Nvidia is still the backbone, just that the firepower is nearing its peak

NVIDIA (NVDA.O) released its Q3 FY2025 financial report (ending October 2024) after U.S. stock market hours on November 21, Beijing time, with the following details:

1. Overall performance: Revenue continues to grow, gross margin under temporary pressure. This quarter, NVIDIA achieved revenue of $35.08 billion, a year-on-year increase of 93.6%, better than Bloomberg's consensus estimate ($33.2 billion). The company's revenue growth was mainly driven by increased demand in the data center business. This quarter, NVIDIA achieved a gross margin (GAAP) of 74.6%, better than Bloomberg's consensus estimate (73.3%). However, due to factors such as inventory preparation for the Blackwell new products, the company's gross margin experienced a temporary decline. This quarter's net profit was $19.3 billion, a year-on-year increase of 109%, setting a new high for profits.

2. Core business situation: AI big winner. The data center business accounted for 87.7% of the company's revenue, making it the company's current core business.

1) This quarter, the gaming business grew by 14.8% year-on-year, continuing to recover. Dolphin believes that the growth in the company's gaming business this quarter was mainly influenced by the increase in the company's gaming graphics card market share. Considering the 0.9% year-on-year growth in the global PC market this quarter and the significant decline in AMD's gaming business during the same period, the company mainly benefited from the better-than-expected performance of its RTX product shipments this quarter.

2) This quarter, the data center business grew by 112% year-on-year, mainly driven by the demand for large models, recommendation engines, and generative AI. The growth in business was supported by increased capital expenditures from cloud service providers. With the shipment of Blackwell next quarter, the company's related revenue is expected to continue to grow.

3. Key financial indicators: Operating profit margin remains stable. $NVIDIA(NVDA.US) This quarter, the operating expense ratio continued to decline to 12.3%, with revenue growth offsetting the increase in expenses. The current inventory ratio remains at a historical low, indicating that the demand for the company's current products is still good.

4. Guidance for the next quarter: NVIDIA expects Q4 FY2025 revenue of $37.5 billion (plus or minus 2%), a year-on-year increase of 69.7%, better than Bloomberg's consensus estimate of $37 billion; Q4 gross margin of 73% (plus or minus 0.5%), better than Bloomberg's consensus estimate of 72.4%.

Dolphin's overall view: NVIDIA's financial report this time is quite good. The company's revenue this quarter continues to beat the guidance of "+$2 billion," and the gross margin has also reached the expected guidance. This quarter, all of the company's businesses showed varying degrees of growth, with the data center and gaming businesses contributing significantly to the company's incremental revenue. As downstream cloud vendors continue to increase capital expenditures, the company's data center has grown to over $30 billion, accounting for nearly 90% of the company's total revenue. With the expansion of the company's business scale, although the absolute value of expenses such as R&D and sales has increased, the expense ratio continues to decline. Overall operating expenses are still developing positively.

After reaching the regular beat guidance of +$2 billion, the market is more focused on the company's guidance for the next quarter. The guidance for the next quarter includes a revenue forecast of $37.5 billion and a gross margin forecast of 73%. The company's performance next quarter will be mainly driven by the mass production of Blackwell, while the initial ramp-up will also have some impact on the gross margin. Overall guidance and pace are close to market buyers' expectations ($37.5-38 billion).

NVIDIA's stock price has recently risen, mainly due to three positive factors: 1) The company will replace Intel in the Dow Jones Industrial Average starting in November; 2) Jensen Huang and the market further confirmed that the company's mass production progress of Blackwell in the fourth quarter is proceeding as planned, alleviating previous market concerns about Blackwell; 3) The company's strategy in the PC sector is expected to launch related PC products in the consumer market by 2025, potentially bringing new incremental revenue to the company.

Additionally, regarding the current market focus on Blackwell, from multiple sources, Hon Hai, Quanta, and Dell's servers equipped with Blackwell are expected to be shipped successively by the end of 2024. The company's management has also raised its expectations, which will exceed the previous expectation of "tens of billions of dollars for Blackwell in the fourth quarter" (previous market expectations were between $3-5 billion).

In terms of short-term performance, the market's focus is on the data center business, which accounts for nearly 90%. This quarter, the company's data center continued to grow strongly, with the revenue share of core AI chips in the data center market reaching 80.8%, far surpassing AMD and Intel.

The revenue from data center AI chips mainly depends on the capital expenditure situation of downstream cloud vendors. Combining the situation of the four major core cloud vendors (Meta, Google, Microsoft, and Amazon), Dolphin expects the total capital expenditure of the four to reach $69.6 billion next quarter, a quarter-on-quarter increase of 7.2%. Compared to AMD's weak guidance, the market increment has basically been captured by NVIDIA, and the company's market share in AI chips is expected to further increase next quarter.

