Nvidia Earnings Were a Blowout. Just Ignore the Stock Move For Now. -- Barrons.com

By Tae Kim

This week's earnings offered more evidence: Nvidia's AI growth story is far from over. The company's new Blackwell graphics processing unit seems to have limitless demand, which bodes well for the company's stock price.

On Wednesday, Nvidia reported another quarter of stunning revenue. Sales came to $35 billion for the three months ending in October, for year-over-year growth of 94%. The company's data-center business, driven by AI demand, grew even faster at 112%. Net profit doubled to $20 billion over the prior year. The company also provided a robust outlook for the current quarter, slightly exceeding Wall Street expectations.

Nvidia shares fell in after-hours trading following the report and wavered between positive and negative territory on Thursday. I wouldn't read too much into the initial reaction, which could easily be some profit-taking given that the stock has roughly tripled this year.

Instead, investors should ignore near-term noise, remain focused on the big picture, and not overlook the unprecedented magnitude of Nvidia's performance. Triple-digit growth rates while making tens of billions of dollars isn't normal. Microsoft in its latest quarter grew sales and net profit by 16% and 11%, respectively.

The main question from here is whether Nvidia can produce another big growth year in 2025, satisfying Wall Street's forecast for 54% revenue growth.

The latest commentary from Nvidia's executives suggests the answer is yes. "Blackwell demand is staggering, and we are racing to scale supply to meet the incredible demand," Chief Financial Officer Colette Kress told investors on the company's conference call Wednesday night.

CEO Jensen Huang says that Blackwell revenue for the current quarter would exceed the company's prior guidance of "several billion dollars." He said Blackwell is in full production and has been shipped to all of Nvidia's major partners.

Customers are eager to purchase the next-generation Blackwell GPU because it's far more powerful than prior models. Nvidia management said it wouldn't be able to meet all of the demand for Blackwell from its customers for the next several quarters.

Huang was asked by an analyst if he expects a pause in AI system demand at some point as large technology companies digest their prior purchases -- that's been the case in prior hardware cycles. But this time will be different, according to Huang. He said there would be "no digestion" until the industry completely replaces the $1 trillion worth of old data center infrastructure that isn't optimized for AI. Huang recently said that companies were about $150 billion into the $1 trillion transformation process.

Investors came into Nvidia's report with a broader worry about the pace of AI model improvements. But Huang isn't concerned. "Pre-training scaling is intact," he said on Wednesday's earnings call. AI model makers continue to see the benefits of scaling, he said, meaning the capabilities of models continue to improve as companies add more computing power and data to their AI model training.

Meanwhile, other AI innovations have the potential to drive the next wave of growth, increasing the need for GPU capacity.

AI agents, programs that have the ability to take simple directions and complete multistep computer actions to automate tedious business and personal tasks, is rapidly improving. "Within the next two years, you're going to see a massive proliferation of agents," Dell executive Arthur Lewis told me recently, as companies use AI to free up employee time to focus on higher level tasks.

Then there is the emergence of a new scaling law called "test-time compute," which Microsoft CEO Satya Nadella spoke about optimistically this week. It's the ability of new AI models to think about queries for longer time periods to come up with better answers.

As for answering what happens to Nvidia, AI is becoming more capable. And that means 2025 should be another good year for the stock.

Write to Tae Kim at tae.kim@barrons.com

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November 21, 2024 15:35 ET (20:35 GMT)

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