The technology company Nvidia is one of the most critical stocks in the world. It is by far the most actively traded stock in the market.
After the market closed on Wednesday, the company reported strong numbers for both earnings and revenues. Nvidia earned 68 cents against market expectations of 64 cents. On the revenue side, Nvidia generated revenues of $30.04 billion, a growth rate of 122%. The market anticipated a revenue number of $28.7 billion. As for the all important data center segment of Nvidia’s revenues, that too exceeded projections by analysts. It did so by over $1 billion.
The company also raised guidance for its October quarter. Nvidia operates on a January-January fiscal year. Very importantly, because of the rumors that Nvidia’s next generation architecture, Blackwell, is delayed, management said that this architecture system is currently being shipped in “sample” size and that the Blackwell system will ship in volume in the final 3 months of this calendar year.
When Blackwell ships in volume, revenue growth and earnings growth will probably accelerate. The Blackwell platform is 30 times more powerful than the Hopper platform, which is Nvidia’s current generation accelerated computing system.
Eric Schmidt, former CEO of Alphabet-Google, is very positive on Nvidia. Speaking at Stanford University earlier this month, Schmidt said Nvidia should capture almost all of the revenue opportunity for the semiconductors and software necessary for the full implementation of artificial intelligence. He said that AMD is Nvidia’s closest competitor but that AMD’s competitive AI chip alternative is still being developed. Schmidt and many Wall Street analysts believe that Nvidia will capture 80% or more of the AI semiconductor opportunity for at least the next few years.
Yet Nvidia is not only the designer of the world’s most important chip, it is also the developer of CUDA, a proprietary programming language for Nvidia’s hardware platforms. With CUDA, Nvidia creates a software system that locks customers into Nvidia’s semiconductor designs. The chip architecture and proprietary software language create a wide deep moat against existing competitors and potential competitors.
The future looks very bright but there are caveats to the Nvidia story.
The law of large numbers will catch up to Nvidia. It cannot keep growing at rates exceeding 100%, and operating margins are peaking for Nvidia. Analysts and investors will fret about when Nvidia’s earnings and growth rates will slow to more traditional levels of 15-25%. Still, that is several years in the future. And Nvidia’s current valuation does not reflect future growth rates of 100%. Analysts believe that Nvidia can earn $5 a share in its fiscal year beginning Feb. 1, 2025.
On Wednesday, after the company had announced its results for the July quarter, Nvidia’s share price was trading in the range of $120-$125. So, with a $5 earnings number for its upcoming fiscal year, Nvidia is trading with a forward earnings multiple of around 24-25 times, $5 times 24 or 25. Price earnings multiples are an accepted valuation model for stocks. Arguably, that is not expensive for a company that should grow earnings at rates well in excess of 50% for the next 12 months and probably longer.
While Nvidia beat estimates it also traded down after market hours. Why?
Because the stock is up over 100% this year. Profit taking becomes irresistible for some traders.
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Still, AI is the high ground in the global race for economic supremacy. The United States is fortunate that Nvidia is an American company. It is arguably the crown jewel of the U.S. economy. And the economy matters a very great deal .
The writer owns shares in Nvidia.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at RoganJames8202@gmail.com
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