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Nvidia’s revenues have exceeded our high bar. Here’s our new price target for the AI chip king

Vaseline November 21, 2024

Nvidia shares fell Wednesday evening despite another beat-and-raise quarter. Simply put, the leading AI chip maker once again fell victim to the curse of high expectations. That’s not a problem for us, though, as Nvidia’s underlying fundamentals and long-term prospects appear as healthy as ever. Revenue rose 94% year over year to a record $35.08 billion, easily surpassing the $33.16 billion the Street was looking for, according to estimates from data provider LSEG. Adjusted earnings per share more than doubled to 81 cents, beating the consensus estimate of 75 cents, LSEG data showed. Sales and gross margin expectations for the current quarter were also higher than expected, but clearly not the size the most optimistic investors had hoped for (let them sell, more for us). Shares fell nearly 2% to around $143 apiece in extended trading. Shares of Nvidia, the world’s most valuable company, ended Wednesday’s session up nearly 42% since their most recent low in early September. That marked the end of an unnecessarily steep sell-off in response to the late August earnings report. NVDA YTD stocks Nvidia’s stock performance this year. In short, Nvidia reported a fantastic quarter on Wednesday – even if guidance for the current quarter fell slightly short of top expectations, which weighed on the stock. It’s hard to complain about a beat-and-raise quarter just because the beat-and-raise wasn’t as big as some wanted. Nvidia’s earnings numbers made it clear that we’re just in the early stages of an artificial intelligence revolution that will drive demand for Nvidia’s market-leading chips well into 2025 and likely well beyond. We reiterate our 1 rating and increase our price target for the stock from $150 to $165 per share. Comment Nvidia’s next-generation AI chip Blackwell is “in full production,” according to CFO Colette Kress. And it will increase until the 2026 budget year, which begins in earnest in February. Customers are hungry for the chips. “We will ship both Hopper and Blackwell (current generation) systems in the fourth quarter of fiscal 2025 and beyond,” Kress said in written comments. “Both Hopper and Blackwell systems have certain supply constraints, and demand for Blackwell is expected to exceed supply for several quarters in fiscal 2026.” Some investors may see the supply crunch as disappointing because it means money will be left on the table, at least until the middle of next year. But we’re not worried. This is almost certainly a dynamic in which revenue is displaced rather than completely lost. Therefore, any material pullback in Nvidia stock due to these restrictions is buyable – that’s the advantage of a long-term-oriented investor. Ultimately, the Blackwell orders will be filled, and given the company’s efforts to update its product lines annually, we’ll already be hearing about the next generation of chips by the time supply catches up with demand. CEO Jensen Huang was unsurprisingly asked about a recent media report stating that a certain configuration of Blackwell chips was overheating. Huang was about as dismissive as he could be – not that he necessarily deflected the question. His answer made it seem like he just didn’t see the problem. He highlighted how advanced Blackwell is, both in terms of the complex manufacturing process and the act of actually having them installed in data centers. “That integration process (with customer-specific data centers) is something we have been doing for several generations now. We are very good at it,” says Huang. “But there is still a lot of technology going on at the moment. … As you can see from all the systems being set up, Blackwell is in great shape.” Nvidia Why We Own It: Nvidia’s powerful graphics processing units (GPUs) are the main driver of the AI revolution, powering the accelerated data centers that are rapidly moving across the are being built around the world. But this is more than just a hardware story. Through its Nvidia AI Enterprise service, Nvidia is building a potentially huge software company recent purchase: August 31, 2022 Initiation: March 2019 Huang has pushed back on another burgeoning concern in the investment community: Does the quality of AI models not improve as much as previously expected, despite the added computing power It is what is known in the technology industry? as “scaling.” Think of it as reaching a ceiling where larger data centers with more GPUs don’t yield as much improvement in model capabilities – at least not enough to justify all the extra spending on the latest and greatest hardware. justify. Perhaps that will be the case one day, but according to Huang that does not seem to be the case for the time being. Analyzing a given AI model, Huang said there are essentially three distinct phases in which it can become more advanced