NVIDIA: The computing power czar with full firepower? The "virtual fire" is faintly visible.

NVIDIA (NVDA.O) released its fiscal third-quarter earnings report for the 2024 fiscal year (ending in October 2023) after the US stock market closed on November 22nd:

Overall Performance: Revenue & Gross Margin Exceed Expectations. In this quarter, NVIDIA achieved a revenue of $18.12 billion, a year-on-year increase of 205.5%, surpassing market expectations ($16.1 billion). The gross margin (GAAP) for this quarter was 74%, also exceeding market expectations (72.1%). The gross margin reached a historical high, mainly driven by the strong performance of the data center business. The net profit for this quarter was $9.243 billion, a year-on-year increase of 1259%, also reaching a historical high.

Core Business Situation: "Explosive" Data Center. The gaming and data center businesses account for over 95% of the company's revenue, with the gaming business showing signs of recovery and the data center business continuing to "explode".

The gaming business grew by 81.4% year-on-year this quarter, continuing its recovery. Dolphin Research believes that the main reasons for the recovery of the gaming business this quarter are: a) the gradual improvement of the PC market, which has increased the demand for GPUs to some extent; b) the recent increase in cryptocurrency value, which has also boosted the demand for certain graphics cards.

The data center business grew by 278.7% year-on-year this quarter, reaching a new high, mainly driven by strong demand for large models, recommendation engines, and generative AI.

Key Financial Indicators: Expense Ratio Reaches a New Low. NVIDIA's operating expense ratio continued to decline to a low of 16% this quarter. This is mainly due to the significant increase in revenue, which has significantly reduced the proportion of expenses. While inventory has increased slightly this quarter, it remains at a historical low compared to revenue.

Guidance for the Next Quarter: NVIDIA expects fourth-quarter revenue of $20 billion (plus or minus 2%), a year-on-year increase of 231%, surpassing market expectations of $17.85 billion. The fourth-quarter gross margin is expected to be 74.5% (plus or minus 0.5%), also exceeding market expectations of 72.4%, reaching a new high.

Overall View: NVIDIA's earnings report once again exceeded market expectations. Both core indicators, revenue and gross margin, surpassed market expectations, mainly driven by the data center and gaming businesses. Although inventory has slightly increased, it continues to decrease compared to the high revenue growth.

In addition to the financial data, the company's guidance is also impressive. NVIDIA has provided guidance for the next quarter's revenue and gross margin, reaching $20 billion and 74.5% respectively, setting a new record for the company. The projected revenue for the next quarter is $20 billion, a year-on-year increase of 231%, surpassing market expectations ($17.85 billion). The gross margin for the next quarter is expected to be around 74.5%, a year-on-year increase of 11.2 percentage points, also surpassing market expectations (72.4%).

Looking at the financial data and guidance alone, it undoubtedly brings confidence to the market. However, when it comes to investment, the company's stock performance should also be taken into consideration. NVIDIA's stock price has already more than doubled this year, with a market value of $1.2 trillion. Such strong performance requires sustained better-than-expected performance to support it.

However, there are still certain risks for the company in the next quarter:

a）In terms of revenue performance, the quarter-on-quarter growth for the next quarter is significantly narrowed to around 10%, much lower than the quarter-on-quarter growth in the previous two quarters (which had a strong momentum).

b）In terms of regional revenue, there is a noticeable decline in revenue in certain regions such as China due to export restrictions.

c）The ongoing Israeli-Palestinian conflict will also affect the company's future product development, operations, and revenue, bringing uncertainty to the business.

Considering the company's stock price, the previous rise has already incorporated expectations of the company's improved performance, and further increases require sustained positive factors. Although the company's performance in this quarter is good, the risks it currently faces also test the market's confidence. As a star growth stock that has already risen by 240% this year, NVIDIA needs to inject "stronger" confidence into the market.

For a detailed analysis of NVIDIA's financial report, please refer to the following:

1.Core Performance Indicators: Revenue and Gross Margin Exceed Expectations

1.1 Revenue: In the third quarter of fiscal year 2024, NVIDIA achieved revenue of $18.12 billion, a year-on-year increase of 205.5%, surpassing the company's previous guidance ($16 billion). The significant increase in revenue this quarter is mainly due to the recovery of downstream data center and gaming businesses.

Looking ahead to the fourth quarter, the company continues to show growth in revenue. NVIDIA expects revenue of $20 billion for the fourth quarter (plus or minus 2%), a year-on-year increase of 231%, surpassing market expectations of $17.85 billion. Dolphin Research believes that the revenue growth in the next quarter will mainly come from the growth of the data center and the recovery of the gaming business.

1.2 Gross Margin (GAAP): In the third quarter of fiscal year 2024, NVIDIA achieved a gross margin (GAAP) of 74%, surpassing the upper limit of the guidance (71%-72%), and reaching a new high for this quarter. The significant drop in the company's gross profit margin was mainly due to inventory write-downs. When the gross profit margin returned to 63%-64%, inventory was no longer a problem. Considering the company's inventory situation, NVIDIA's inventory for this quarter has increased slightly to $4.8 billion. Compared to the significant increase in revenue, NVIDIA's current inventory level is still low.

NVIDIA expects its gross profit margin for the fourth quarter to return to 74.5% (±0.5%), surpassing market expectations (72.4%). The gross profit margin for the fourth quarter is slightly higher than that of the third quarter, and overall, it remains at a high level. With the drive of AI and other demands, the company's profitability is currently at its best in history.

