NVIDIA (NVDA) Earnings Q&A

November 27, 2023

What is the biggest positive you see in the report?
The most impressive positive in NVIDIA's annual report is the robust growth in its Data Center revenue, which surged by 41% year-over-year to a staggering $15.01 billion. This growth signifies NVIDIA's successful pivot towards high-performance computing and AI, areas with enormous growth potential. Their data center business has become a cornerstone, reflecting strong demand for their accelerated computing platforms and GPUs from hyperscale customers and cloud service providers. This is a clear indication that NVIDIA is well-positioned in a market that is critical for the future of technology.

What is the biggest concern?
A glaring concern is the significant decline in NVIDIA's gross margin, which dropped 8 percentage points to 56.9%. This was largely due to substantial inventory charges of approximately $2.17 billion. These charges reflect an excess supply of products, hinting at potential misalignment between production and market demand, particularly in the Gaming and Data Center sectors. This raises questions about the company's capacity to forecast market trends and manage inventory efficiently, which is crucial in the fast-paced tech industry.

Is there a worrying tone taken somewhere that you noticed?
The report reflects a cautious tone when discussing the global disruptions caused by the COVID-19 pandemic and the resulting decline in Gaming and Professional Visualization revenues. The 27% drop in Gaming revenue, a traditionally strong sector for NVIDIA, suggests a vulnerability to external market shocks. Additionally, the increase in operating expenses by 50% due in part to the termination of the Arm transaction is concerning, as it reflects a significant cost without the intended strategic acquisition benefits.

What is the most startling change you detected from last year to this?
The most startling change is the sharp increase in operating expenses, which rose by 50% year-over-year. This surge is attributed to the $1.35 billion charge related to the termination of the Arm transaction and increased investment in compensation, data center infrastructure, and engineering development. Such a steep rise in expenses, if not matched with proportional revenue growth, could signal inefficiencies and could impact profitability in the long run.

What is next, what's the next big thing you see for this company?
The next big thing for NVIDIA appears to be the continued expansion into AI and deep learning technologies. With the Data Center segment showing tremendous growth, NVIDIA's investment in AI research and their strong position in providing the necessary hardware for AI computations set the stage for future growth. The company's GPUs are already a staple in AI and machine learning, and NVIDIA's foray into AI software, such as their AI platform Jarvis, could open new revenue streams and solidify their market leadership.

Are there world events/situations that worry you that are out of their control?
Geopolitical tensions, particularly in regions like China and Taiwan where NVIDIA has significant exposure, pose a substantial risk. The ongoing trade disputes and potential for regulatory changes can disrupt supply chains and affect sales. Moreover, global economic uncertainties, including the potential for a prolonged COVID-19 pandemic recovery, could dampen consumer and enterprise spending, which would impact NVIDIA's bottom line.

Are there changes in domestic or foreign policy that will affect future performance?
Changes in U.S. trade policy, particularly regarding tariffs and trade relations with China, could significantly impact NVIDIA's operations. The company's supply chain and sales could be affected by restrictive trade policies or sanctions. Additionally, any tightening of regulations around data security and privacy could influence NVIDIA's data center business, potentially requiring costly compliance measures or limiting its market reach.

If we move into a recession, how will they weather the storm?
In the event of a recession, NVIDIA's diverse product portfolio could help mitigate risks. While consumer-facing sectors like Gaming might suffer from reduced discretionary spending, the demand for Data Center capabilities, particularly for cloud computing and online services, may remain more resilient. NVIDIA's strong balance sheet, with $13.3 billion in liquidity, positions them well to navigate economic downturns. However, they would likely need to moderate their aggressive investment strategies and focus on core profit-generating areas.

And finally, what is possible in AI for them in the future?
The potential for NVIDIA in AI is vast. The company is at the forefront of providing the GPU technology that powers much of today's AI research and applications. As AI becomes increasingly integrated into various industries—from automotive to healthcare, finance, and beyond—NVIDIA's technology is poised to be the backbone of these AI solutions. The company's continued investment in AI-specific hardware and software, along with strategic partnerships and acquisitions in the AI space, could further solidify its position as an indispensable player in the AI revolution.