- NVIDIA easily surpasses expectations for Q1 and raises guidance hugely for Q2
- AI lies behind fresh surge in demand
- Company on its way to becoming first chip maker to have $1 trillion market cap
“Last year’s share price slump after a profit warning, a slowdown in demand for graphics card sales and a surge in inventory all seem like a distant memory after NVIDIA’s better-than-expected first-quarter results and huge upgrade to second-quarter revenue and profit forecasts,” says AJ Bell investment director Russ Mould. “The shares shot up by a quarter in after-hours trading to leave the stock on the cusp of becoming the first silicon chip specialist to have a $1 trillion market cap, as chief executive Jensen Huang identified artificial intelligence (AI) as a key driver of increased demand.
“Full-year sales and earnings fell in 2022 and Mr Huang’s guidance for Q1 of the new fiscal year had been cautious back in February, but NVIDIA simply breezed past analysts’ forecasts. Sales fell year-on-year, but by a lot less than expected, and net profit actually rose both quarter-on-quarter and year-on-year.
“First-quarter sales came in at $7.2 billion, compared to forecasts of $6.5 billion and the prior period’s $6.1 billion, to give investors grounds for believing that mid-2022’s stumble was just a blip. Net income reached $2.0 billion, against consensus forecasts of $1.5 billion, and the prior quarter’s $1.4 billion. Net profit even advanced from Q1 2022’s $1.6 billion.
“Bulls of the stock could also draw encouragement from how inventory dropped by $500 million to $4.6 billion.
Source: Company accounts
“That helped to take inventory days down from 212 to 165.
Source: Company accounts
“Although that is still an uncomfortably high number by NVIDIA’s standards, the drop in inventory helps to set the scene for the second quarter, as demand surges thanks to the shift towards generative AI and accelerated computing, whereby core control remains on the central processing unit (CPU) and data-intensive tasks are managed by a separate acceleration device.
“NVIDIA is guiding Q2 sales to $11 billion, miles above the consensus of $7.1 billion and the $6.7 billion achieved in the same three-month period a year ago.
Source: Company accounts, Zack’s, NASDAQ, analysts’ consensus forecasts, company guidance
“Mr Huang’s guidance for cost of goods, operating expenses, interest expense and tax imply a net profit of some $4.2 billion, a figure that comfortably exceeds the quarterly record of $3 billion chalked up in the final quarter of 2021.
Source: Company accounts, Zack’s, NASDAQ, analysts’ consensus forecasts, company guidance
“The 25% after-market surge in the shares to an all-time high looks understandable in that respect, although the ongoing inventory bulge does leave NVIDIA vulnerable to any further unexpected stumbles in demand.
“For the moment, though, the AI hype-train is not only rolling but delivering, as far as NVIDIA is concerned. Its market capitalisation is now $950 billion and surging, and momentum investors seem happy to pile in. Although value seekers are likely to be more reticent given how the stock trades on more than 20 times forecast sales and, even allowing for forecast upgrades, well in excess of 50-60 times earnings for 2023.
“Such multiples leave little margin for error should anything go wrong, and not everything is necessarily rosy for the global semiconductor industry. Analog Devices’ guidance for its third quarter failed to deliver the hoped-for second-half recovery and the shares sagged by 8% in after-market trading.
Source: Refinitiv data
“Analog Devices flagged weakness in its industrial and automotive segments, its biggest markets, and surprised analysts and shareholders by warning of a softening in demand from both China and its electric vehicle customers. These are trends which could have wider implications for individual companies like Tesla or equity markets more generally, as they continue to price in a robust reopening of China’s economy and ongoing global growth, rather than a recession.
“Despite NVIDIA’s blow-out quarter and guidance, the 30-stock Philadelphia Semiconductor Index still sagged on Wednesday and investors need to keep an eye on this indicator.
Source: Refinitiv data
“Silicon chips are a good guide to global economic health owing to their ubiquity – they are everywhere, from smart phones to laptops, cars to industrial robots and servers to smart meters. Global sales reached an all-time high of around $575 billion in 2022 amid widespread shortages. However, forecasts for further growth to total sales in excess of $600 billion have been cut and consensus estimates have shifted to looking for a flat-to-down year, thanks to disappointing earnings, ballooning inventories and fears of a recession, which have all weighed heavily.
“In addition, the SOX has an uncanny record of being a decent guide to investors’ risk appetite – it topped out six to nine months before the S&P 500 and FTSE All-World did so in 2000 and 2007, to herald two thumping bear markets, and then bottomed out before those headline indices did in 2002 and 2009, to signal the start of a new bull market. The index has rallied sharply since last autumn and further gains could be a good sign, but, equally, a loss of momentum could be a warning that the global run in equities is beginning to run out of steam.
“NVIDIA’s successes are helpful, but the US stock market is already relying upon it and a narrow handful of other firms, notably Meta, Amazon, Apple, Netflix, Alphabet and Microsoft, for the gains forged so far in 2023 and overall market breadth remains poor.”