1.3 Operational Indicators

Inventory/Revenue: The ratio for this quarter is 26%, a decrease of 6% MoM. Although the company's inventory has increased slightly to $4.8 billion this quarter, considering the high growth in the company's revenue, the inventory is still at a historically low level.

Accounts Receivable/Revenue: The ratio for this quarter is 46%, a decrease of 6% MoM. The decrease in the proportion of accounts receivable indicates that the company's collection situation is still good.

2.Core Business: "Explosive" Data Centers

Driven by AI and other demands, NVIDIA's data center business accounted for 80.1% of the company's revenue in the third quarter of the 2024 fiscal year. Although the gaming business has stabilized and even increased this quarter, its proportion has been compressed to less than 20% due to the rapid growth of the data center business.

The gaming business and data centers are still the core businesses of the company, with a combined revenue share of over 95%.

2.1 Gaming Business: In the third quarter of the 2024 fiscal year, NVIDIA's gaming business achieved revenue of $2.856 billion, a YoY growth of 81.4%. After experiencing a few quarters of decline, the gaming business continues to recover and has emerged from its "difficulties".

The global PC market showed signs of recovery in the third quarter, with a continued narrowing YoY decline. According to the latest data from IDC, global PC shipments in the third quarter of 2023 were 68.2 million units, a YoY decline of nearly 8.2%. Although there is still a decline, the decline is better than the previous five quarters, and the overall PC market is gradually improving.

Combined with the PC market and the financial reports of peers, Dolphin Research believes that the main reasons for the recovery of the company's gaming business this quarter are: 1) The gradual improvement of the PC market has also increased the demand for GPUs to some extent; 2) The recent rise in currency value has also increased the demand for certain graphics cards.

2.2 Data Center Business: In the third quarter of fiscal year 2024, NVIDIA's data center business achieved revenue of $14.514 billion, a year-on-year increase of 279%. This quarter, NVIDIA's data center business reached a new high, mainly driven by the global demand for training and inference of large-scale language models, recommendation engines, and generative AI applications.

The strong growth of the HGX platform based on the Hopper GPU architecture. As the end of the Hopper GPU architecture approaches, the corresponding sales have declined compared to the previous quarter. The company confirmed the initial revenue brought by the L40S GPU and GH200 Grace Hopper superchip to a wide range of customers. Currently, cloud service providers (CSPs) contribute about half of the data center revenue, while consumer internet companies and enterprises account for the other half.

Regarding the regulation by the US government: Effective from the fourth quarter of fiscal year 2024, restrictions will be applied to the export of products exceeding specific performance thresholds to regions such as China (including A100, A800, H100, H800, L4, L40, L40S, and RTX 4090).

These licensing requirements did not have a significant impact on the revenue of the third quarter of fiscal year 2024, and sales to these destinations are expected to decline significantly in the fourth quarter of fiscal year 2024. However, the company believes that strong growth in other regions will offset this decline.

Regarding the strong revenue guidance of $20 billion for the next quarter given by the company, Dolphin Research believes that this is still mainly due to the growth in demand for data center business. It is expected that the revenue of NVIDIA's data center business will reach $15 billion in the next quarter.

2.3 Automotive Business: In the third quarter of fiscal year 2024, NVIDIA's automotive business achieved revenue of $261 million, a year-on-year increase of 4%. This growth mainly comes from the revenue of autonomous driving and AI cockpit solutions.

Although the growth rate of the company's automotive business continues to decline, it currently accounts for a small proportion of the revenue (less than 2%). Currently, NVIDIA's performance is still mainly focused on the performance of the data center and gaming businesses.

3. Key Financial Indicators: Expense Ratio Hits a New Low

3.1 Operating Profit Margin

In the third quarter of the fiscal year 2024, NVIDIA's operating profit margin rebounded to 57.5%, reaching a new historical high. The increase in operating profit margin this quarter was mainly due to the combined effect of rising gross profit margin and declining expense ratio.

Analyzing the composition of the operating profit margin, the specific changes are as follows:

"Operating Profit Margin = Gross Profit Margin - R&D Expense Ratio - Sales and Administrative Expense Ratio"

Gross Profit Margin: This quarter was 74%, a year-on-year increase of 20.4 percentage points. After the gross profit margin returned to the normal range, the "supply shortage" in the data center business continued to drive the company's gross profit margin upward.

R&D Expense Ratio: This quarter was 12.7%, a year-on-year decrease of 2.4 percentage points. Although the absolute value of the company's R&D expenditure has increased, the expense ratio has decreased significantly due to the surge in revenue.

Sales and Administrative Expense Ratio: This quarter was 3.8%, a year-on-year decrease of 0.8 percentage points. Although the absolute value has increased, the company's sales expense ratio has reached a historical low.

The company's guidance for operating expenses in the fourth quarter continues to rise to $3.17 billion, but compared to the growth in revenue, the operating expense ratio is expected to remain at a low level of around 16%. The rapid growth in revenue directly continues to lower the expense ratio.

3.2 Net Profit (GAAP) Margin

In the third quarter of the fiscal year 2024, NVIDIA's net profit was $9.243 billion, a year-on-year increase of 12 times, and the net profit margin continued to rise to 51% this quarter. The company's revenue in this quarter achieved a year-on-year growth of 200%, and the gross profit margin reached a new historical high. The decline in operating expense ratio to a historical low level drove a significant increase in profit.