Portfolio holding Nvidia (NVDA) once again came into its quarterly print with sky-high expectations — and once again, exceeded them. More importantly, guidance for the current quarter, the final three months of the chipmaker’s fiscal 2024, was just as strong.

• Revenue for Nvidia’s fiscal 2024 third quarter, which ended Oct. 29, surged 206% year-over-year to $18.12 billion, well ahead of analysts’ forecasts of $16.18 billion, according to data provider LSEG, formerly known as Refinitiv.

• Adjusted earnings-per-share grew rocketed 593% to $4.02, exceeding the LSEG compiled consensus estimate of $3.37.

• Adjusted gross margin of 75% beat out Wall Street’s 72.4% estimate, according to market data platform FactSet.

Bottom line

This was a very strong quarter, with almost nothing to nitpick except marginally shortcoming on Automotive sales and OEM & Other sales. But to put it plainly, it just doesn’t matter, the misses were immaterial, and those segments are not what this company is all about. Right now, it’s all about Data Center business – and to a lesser extent, gaming, which saw a sales beat and robust growth. Gaming is Nvidia’s second-biggest segment but still only accounts for 15% of total revenue. It put up solid results in both areas.

As the Data Center segment becomes a bigger and bigger part of total revenue, currently at around 80%, the stronger Nvidia’s overall gross margin becomes thanks to its associated high-margin revenue sales. This year’s rapid Data Center sales growth we’ve seen has been driven largely by cloud providers and enterprises.

However, on the post-earnings call, management said they’re starting to see many countries “awakening to the need to invest in sovereign AI infrastructure to support economic growth and industrial innovation.” In other words, Nvidia’s market opportunity is larger than just big American tech firms such as fellow Club names Amazon (AMZN), Microsoft (MSFT), Meta Platforms (META), Alphabet (GOOGL), and Oracle (ORCL). We’re just starting to see these other buyers, with pockets as deep as they get, start their infrastructure buildouts.

While U.S. government restrictions on exporting Nvidia’s most advanced chips to China is a headwind that must be monitored, management was still able to guide well above expectations due to strong demand in other parts of the world. Put another way, the export ban certainly serves to limit Nvidia’s total addressable market over the long term; should they remain in place. But in the near term, it’s not yet an issue because demand continues to outstrip supply.

When these restrictions become an issue is the biggest question for investors. However, trying to time such a possibility is no simple task. Even management conceded that they “do not have good visibility into the magnitude of that impact even over the long-term.” For now, we’re highly encouraged by management noting that they “absolutely believe that Data Center can grow through 2025.” Supporting that view are efforts to significantly expand supply, new customers coming into the fold (like those sovereign buyers noted above), and new products such as the recently announced H200 graphics processing unit (GPU).

While we understand investor concerns regarding growth sustainability and the China export issues, we think trying to time these variables by hopping in and out of the stock will ultimately result in less upside over the long term, than simply riding out any rough patches. In the end, artificial intelligence is a game-changing technological advancement, and it’s clear that we’re only in the early innings of the AI revolution.

Nvidia management does not provide an EPS forecast. However, research analysts at Truist calculated that the implied earnings guidance for fiscal Q4 was $4.47 per share. That’s 69 cents more than what the Street was expecting. If that number were to be achieved, Nvidia would have generated $12.28 in EPS for its entire fiscal 2024.

• On Jan. 3, the first trading day of the year, shares opened at $148.51 apiece. At the time, Wall Street thought shares were trading at about 35x 12-month forward earnings estimates at the time. However, in hindsight, again assuming that $4.47-per-share guide materializes in fiscal Q4, shares were really trading at just 12.1x back then. We suspect there will be many years like this in the decade ahead as AI adoption becomes more widespread and pervasive in our daily lives. With management expecting continued Data Center growth in 2025 despite the recently implemented export restrictions, we are reiterating our $600 price target.

Quarterly commentary

Data Center revenue in the quarter of $14.51 billion reached a new record, up nearly 280% from a year ago and increasing 41% on a sequential basis. As has been the case in recent quarters, strong Nvidia HGX platform sales are being driven by the development of large language models, recommendation engines, and generative AI applications. On the release, management said that about half of Data Center revenue was driven by cloud service providers, with the other half coming from consumer internet companies and enterprises. 

• Importantly, as it relates to China and other regions affected by the recently implemented U.S. government export restrictions, management expects these new restrictions to result in a significant decline in sales to these destinations in the current quarter. Sales to China and other impacted regions have, in the past few quarters, accounted for 20% to 25% of Data Center sales. However, the team added that they “believe the decline will be more than offset by strong growth in other regions.” This view is clearly baked into management’s guidance, which was well ahead of expectations.

Gaming revenue was up 81% year-over-year and 15% sequentially to to $2.87 billion. The annual increase reflects Nvidia’s able to increase sell-in to partners now that channel inventory levels have finally normalized. Members will recall, that Nvidia was previously shipping fewer cards to channel partners in order to get inventories back to a normal level. On the release, management said, “Strong demand for our GeForce RTX 40 Series GPUs for back-to-school and the start of the holiday season” were the drivers behind the sequential increase.

Sales at the Professional Visualization unit increased 108% from last year and 10% sequentially to $416 million. Like Gaming, the annual increase comes as a result of increased sell-in to partners following efforts to normalize channel inventories. Sequential growth was driven by “stronger enterprise workstation demand and the ramp of notebook workstations based on the Ada Lovelace GPU architecture,” the company said.

Sales at Nvidia’s Automotive unit were up 4% from last year and 3% sequentially to $261 million. The year-over-year gain was driven by cockpit solutions and self-driving platform sales, while the sequential gain came as a result of an increase in self-driving platform sales.

Sales at the company’s OEM & Other segment, its smallest unit, were flat year-over-year at $73 million.

Guidance

Looking ahead to Nvidia’s fourth quarter of fiscal 2024, we once again got far stronger guidance than Wall Street was modeling. However, as we can see by the muted stock reaction, investors clearly had demanding expectations and beating the estimate was the minimum Nvidia needed to do to hold on to recent gains.

On the top line, management expects revenue to be $20 billion, plus-or-minus 2% with an adjusted gross margin of 75%, plus-or-minus 50 basis points or 0.5 percentage points. That’s well above the $17.86 billion and 72% we were looking for. Helping to drive that gross margin expansion is the growth in Data Center revenue, which has a high-margin software component associated with it. The results, combined with the outlook, once again demonstrate how Nvidia’s lofty price-to-earnings multiple can be deceiving when the company is firing on all cylinders and its chips are in high demand. On the call, management commented said, “We have significantly increased supply every quarter this year, to make strong demand and expect to continue to do so next year. We will also have a broader and faster product launch cadence to make a growing and diverse set of AI opportunities.”