Overall, NVIDIA's financial report this time is quite good. For the market's focus on the guidance information for the next quarter, it barely meets buyers' expectations ($37.5-38 billion). Due to the market's accustomed expectation of companies beating "over $2 billion," fourth-quarter revenue is actually expected to reach around $40 billion. Blackwell's revenue has been revised upward, which is slightly better than originally anticipated. With the expectation of continued high investment from cloud vendors in the next fiscal year and the new Blackwell products driving growth, Dolphin expects the company's current stock price to correspond to a profit of about 33 times PE for the next fiscal year, which is an acceptable valuation level in the market. After an initial rise, the stock price has not seen much increase due to the lack of significant highlights in this earnings report.

Dolphin's specific analysis of NVIDIA's earnings report is detailed below:

I. Core Performance Indicators: Revenue Continues to Grow, Gross Margin Under Temporary Pressure

1.1 Operating Revenue: In the third quarter of fiscal year 2025, NVIDIA achieved revenue of $35.08 billion, a year-on-year increase of 93.6%, better than Bloomberg's consensus estimate ($33.2 billion). The company's revenue continued to rise this quarter, mainly driven by growth in downstream data center and gaming businesses.

Looking ahead to the fourth quarter of fiscal year 2025, the company's revenue is expected to continue to grow. NVIDIA expects fourth-quarter revenue of $37.5 billion (plus or minus 2%), a year-on-year increase of 69.7%, better than Bloomberg's consensus estimate of $37.05 billion, with revenue growth mainly coming from the mass production of Blackwell in the data center business. Previously, the mainstream market expectation was between $37.5 billion and $38 billion, and this guidance is relatively close, basically in line. Among them, Blackwell's revenue in the fourth quarter is also expected to be better than the company's previous estimate of "several billion dollars."

1.2 Gross Margin (GAAP): In the third quarter of fiscal year 2025, NVIDIA achieved a gross margin (GAAP) of 74.6%, better than Bloomberg's consensus estimate (73.3%). The company's current gross margin is mainly affected by the data center business, with this quarter's low production of Blackwell material inventory reserves and other factors.

The company believes that "the medium to long-term gross margin of Blackwell products will still reach around 75%." Therefore, as the mass production of Blackwell accelerates, the overall gross margin of the company is also expected to rebound again. However, during the current capacity ramp-up process, the gross margin will be affected to some extent.

NVIDIA's gross margin expectation for the fourth quarter of fiscal year 2025 is 73% (plus or minus 0.5%), better than Bloomberg's consensus estimate (72.4%). Driven by demand from AI and other sectors, the company's gross margin center has risen from 65% to over 70%. From the company's continuously improving guidance, the orders for the data center business remain robust, and product prices are relatively stable. However, during the current stocking and ramp-up phase of the new Blackwell products, the company's gross margin will face temporary pressure.

1.3 Operating Indicators

1) Inventory/Revenue: This quarter's ratio is 22%, remaining flat quarter-on-quarter. The company's inventory this quarter has risen to $7.6 billion, part of which is for stocking products for Blackwell. Compared to the company's high growth revenue, the inventory proportion remains at a historical low. Considering the company's continuously improving growth guidance, the company's products are currently still in a state of supply shortage, and the gross margin will continue to maintain at a relatively high level;

2) Accounts Receivable/Revenue: This quarter's ratio is 50%, showing an increase. The accounts receivable proportion is also at a relatively low position, and the company's collection situation is still good.

II. Core Business Situation: AI Big Winner

Driven by demand such as AI, the share of NVIDIA's data center business in the company's revenue continued to expand in the third quarter of fiscal year 2025, reaching 87.7% this quarter. The share of the gaming business has been squeezed to below 10%, and the data center business is the most important factor affecting the company's performance.

2.1 Data Center Business: In the third quarter of fiscal year 2025, NVIDIA's data center business achieved revenue of $30.77 billion, a year-on-year increase of 112%. The data center business is the market's biggest focus, and this quarter's growth is mainly driven by the demand for the Hopper GPU computing platform, which is used for training and inference of large language models, recommendation engines, and generative AI applications. The year-on-year growth this quarter is driven by both computing and networking demand.

In detail: The computing revenue in the company's data center business is $27.6 billion, a year-on-year increase of 132%; networking revenue is $3.1 billion, a year-on-year increase of 20%, benefiting from Ethernet for AI, which includes the Spectrum X end-to-end Ethernet platform.

For the new product Blackwell, the company has successfully completed the mask replacement, thereby increasing the relevant output. The production and shipping plan for Blackwell will start next quarter and will continue to increase in the next fiscal year. (This aligns with previous market expectations, as servers equipped with Blackwell from Hon Hai, Quanta, and Dell will be shipped successively by the end of 2024.)

