Market Pulse: Nvidia Earnings, What You Must Know
In 4 minutes, understand exactly why the market disliked Nvidia's Q3 earnings report.
In 4 minutes, understand exactly why the market disliked Nvidia's Q3 earnings report.
The market’s favorite AI stock, Nvidia, reported earnings last Tuesday and the results were tepidly received. The stock is currently down 5% from its pre-earnings peak.
While Nvidia crushed Wall Street’s expectations (+11.4% beat for revenue and +19.3% beat for earnings per share), the market didn’t like the company’s weak Q4 guidance that was hampered by newly expanded semiconductor export restrictions to China.
Our prediction for Nvidia’s Q3 earnings was spot on (see: The Big Issue: Nvidia Earnings, What To Expect). We thought that even if the company beat expectations, the market wouldn’t care and would instead be focused on guidance. This was exactly what happened.
Here are our main takeaways from the earnings call:
Nvidia consistently sandbags their guidance
The market’s expectations for this quarter were actually set by Nvidia in its previous Q2 earnings call ($16B in revenue, $3.39 in EPS). The company smashed through its own Q3 guidance by pulling in $18B in revenue and $4.02 in EPS.
However, Nvidia has a habit of under-promising and over-delivering. In the last four quarters, Nvidia consistently beat its own guidance by a significant margin. While beating expectations should be celebrated, when you keep doing it for your own numbers, you’re probably setting your own bar a little too low.
The AI boom is still skyrocketing Nvidia’s business results
Nvidia’s data center revenue, which includes sales of AI chips, is up 41% quarter-over-quarter and 279% year-over-year! Data center revenue dwarfs revenue from other business verticals and is the primary driver of massive overall revenue growth (+34% quarter-over-quarter and +205.51% year-over-year).
This is Nvidia’s third “AI quarter” where it has seen massive year-over-year revenue bumps due to a sudden industry-wide demand spike for AI chips. It’s unclear how sustainable this growth rate is but we’re not optimistic. Expect Nvidia’s growth numbers to start normalizing next year.
Most importantly, Nvidia will hurt from the new China semiconductor export restrictions that were introduced in late October. These restrictions have effectively blocked off Nvidia from the Chinese AI market for all of Q4 2023
A fifth of Nvidia’s revenue comes from China. Most of this revenue comes from the sale of throttled H800 and A800 AI chips. However, October’s new semiconductor export restrictions banned the sale of H800 and A800 chips to China and Nvidia has to scramble to bring up new product lines for the Chinese market.
Nvidia plans to replace the H800 and A800 with new H20, L20, and L2 chips that comply with October’s new restrictions but they won’t launch until Q1 next year. This means that Nvidia has been effectively blocked off from the Chinese AI market for all of Q4 2023.
As a result, guidance for Q4 2023 is weak. The company expects $20B in revenue which is +11% quarter-over-quarter and a far cry from the +41% quarter-over-quarter revenue growth seen in Q3. “We expect that our sales to [China] will decline significantly in the fourth quarter of fiscal 2024” - Nvidia
This Q3 earnings report has confirmed our fears of Nvidia’s shrinking China business due to increasing US semiconductor sanctions. Unfortunately, we don’t think the trouble ends with a weak fourth quarter, we think it’s just the beginning as the US and Chinese governments continue to trade blows over this semiconductor trade war. Both governments view AI as existential threats and there’s no doubt the US considers Nvidia’s revenue growth as acceptable collateral damage if that means getting a little boost in this AI race.
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The Details
Visualizing Nvidia’s sudden AI boom
In today’s hyper-connected world, investment cycles start and end on a dime. Nvidia’s data center revenue chart below demonstrates this phenomenon for the current AI cycle.
It’s as if a switch flipped in the minds of every tech executive, probably after trying ChatGPT a few times, and everyone started pouring money into their company’s AI infrastructure. Nvidia was perfectly positioned to benefit from this sea change but is this growth sustainable? We have our doubts; large capital expenditures for a new computing vertical isn’t a mainstay in most income statements.
What’s going on in Singapore?
This quarter, Nvidia’s booked $2.7B in revenue from Singapore, a country with just 6 million people. $2.7B is almost 70% of this quarter’s China revenue and 15% of total revenue. Singapore’s out-sized revenue has led some people to speculate that the Southeast Asian island nation could be a proxy market for China, which of course, violates sanctions.
Could Nvidia’s China revenue be larger than what the official bookkeeping shows? If so, further US government semiconductor sanctions to China could be more painful for Nvidia than originally expected.