revenue in the Data Center segment. The better-than-expected $26.27 billion in Data Center sales came primarily from Compute such as Hopper GPUs, while the remaining $3.67 billion came from Networking such as InfiniBand and Spectrum-X. About 45% of segment sales came from cloud service providers including Azure, AWS, Google Cloud, and more than 50% came from “consumer internet and enterprise companies,” as generative AI, model training and inference continue to drive demand for Nvidia’s cutting-edge offerings. Management estimates that inference demand has accounted for 40% of data center revenue over the past four quarters. When you ask ChatGPT — or other generative AI models — a question, the answer you get back is inference at work. The model “infers” the answer to a new question based on its training. On China, Kress said: “Data center revenue in China grew sequentially in Q2 and is a significant contributor to our data center revenue. As a percentage of total data center revenue, it remains below the levels seen prior to the imposition of export controls. We continue to expect the Chinese market to be very competitive going forward.” Global governments also remain a very exciting source of demand, with Huang saying during the Q&A portion of the call that “in terms of revenue, it’s certainly a unique and growing opportunity, something that’s come up with generative AI and the desires of countries around the world to have their own generative AI that could integrate their own language, their own culture, their own data within that country. So there’s increasing excitement around these models and what they can be specific to those countries. So yes, we do see some growth opportunities ahead of us.” During the call, Kress said, “Automotive was a key growth driver for the quarter, as every automaker developing autonomous vehicle technology uses Nvidia in their data centers. Automotive will drive billions of dollars in revenue across on-prem and Cloud prem and will grow as next-generation AV (autonomous vehicle) models require significantly more computing power.” Growth in the Automotive segment was driven by “new customer acquisitions in self-driving platforms and increased demand for AI cockpit solutions,” she added. Turning to robotics, an area we believe could see tremendous growth over the next decade and one that Nvidia is uniquely equipped to handle given its years of research and experience coding the real laws of physics into digital simulations, Kress said, “Boston Dynamics, BYD Electronics, Intrinsic, Siemens, Skill AI and Paradigma Robotics are using the Nvidia Isaac Robotics platform for autonomous robotic arms and mobile robots.” On Gaming and AI personal computers, Kress noted sequential growth in console, notebook and desktop PC sales, adding that “demand is strong and channel inventory growth remains healthy.” In the Professional Visualization segment, Kress said that “demand is being driven by AI and graphics use cases, including model fine-tuning and Omniverse-related workloads.” Digital twins remain a key use case, with companies using Nvidia Omniverse to create virtual models of physical locations. “The world’s largest electronics manufacturer, Foxconn, is using Nvidia Omniverse to power digital twins of its physical factories producing Nvidia Blackwell systems. And several large global enterprises, including Mercedes-Benz, signed multi-year contracts with Nvidia Omniverse Cloud to build industrial digital twin factories.” Guidance Looking closer at the guidance, Nvidia’s fiscal third quarter may not have beaten Wall Street estimates to the extent some had hoped, but it was far from disappointing. Revenue of $32.5 billion, plus or minus 2%, was above the consensus of $31.77 billion. Adjusted gross margins are expected to be 75%, plus or minus 50 basis points, slightly below estimates of 75.5%, at the midpoint and below the in-line 75.7% in the fiscal second quarter. Expectations for adjusted operating expenses in the fiscal third quarter appear to be in line with expectations of about $3 billion. (Jim Cramer’s Charitable Trust is long NVDA, AAPL, MSFT, AMZN, META, MSFT. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim executes a trade. Jim waits 45 minutes after a trade alert is sent before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR DUTY EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Nvidia’s headquarters in Silicon Valley.

Andrei Sokolow | Photo Alliance | Getty Images

Nvidia‘s financial data released after Wednesday’s close wasn’t quite the $4 billion “Triple Lindy” of upside that many investors were hoping for. But it was darn close, preventing a feared mass sell-off in one of the three U.S. companies in the $3 trillion market-cap club.