The company will ship Hopper and Blackwell systems in the fourth quarter of fiscal year 2025 (from November 2024 to January 2025) and beyond. Both Hopper and Blackwell systems have certain supply constraints, and the company expects that demand for Blackwell in the next fiscal year will exceed supply in several quarters

Due to the fact that cloud service providers currently account for about 50% of the company's data center revenue, capital expenditures on cloud services have a direct impact on the company's data center business. From the capital expenditures of the four giants: Meta, Google, Microsoft, and Amazon, the total capital expenditures of the four companies reached $64.9 billion this quarter, a year-on-year increase of 73.8%. Combined with the company's data center business year-on-year growth rate of 112%, NVIDIA's share of capital expenditures from core cloud vendors continues to rise. The continuous increase in capital expenditures from these giants provides assurance for the growth of the company's data center business.

Looking at the expected capital expenditures for the next quarter, the total capital expenditures of the four companies are expected to be approximately $69.6 billion, a year-on-year increase of 59% and a quarter-on-quarter increase of 7.2%. At the same time, AMD has provided relatively weak AI guidance. Dolphin believes that core companies have increased their procurement of NVIDIA products next quarter and have begun shipping the new Blackwell products, which is expected to further enhance the company's market position in AI chips (currently holding an 80.8% share). This also provides significant incremental support for the company's guidance of $37.5 billion next quarter.

2.2 Gaming Business: In the third quarter of fiscal year 2025, NVIDIA's gaming business achieved revenue of $3.28 billion, a year-on-year increase of 14.8%. This is mainly due to the increase in sales of GeForce RTX 40 series GPUs and gaming console SoCs.

Considering AMD's performance, Dolphin believes that NVIDIA has clearly gained more market share this quarter. AMD's gaming business declined by 69.3% year-on-year this quarter, only reaching $462 million. Meanwhile, NVIDIA continues to grow year-on-year, allowing the company to capture more discrete graphics share.

In addition, the overall performance of the PC market will also impact the company's gaming business. According to the latest data from IDC, global PC shipments in the third quarter of 2024 reached 68.8 million units, a year-on-year increase of 0.9%. With the overall recovery of the PC market, there will be direct benefits to AMD and Intel's PC businesses. Since gaming graphics cards are primarily installed in PCs, this also has a certain driving effect on discrete graphics. Recently, as AMD's gaming business continues to decline, NVIDIA's gaming business continues to grow, and the company has also increased its share in the discrete graphics market.

2.3 Automotive Business: In the third quarter of fiscal year 2025, NVIDIA's automotive business achieved revenue of $449 million, a year-on-year increase of 72%. NVIDIA's automotive business is primarily driven by its autonomous driving platform.

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

III. Key Financial Indicators: Operating Profit Margin Remains Stable

3.1 Operating Profit Margin

In the third quarter of fiscal year 2025, NVIDIA's operating profit margin was 62.3%, remaining stable quarter-on-quarter. The decline in the company's expense ratio this quarter offset the decline in gross margin, resulting in a stable operating profit margin.

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

“Operating Profit Margin = Gross Margin - R&D Expense Ratio - Sales, Administrative, and Other Expense Ratio”

1) Gross Margin: 74.6% this quarter, a quarter-on-quarter decrease of 0.5 percentage points. The company's gross margin was under pressure due to factors such as inventory reserves of new materials from Blackwell;

2) R&D Expense Ratio: 9.7% this quarter, a quarter-on-quarter decrease of 0.6 percentage points. The absolute value of the company's R&D expenditure has increased, but due to the rapid increase in revenue, the expense ratio has decreased again;

3) Sales, Administrative, and Other Expense Ratio: 2.6% this quarter, a quarter-on-quarter decrease of 0.2 percentage points. Although the absolute value has increased, the company's sales expense ratio remains at a relatively low level.

The company's guidance for operating expenses in the fourth quarter of fiscal year 2025 continues to rise to $4.8 billion, but compared to the growth in revenue, the operating expense ratio is expected to remain at a low level of around 12.8% next quarter. The rapid growth in revenue and the healthy state of the expense ratio are positive.

3.2 Net Profit (GAAP) Margin

In the third quarter of fiscal year 2025, NVIDIA's net profit was $19.3 billion, a year-on-year increase of 109%. The net profit margin for this quarter was 55%, showing a slight decline quarter-on-quarter. The company's revenue continues to grow this quarter, and the operating expense ratio continues to decline, with the two essentially offsetting each other. Although the net profit margin has declined, the company's operating profit margin remains stable at a high level.