Nvidia's Q4 Success Fueled by Hyperscalers: Analysts Explain

Nvidia Corporation (NASDAQ: NVDA) reported another strong quarter, with revenue of $39.3 billion and earnings per share (EPS) of $0.89, beating analyst estimates of $38.05 billion and $0.84, respectively. The company's success can be attributed to the increasing capital expenditure (CapEx) plans of hyperscalers, which are investing heavily in AI infrastructure. According to a quarterly update, the hyperscalers (MSFT, AMZN, GOOGL, META) are expected to increase CapEx by 42% next year, with this quarter's CapEx alone increasing 68% Y/Y. This aggressive spending on AI infrastructure has driven demand for Nvidia's advanced chips, leading to another record-breaking quarter.



Analysts at Wedbush and Oppenheimer have suggested that booming demand for Nvidia's advanced chips, driven by Big Tech firms ramping up spending on AI infrastructure, could lead to another record-breaking quarter. UBS analysts have also noted that supply chain improvements could mean higher sales of Nvidia's Blackwell line, which is expected to contribute significantly to fourth-quarter revenue. Oppenheimer analysts have indicated that the rapid rise of Chinese AI startup DeepSeek could ultimately prove "positive" for Nvidia, as competition pushes its American clients to step up their efforts in the AI race instead of pulling back.



However, despite the strong quarterly results, Nvidia's shares remained flat in early aftermarket trading. Along with its revenue and EPS, another key metric that has driven the stock price performance is the margin. Nvidia's latest chips are costly to produce, and investors have previously punished the stock because of the firm's inability to eke out higher margins. Later, as investors digested the results, the shares jumped by 2.76%.

While Nvidia's top and bottom line metrics did beat analyst estimates, its margins remained tough. For Q4, the firm's adjusted gross margin sat at 73.5% to mark a 1.5 percentage point annual drop. As part of her earnings commentary, CFO Collete Kress explained that "gross margins for the fourth quarter decreased from a year ago and sequentially, primarily due to a transition to more complex and higher cost systems within Data Center." Its Q1 margins guidance didn't impress investors either. For the first quarter, Nvidia expects gross margins to sit at 71%, which is more than a percentage point lower than consensus LSEG estimates of 72.2%. The firm's Blackwell ramp appears to be playing a role here, and it is possible that had it not been for a revenue and guidance beat, then the margins miss could have driven the stock substantially lower in aftermarket trading.

Crucially, however, Nvidia's upbeat guidance removes doubts surrounding a drop in demand for its AI GPUs. Last month's DeepSeek selloff was premised on the assumption that training AI models could require fewer GPUs and lower spending. However, along with multi-billion dollar capital expenditure commitments by big tech, the upbeat guidance appears to assuage these worries.

In conclusion, Nvidia's Q4 success was fueled by hyperscalers' increasing CapEx plans, with analysts expecting future growth to remain strong. Despite concerns about competitive pressures and margins, Nvidia's upbeat guidance has assuaged investor worries about a potential drop in demand for its AI GPUs. As the company continues to benefit from the growing adoption of AI by hyperscalers, investors can expect Nvidia to maintain its strong performance in the coming quarters.