Nvidia pops after strong quarter, guidance — showing why the stock still has long-term promise

Published Wed, Feb 22 20238:24 PM ESTUpdated Wed, Mar 8 20231:49 PM EST

Nvidia (NVDA) reported better-than-expected fiscal 2023 fourth-quarter results after the closing bell Wednesday and a strong current-quarter forecast. These promising financials show why we've kept a small position in this high-end chipmaker despite the headwinds facing the semiconductor industry. Revenue fell 21% year over year to $6.05 billion but exceeded expectations of $6 billion, according to the consensus estimate from Refinitiv. Adjusted earnings dropped 33% to 88 cents per share, though still outpaced estimates of 81 cents. Adjusted gross margin of 66.1% edged out the 65.6% estimate. NVDA YTD mountain Nvidia (NVDA) YTD performance Shares of the Club holding, which lost half their value last year, jumped nearly 9% in extended trading following the release. As of Wednesday's close, Nvidia has been one of our best performers in 2023, up 42% this year. Bottom line Taken as a whole, it was a very good print from Nvidia. While Data Center revenue came up a bit short, it was more than offset by strength in the rest of the business. Moreover, forward guidance came in ahead of expectations and management also noted on the call that they're "encouraged by early signs of a recovery" in the Chinese market. Importantly, on the call, management said the channel inventory correction in gaming "is largely behind us," and the inventory correction that impacted Pro Visualization sales on a year-over-year basis is expected to end in the first half of the new fiscal year. Nvidia's conference call can get very technical given the nature of its business, but one thing was apparent, the company is the clear winner of the artificial intelligence (AI) arms race currently underway. As one analyst called out on the call, Nvidia has been a key beneficiary of every major workload in recent years — be it facial recognition technology, recommendation engines, natural language processing advancement, the Nvidia Omniverse or the generative AI engines such as ChatGPT that have captivated users of all levels. When asked what the next major workload to drive demand for Nvidia's chips will be, CEO Jensen Huang didn't give up the goods but did say the company has new applications and workloads that have not yet been disclosed to the public but will be unveiled at the upcoming GTC developers conference being held from March 20-23. We're raising our price target on the stock to $240 per share from $200. We reduced Nvidia to a 1.3% weighting in the portfolio during the carnage of last year and our other two chip stocks, Advanced Micro Devices (AMD) and Qualcomm (QCOM), are just under 1% each. DGX Cloud In addition to releasing earnings, management also announced the DGX Cloud. Essentially, this service provides customers the ability to access an Nvidia DGX super-computer with nothing more than their browsers and allows them to access Nvidia AI Enterprise for "training and deploying large language models or other AI workloads." The DGX is already available via Oracle Cloud infrastructure, Microsoft 's (MSFT) Azure cloud, Alphabet 's (GOOGL) Google Cloud Platform, and others are on the way. Guidance Looking ahead to fiscal 2024 first quarter, management forecasted better-than-expected sales, adjusted gross margin and capital expenditures on a non-GAAP basis. (GAAP stands for generally accepted accounting principles.) Additionally, not in the above table, management expects operating expenses of $1.78 billion, other income of approximately $50 million, and a tax rate of 13% (plus/minus 1%). Quarterly commentary In the Segment results section of the table above, we saw Gaming sales decline 46.5% year over year as management continued to sell to partners at a lower level in order to reduce inventory in the channel. On the release, management attributed the annual growth in Data Center, up 10.8% year over year, to U.S. cloud service providers (CSPs), where strength managed to offset a decline in sales to China. The team did note that some CSPs paused activity at the end of the year to "recalibrate their build plans." However, management believes this trend to have been more so a reflection of macro uncertainty, calling it a "timing issue." They added that "end market demand for GPUs and AI infrastructure is strong." (GPU stands for graphics processing unit.) Professional Visualization revenue performance versus the year-ago period was also impacted by efforts to reduce channel inventory. It fell 64.9%. Automotive sales set a new record, up 132.5% year over year, with the growth attributable to strong sales of self-driving solutions, computing solutions for electric vehicle makers and AI cockpit solutions. Capital Allocation In its fiscal 2023 fourth quarter, Nvidia returned a total of $1.15 billion to shareholders via dividends and buybacks. As of the end of fiscal Q4, there was $7.23 billion remaining under the current authorization, which runs through December 2023. (Jim Cramer's Charitable Trust is long NVDA, MSFT, GOOGL, AMD, QCOM. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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Nvidia's corporate headquarters in Santa Clara, California, in May 2022.

Nvidia | via Reuters