LC Ideas: Views & Insights
Equity Insight - Perfection is unachievable. Even for Nvidia.
Drishtant Chakraberty Senior Associate, Investment Consulting, Lighthouse Canton
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When you are priced to perfection, you need to deliver just that. Anything less and you will be punished by the market. While Q2 numbers and Q3 guidance both came in above expectations, a quarter’s delay in Blackwell revenue recognition was all it took to thwart what was otherwise a strong earnings print.
While market perception is volatile, Nvidia’s market standing continues to be solid and this drop in the stock price provides a reasonable entry point for investors.
Trades worth exploring – Even though the stock continues to be priced richly, the correction has brought the risk reward ratio of taking exposure to the stock into better balance. We believe selling OTM put options yield reasonably attractive premiums, while potentially resulting in having to take delivery of shares at a price point that we consider attractive for a long term investor to start building up / add exposure.
Earnings & Guidance
The company reported 2nd quarter revenue of $30bn (122% YoY growth & 15% sequential growth) and guided Q3 revenues of c$32.5bn which was ahead of reported sell side expectations of $31.7bn, but likely missing “buy-side” expectations believed to be c$33-34bn.
Additionally, Jensen Huang announced that they now expect to ramp up Blackwell sales only in Q4 which represents a quarter’s delay.
While not a perfect quarter, there were a number of positives in the earnings report and the analyst call :-
Supply Commitments, Strong Demand to Support Revenue Growth – Additional supply commitments from TSMC suggest support for strong sequential revenue growth, not just into 2024,but well into 2025. Equally, demand for the ‘older’ generation Hopper chips remains robust with no evidence of a slowdown. Cloud service providers and enterprises continue to buy additional units of the Hopper without delaying their purchases in anticipation of the Blackwell. This seems to be in line with Microsoft’s comments where they indicated GPU related supply constraints resulted in a few percentage points of Azure growth being left on the table. Therefore, till the time demand for renting GPUs from cloud service providers continues to exceed capacity, we expect the hyperscalers to support demand for Hopper chips.
Blackwell, Back on Track - Blackwell related production issues appear to have now been completely solved with functional samples currently being shipped to customers. The Blackwell’s 3-5x more (vs. Hopper chips) AI throughput in a power limited datacenter is likely to result in better performance and total cost of operation, driving solid end demand.
NVDIA Ecosystem – Much like Apple’s iOS ecosystem (which supports elevated margins), Nvidia continues on its path towards becoming an AI ecosystem provider. While chip sales continue to be the largest contributor towards revenue, the company’s networking business continues to go from strength to strength doubling over last year and its CUDA software platform is now annualizing revenue at a rate of $2 Billion a year, which is double the rate at which it exited 2023 at and we expect this to continue to increase, especially as the CUDA compatible GPU installed base grows from a million to tens of millions.
Performance of recommendations issued prior to earnings
Short options ahead of earnings (see Note NVIDIA-Navigating Volatility with Intelligent Data and Analysis dated 23rdAugust) gained as the stock corrected 6.4% on Thursday (less than the options implied move of 10%) followed by a 1.5% recovery on Friday, primarily due to a sharp fall in implied volatility levels commonly seen post earnings.
