Investing Club: Nvidia's great quarter is overshadowed by expectations for even stronger guidance

Published Wed, Feb 16 20229:07 PM EST

Investing Club holding Nvidia (NVDA) reported better-than-expected fiscal fourth-quarter 2022 results after the closing bell Wednesday. On the top line, record quarterly revenue of $7.64 billion (up 53% year over year) outpaced expectations of $7.4 billion. On the bottom line, adjusted diluted earnings of $1.32 (up 69% year over year) came in ahead of the $1.22 per share expected. Additionally, gross margin of 67% was in line with expectations while operating income of $3.677 billion (up 76% year over year) was better than the $3.529 billion the Street was looking for. Bottom line This was a near perfect earnings release met with forward revenue guidance that is nothing short of impressive. So why the lack of enthusiasm? Nvidia shares fell roughly 2.5% in after-hours following the release. We believe it has everything to do with expectations and valuation. Investors may have come to expect materially better-than-expected guidance and against the backdrop of rising interest rates and geopolitical uncertainty, upside on the back of multiple expansion for a stock that already trades just north of 50x forward earnings may be asking too much in the near-term. That said, longer-term we believe it is the earnings power, not multiple expansion that will ultimately lead to upside. As long-term investors, Wednesday's release once again served to increase our conviction that Nvidia remains at the heart of some of the strongest secular growth trends in the world. With the data center set to overtake gaming and software sales now coming into the fold, we believe the stock will quickly grow into and exceed its current valuation. Earnings are currently projected to grow at a compounded annual growth rate, or CAGR, of just over 22% for the next six years, and Nvidia has a track record of exceeding estimates. We are therefore not reading much into this after-hours action in the stock and believe that patience will ultimately be greatly rewarded as the underlying fundamentals are as strong as ever. Guidance (non-GAAP) Looking ahead to fiscal first-quarter 2023, management forecasts the following: Revenue of $8.1 billion plus-or-minus 2%. That's a monster guide versus expectations of $7.32 billion coming into the print with sequential growth driven by the Data Center Gross margin of 67% plus-or-minus 50 basis points, slightly ahead of the 66.7% expected Operating expenses of $1.6 billion excluding a $1.36 billion write-off from the cancelation of the Arm acquisition Other expense of $55 million, and a 13% non-GAAP tax rate Capital expenditures of roughly $350 million to $400 million, a bit above the $268 million consensus Looking back at the last four quarterly guides, we see Nvidia's track record of issuing strong outlooks. Management guided for fiscal first-quarter 2022 sales to be roughly $806 million above expectations at the time. The team guided for fiscal second-quarter sales to be about $826 million above consensus at the time. The team guided fiscal third-quarter for sales to come in roughly $230 million ahead of expectations at the time. Management guided fourth-quarter for sales to be roughly $510 million ahead of the expectations. On Wednesday's call, the guidance (as noted above) came in roughly $780 million ahead of expectations, but perhaps what that was expected given what we have seen over the past year. Of course, should this trend continue, one does have to wonder just how much future revenue the sell-side is failing to account for in their models. Failed Arm deal Despite failing in its attempt to acquire Arm, Nvidia's work in accelerated computing will continue. The team has "multiple Arm projects ongoing" from autonomous vehicles to industrial automation and robotics and is "on track to launch [their] Arm-based CPU, targeting giant AI and HPC workloads in the first half of next year." Moreover, Nvidia maintains a 20-year architecture license to Arm's IP and intends to deliver on their "3-chip strategy across CPUs, GPUs and DPUs." Sales by segment Nvidia reported record revenue in Gaming, Data Center, and Professional Visualization for the fiscal fourth-quarter 2022 (and the fiscal year, for that matter). Gaming Q4: $3.42 billion (up 37% year over year) vs. $3.35 billion expected Management attributed the annual growth to higher sales of GeForce GPUs that were driven by strong demand for Nvidia's Ampere architecture while noting that sequentially, sales growth of GeForce GPUs were partially offset by a seasonal decline in game-console SOCs (system on a chip), which are used in the Nintendo Switch. The team also called out record desktop and laptop gaming revenue in the quarter. Data Center Q4: $3.263 billion (up 71% year over year) vs. $3.17 billion expected The team said growth was driven by Ampere architecture GPUs "across both training and inference for cloud computing and AI workloads such as natural language processing and deep recommender models." Demand from hyperscale and cloud was "outstanding, with revenue more than doubling year-on-year." Demand continues to outpace supply, the team said. Professional Visualization Q4: $643 million (up 109% year over year) vs. $577 million expected Growth was also driven by a ramp up of Ampere based products with strong demand seen for workstations to support hybrid work environments and "growth in workloads such as 3D design, AI and rendering." Automotive Q4: $125 million (down 14% year over year) vs. $139 million expected Sales declined as Nvidia continues to shift away from its legacy cockpit business, a dynamic compounded by automotive supply shortages. That said, the decline was partially offset by a ramp of self-driving programs. On the call, we received some insight into the future self-driving opportunity. Commenting on a partnership announced ahead of the release between Nvidia and Jaguar Land Rover "to jointly develop and deliver fleets of software-defined cars," management noted "our full stack end-to-end approach is a new business model that offers downloadable AV and AI services to fleet of JLR vehicles with a shared software revenue stream for both companies over the life of the fleet." OEM & Other Q4: $192 million (up 25% year over year) vs. $159 million expected Sales were up annually but down sequentially as Cryptocurrency Mining Processor (CMP) sales came in at $24 million for the quarter, down from the $105 million seen in the prior quarter.