To The Moon

$NVIDIA Corp(NVDA)$

After hours, NVIDIA released its Q3 FY2025 earnings (for the three months ending October 27), significantly surpassing expectations.

Q3 revenue reached $35.08 billion, well above analysts' forecast of $33.25 billion. Adjusted net profit was $20 billion, exceeding the expected $18.56 billion.

However, NVIDIA's stock dropped nearly 5% after hours due to Q4 guidance falling short of analyst expectations. A similar drop occurred after the previous earnings report, but the stock quickly rebounded and set a new all-time high. Will history repeat itself?

In terms of revenue, Q3 saw a 93.6% year-on-year increase, greatly outperforming expectations. Specific business performance includes:

• Data center revenue of $30.77 billion, up 112% year-on-year, well above the expected $29.14 billion.

• Gaming revenue of $3.28 billion, up 14.8%, surpassing the expected $3.06 billion.

• Automotive chip revenue of $450 million, up 72%, exceeding the expected $360 million.

  

Though other business areas also exceeded expectations, their smaller scale has limited impact on the overall company.

The only issue in the report was a slight miss in adjusted gross margin, which came in at 75%, slightly below the expected 75.05%. NVIDIA expects Q4 gross margin to be around 73%, marking its third consecutive decline. This drop is due to the transition from H100 to H200 and the higher-cost Blackwell systems, with some production challenges. The margin decline was anticipated.

Management expects margins to recover to around 75% in the second half of next year, so the temporary decline should have little impact on stock prices.

The main reason for the after-hours drop is high market expectations. NVIDIA's Q4 revenue guidance of $37.5 billion slightly exceeded the analysts' consensus of $37.1 billion. Given the enormous stock price increase this year and its historically high valuation, significant post-earnings stock gains are unlikely.

Long-term, however, NVIDIA’s valuation still has room to rise.

For example, FY2025 revenue could reach $128.7 billion, implying a price-to-sales ratio of 28x, lower than the semiconductor industry's 30x peak in 2021. Furthermore, FY2026 revenue could continue strong growth, with analysts projecting $189.1 billion, up 49% year-on-year. If this target is met, the price-to-sales ratio would drop to 19x, below recent averages.

Can NVIDIA maintain its high growth? It's very likely.

Firstly, NVIDIA dominates the AI GPU market, with AMD as the only competitor. This year, AI GPU sales are expected to reach $4.5 billion, far below NVIDIA’s $100 billion-plus sales.

In terms of GPU performance, NVIDIA is far ahead, and there is no competition in sight.

On the demand side, tech giants like Microsoft, Amazon, and Meta continue to increase AI investments, contributing to 50% of NVIDIA’s data center revenue, up from 45% last quarter.

Moreover, as AI models evolve, GPU demand is rising. For instance, previous-generation models required 100,000 Hopper GPUs, while the next generation needs 100,000 GPUs using the more powerful Blackwell at a higher price.

Looking ahead, AI demand will explode. NVIDIA's AI Enterprise platform is helping companies manage and deploy AI applications efficiently, with expected revenue growth more than doubling from last year.

AI is sparking an industrial revolution, with vast downstream applications and undeniable demand. NVIDIA’s latest Blackwell products are expected to be in high demand for the next few quarters.

In conclusion, NVIDIA is likely to continue its strong growth. If FY2026 revenue targets are met, with a price-to-sales ratio of 30x, NVIDIA's market cap could reach $5.7 trillion, with $6 trillion also within reach. This is an era where AI is changing the game.