thanks to a larger pool of increasingly powerful chips: 1) the initial “pre-training” phase, 2) the refinement process where refined Tuning adjustments take place 3) real world use, also called inference. The CEO argued that as Blackwell availability increases and customers can benefit from the performance improvements over Hopper, there should be a noticeable improvement in model quality at each stage. He noted that the current generation of so-called basic models – essentially large, general-purpose models – uses about 100,000 Hopper chips. As we embark on this next generation, we will see models running on 100,000 Blackwell chips – and the scaling is still in effect. Huang’s argument is that moving beyond 100,000 Blackwell chips will create even more capable models. The positive implication for Nvidia’s shareholders is that its customers are almost forced to buy more or risk falling behind competitors who do. Huang also allayed concerns about a looming “digestion phase” following Hopper’s transition to Blackwell. That’s when customers temporarily withdraw orders, allowing them to make a profit and generate a real return on the investments they’ve made in the existing computing infrastructure. It’s a fair question to ask, because Nvidia stock has historically taken a pretty big hit when its customers — like cloud computing providers — started uttering this phrase. “I believe there will be no digestion until we modernize $1 trillion worth of data centers,” Huang said, adding: “If you just look at the world’s data centers, the vast majority of them have been built for a while where we wrote applications by hand and we ran them on CPUs.” The modernization Huang is referring to is about GPU-centric data centers, aiming for a world of AI-written software. Nvidia also continues to see momentum in sovereign AI now land them embracing chip technology “for a new industrial revolution powered by AI,” according to chief financial officer Kress. This is a growing market for Nvidia that will help broaden its customer base far beyond US tech giants like Microsoft, Meta Platforms and Amazon add up – supply constraints, still-intact scaling, aging centers and a growing customer pool – and it becomes crystal clear that selling Nvidia stock based on quarterly guidance is the wrong approach. Investors will be better served by owning stocks for the long term, rather than trying to trade on every swing in the stock price. Guidance Taking a closer look at the guidance, Nvidia’s fiscal fourth quarter outlook looks good compared to analyst consensus estimates. However, investors have come to expect that ahead of expectations is the bare minimum for this company. Wall Street is expected to debate in the coming days whether the magnitude of the better-than-expected outlook warrants the stock returning to an all-time high close of nearly $149 per share. It’s worth repeating: nitpicking whether management’s outlook for the next three months, especially during a major production disaster, isn’t the way to maximize your long-term upside. Instead, focusing on the underlying trends reveals a company with a huge runway for growth ahead. Revenue of $37.5 billion, plus or minus 2%, higher than the consensus estimate of $37.1 billion. That implies year-on-year growth of about 70%. Adjusted gross margins are expected to be 73.5%, plus or minus 50 basis points, slightly higher than the 73.3% estimate. In the future, margins will remain the same. Expectations for fiscal fourth quarter adjusted operating expenses of $3.4 billion appear to be slightly higher than expectations of about $3.2 billion. Looking a little further, management says it is reasonable to assume that Nvidia’s gross margin percentage will return to the mid-70s by the second half of the 2025 calendar year. To be sure, executives explained that this will depend from the path of the Blackwell disaster. and the company’s sales mix. (Jim Cramer’s Charitable Trust is long NVDA. See here for a full list of the stocks.) As a CNBC Investing Club subscriber with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. No fiduciary obligation or duty exists nor is it created by your receipt of any information provided in connection with the Investment Club. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Jensen Huang, co-founder and CEO of Nvidia Corp., holds up the company’s AI accelerator chips for data centers as he speaks during the Nvidia AI Summit Japan in Tokyo, Japan, on Wednesday, November 13, 2024.

Akio Kon | Bloomberg | Getty Images

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Nvidia’s revenues have exceeded our high bar. Here’s our new price target for the AI chip king

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Nvidia’s revenues have exceeded our high bar. Here’s our new price target for the AI ​​chip king

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Nvidia’s revenues have exceeded our high bar. Here’s our new price target for the AI chip king