Earnings Digest | Nvidia Faces Market Scrutiny Despite Strong Earnings！
After hours on Wall Street, $NVIDIA Corp(NVDA)$ reported its Q2 2025 earnings, covering the period ending July 28, and the results were impressive:
However, Nvidia's after-hours stock price dropped by 6.89%:
The market is reacting negatively despite the strong earnings report. Although Nvidia exceeded expectations, the growth rate is slowing, and the production process for the upcoming Blackwell GPUs needs improvements. This confirms earlier rumors of shipping delays, sparking market concerns!
Even with a stellar report, Nvidia's high market expectations mean that even minor issues can trigger a sharp sell-off. As the king of AI, Nvidia's rigorous market scrutiny is to be expected.
Revenue Exceeds Expectations but Slows Down
Nvidia's Q2 revenue was $30 billion, a 122% year-over-year increase, surpassing analyst predictions of $28.9 billion.
Although Nvidia's revenue beat expectations, it has clearly slowed compared to the previous 262% growth rate, and the beat has also been narrowing relative to market forecasts:
A 122% revenue growth rate isn’t enough to satisfy investors. According to Nvidia's guidance, Q3 revenue is projected to be $32.5 billion, with a 2% variance. This is above the analyst forecast of $31.9 billion, but the year-over-year growth rate will further slow to around 79%.
A slowdown in revenue growth is normal given the higher base last year; a 200%+ growth rate isn’t sustainable long-term. However, market expectations are exceptionally high.
Breaking it down by business segments:
- Data Center revenue for Q2 was $26.27 billion, up 154.5% year-over-year, beating the analyst expectation of $25.08 billion.
- Gaming revenue was $2.88 billion, up 15.8%, surpassing the analyst forecast of $2.79 billion.
- Professional Visualization revenue reached $450 million, up 19.8%, matching the analyst expectation.
- Automotive chips revenue was $346 million, up 36.8%, slightly missing the analyst expectation of $348 million.
Professional Visualization and Automotive Chips revenue are relatively small for Nvidia, with the focus remaining on the Data Center segment.
Regionally, Nvidia's revenue from China for Q2 was $3.67 billion. Although this is below the pre-sanction level of $4 billion, it is still the second-highest in history. The impact of US sanctions on Nvidia appears to be diminishing:
On gross margin, Q2 was 75.1%, exceeding analyst expectations. Q3 adjusted gross margin is expected to be between 74.5% and 75.5%, with analysts predicting 75%:
Overall, Nvidia's Q2 earnings and Q3 guidance both exceeded market expectations and are hard to fault. However, the market is not buying in, largely due to Nvidia's high current valuation. The price-to-sales ratio is currently 32x, close to the peak of 33.8x during the 2021 semiconductor bull market.
Challenges Remain but There's a Silver Lining
High valuation is investors' biggest enemy, which is why Nvidia's stock has been dropping recently. However, looking ahead, Nvidia's revenue for fiscal year 2025 is expected to surpass $120 billion, which would bring the price-to-sales ratio down to 26x—much more reasonable!
Nvidia CEO Jensen Huang believes that supply issues will improve gradually each quarter, and next year will be significantly better than this year. This suggests that Nvidia's current growth might be peaking.
Huang has repeatedly stated that AI is just getting started, and the future data center market represents a trillion-dollar opportunity. AI will revolutionize every industry!
The potential of AI is enormous, and Nvidia holds a near-monopoly in the AI GPU market. While $Advanced Micro Devices(AMD)$ is often cited as Nvidia's biggest competitor, its AI GPU revenue this year is only $4.5 billion, whereas Nvidia's data center business is poised to reach $100 billion!
As former $Alphabet(GOOG)$ $Alphabet(GOOGL)$ CEO Eric Schmidt has noted, Nvidia’s biggest moat in AI GPUs comes from its CUDA programming language.
What was once seen as a poor language has now become mainstream. Since CUDA's inception in 2008, a whole ecosystem of open-source libraries has been developed, optimized for CUDA. This vast array of mature, efficient tools is hard for competitors to replicate.
Therefore, Nvidia is set to benefit from AI for a long time. Its gross margin has already risen by 10% compared to pre-AI revolution times, justifying a higher valuation.
In other words, while the delay of Blackwell GPUs may worry the market, it’s not critical. Customers will still flock to Nvidia, and production issues will be resolved over time. As Nvidia's guidance suggests, Blackwell GPUs are still expected to contribute billions in revenue in Q4.
In the long run, Nvidia's prospects might give you more confidence and calm.
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