NVIDIA Earnings Preview: AI Boom, China Concerns, and Competition Loom Ahead
NVIDIA Corporation (NVDA), a leading chip maker, is set to report its Q4 2023 earnings Wednesday after the close. The company has been at the forefront of supplying chips for artificial intelligence (AI) systems, and its growth has been driven by the rapid adoption of AI applications by consumer Internet companies and enterprises.
The anticipation around NVIDIA's earnings report is high, with the tech sector's recent rally potentially hinging on the company's performance exceeding expectations. With sales forecasted to more than triple from the previous year to over $20 billion for the January-quarter, NVIDIA continues to lead in the AI chip market. However, amidst its impressive growth, the company faces potential challenges, including a slowdown in its growth rate, regulatory regultions and increased competition, underscoring the importance for investors to look beyond short-term achievements and consider the broader competitive landscape.
Wall Street is overwhelmingly bullish on Nvidia ahead of its earnings report, with an average target price of $751 and 93% of analysts recommending a buy, amid observations of parabolic stock appreciation influenced by both fear and greed. The market anticipates significant moves, evidenced by Nvidia's nearly $1.7 trillion market value and options volatility suggesting an 11% implied move, highlighting the earnings as a pivotal moment for the AI tech rally's momentum.
Nvidia shares fell 5.1% to $689.29 early Tuesday, marking its potential largest one-day drop since May 2023, as the market adopts a cautious stance before its earnings report, positioning it as the S&P 500's worst performer.
NVIDIA has been a major beneficiary of the AI boom, with its Data Center segment revenue jumping 279% year-over-year (y/y ) and 41% sequentially to a record $14.51 billion in Q3. The company's HGX platform and InfiniBand networking have been key drivers of its success, and it has been involved in some of the most exciting generative AI applications, such as Adobe Firefly, ChatGPT, Microsoft 365 co-pilot, CoAssist for ServiceNow, and Zoom AI Companion.
NVIDIA expects continued growth in the AI sector, with enterprise software companies like Adobe, Databricks, Snowflake, and ServiceNow incorporating AI co-pilots and assistants into their platforms. Cloud service providers like Amazon Web Services (AWS), Microsoft Azure, and Google Cloud have also been significant growth drivers.
NVIDIA's fiscal Q3 2024 earnings report was a landmark achievement, highlighting the company's substantial growth across all its business segments. With a record-breaking revenue of $18.12 billion, NVIDIA saw an impressive 206% increase compared to the same period last year and a 34% rise from the preceding quarter. This remarkable growth was primarily driven by its Data Center segment, which alone contributed $14.51 billion, up 279% year-over-year and 41% from the second quarter.
This financial success translated into substantial earnings per share (EPS) of $4.02, significantly higher than the $0.58 reported in the previous year, thereby surpassing analyst expectations for both revenue and EPS.
Such positive surprises in NVIDIA's financial results underscore the company's strong growth trajectory and strategic positioning in key technological domains, including gaming, professional visualization, and automotive. NVIDIA's ability to not only navigate but also thrive in the competitive landscape cements its status as a leader in the global technology arena.
NVIDIA's Gaming segment reported strong Q3 growth, with revenues rising 81% y/y and 15% sequentially to $2.86 billion. This growth can be attributed to the increasing popularity of AI-enhanced games, which have driven upgrade demand and attracted new buyers. However, the segment is expected to decline sequentially in Q4 due to its alignment with notebook seasonality.
NVIDIA's Professional Visualization segment saw revenues more than double y/y to $416 million, driven by the increasing adoption of RTX as the workstation platform of choice for professional design, engineering, and simulation. AI has emerged as a significant demand driver in this segment.
The Automotive segment also saw revenue growth of 4% y/y to $261 million, primarily due to the continued growth of self-driving platforms.
Despite the impressive results, NVDA saw its shares slide from $500 to $450 on December 4. The stock would find support at this level and rally back above $500 in mid-December. It closed out 2023 at $481.
A significant challenge for NVIDIA is the recent set of export control regulations for China imposed by the US government. The sale of some products to China and other affected countries is now subject to licensing requirements, which represents about 20-25% of the Data Center segment revenue. NVDA expects sales to these destinations to decline significantly in Q4 but expects growth in other regions to offset these losses.
NVIDIA's dominance in the AI chip market may face competition from other companies. NVIDIA's market share in graphics-processing units (GPUs) for AI could be around 98-99%. However, companies rarely maintain such a level of dominance for an extended period. Competition in the AI chip market, particularly from AMD, as demand grows for chips capable of performing both training and inference tasks. Analysts, including Stifel's Ruben Roy, highlight concerns about pricing pressures from competitors like AMD but note positive feedback for Nvidia"s GH200 CPU-GPU hybrid system as an inference platform.
Meanwhile, SoftBank's Masayoshi Son is reportedly considering a $100 billion chip venture to challenge Nvidia's AI leadership, potentially partnering with Middle Eastern investors to support a new company alongside its stake in Arm Holdings.
Despite the challenges from rivals and the interest in alternative AI chip suppliers, Nvidia maintains a competitive edge, partly due to developers' familiarity with its CUDA software. However, the industry is witnessing moves by major tech firms to diversify their AI chip sources, including in-house operations, which could heighten interest in AI chip companies like Graphcore, despite its recent challenges and potential sale discussions involving major tech entities like Arm, SoftBank, and Microsoft-backed OpenAI.
Investors are betting on a mammoth move in NVIDIA shares after its earnings report this week. Trading in NVIDIA options has ramped up ahead of the report, with around $500 billion worth of NVIDIA options changing hands last week. The implied option volatility, the likely movement in a securities price, stands at 11% which suggests a nearly $200 billion dollar move given NVDA"s $1.7 trillion valuation.
NVIDIA has been a key player in the AI chip market and has reported strong growth in recent quarters. However, the company faces challenges from regulatory restrictions in China and increasing competition in the AI chip market. Investors should consider these factors when evaluating NVDA's future performance and investment value.