When Nvidia announced surprising earnings with triple-digit year-over-year growth, it was easy to get caught up in the excitement. The company raised $13.500 billion during the quarter, up 101% from a year ago and well above its $11.000 billion guidance. That's certainly something to get excited about.
Nvidia benefits from being a company in the right place at the right time, where its GPU chips are in high demand for running large language models and other AI-powered tasks. This fueled Nvidia's surprising growth last quarter. It is worth noting that the company laid the foundation for its current success some time ago.
"Data center computing revenues nearly tripled year over year, driven primarily by accelerating cloud demand from cloud service providers and large consumer Internet companies for our HGX platform, the engine of generative models and large language models,” Colette Kress, Nvidia executive vice president and chief financial officer, said in the post earnings report with the analysts.
This kind of growth is reminiscent of the heady days of cloud stocks, some of which soared during the pandemic lockdown as companies accelerated the use of SaaS to keep their workers connected. Zoom, in particular, took off with five quarters of absolutely astonishing growth during that time.
The pandemic fueled Zoom's growth.
Today, when double-digit growth no longer exists in the most recent report Zoom's company earlier this month reported revenue of $1.138 billion, up 3,6% from a year ago. This follows five consecutive quarters of single-digit growth, the last three in the low single digits.
Could Zoom be a warning to a company like Nvidia riding the generative AI wave? And perhaps most importantly: Will this drive unreasonable investor expectations about future performance as happened with Zoom?
Data center demand is going nowhere
It's interesting to note that Nvidia's biggest growth area is the data center, and that they are still building at a rapid pace with plans to add over 300 new data centers in the coming years. according to synergy research of 2022.
“The future looks bright for hyperscale operators, with double-digit annual growth in total revenue supported largely by cloud revenues that will grow in the range of 20-30% annually. This, in turn, will drive strong growth in capital spending generally and data center spending specifically,” said John Dinsdale, chief analyst at Synergy Research Group, in a statement on the aforementioned report.
At least a percentage of this spending will almost certainly be devoted to resources to run AI workloads, and Nvidia should benefit from this, CEO Jensen Huang told analysts on Wednesday. In fact, he believes his company's expansive growth is much more than temporary.
“There is approximately $1 trillion worth of data centers, or put another way, a quarter of a trillion dollars of annual capital cost. "We're seeing data centers around the world taking that capital spending and focusing it on the two biggest computing trends today: accelerated computing and generative AI," Huang said. “And that's why I think this is not a short-term thing. “This is a long-term industry transition and we are seeing these two platform changes happening at the same time.”
If he's right, maybe the company can sustain the level of growth, but history suggests that what goes up will eventually come down.
Business Gravity
If Zoom is any indication, some companies that experience rapid growth for one reason or another are able to retain that revenue going forward. While it's certainly less exciting for investors that Zoom's growth rate has moderated dramatically in recent quarters, it's also true that Zoom has continued to grow. That means it has retained all of its previous scale and then some.
But software is not hardware. Zoom is a good historical example that fast growth often turns into slower growth later, but hardware companies have it harder than their digital cousins. In Zoom's case, it appears to have seen an increase in demand rather than a long-term change in its growth rates.
How did Zoom manage to continue growing after a period of excessive customer acquisition? A key element of software in the modern business context is that existing customers tend to spend more over time. This native growth, called net retention by SaaS experts, helps ensure that software companies rarely see their revenue decline. Sure, growth may slow as it becomes harder to get new accounts and upsells become more difficult, but for a revenue line item to actually drop is rare for software companies today.
Nvidia's story shows how different things are for hardware companies. For example, in the first quarter of 2023, the company recorded revenue of $7.190 billion, a figure 13% lower than its result from the previous year. Then Nvidia completely crushed the second quarter.
So when we consider slowing software growth (Snowflake's falling, but still impressive, net retention numbers, for example), the analogy only extends so far to the world of chip manufacturing and sales. In other words, we can't expect Nvidia to follow a similar trajectory to Zoom.
But if hardware revenue is more chaotic than software revenue, how can Nvidia capitalize on the current surge in demand and profits, making sure to take advantage of the moment as best it can? Very simple: you can invest the enormous scale you have today in future revenue and shareholder satisfaction. Both should help you defend your valuation going forward, and both lines are on track.
Regarding R&D, Nvidia spent $2.040 billion in the second quarter on research and development. That's up from $1.820 billion in the same quarter a year earlier. So far in 2023, the company has spent $3.920 billion on R&D, up from $3.440 billion in the first half of last year. This is a large investment in the competitiveness of the product in the short term and in its promotion in the long term; Nvidia is using its profits to help build more, better, and faster chips.
The second area where Nvidia could invest its current boom in demand is by making its shares more valuable individually. It does this by buying back its own capital. Sure, Nvidia is buying at a pretty high price today, but that doesn't seem to be slowing it down. As the company wrote in its most recent earnings letter to shareholders:
Durante el segundo trimestre del año fiscal 2024, NVIDIA devolvió 3.380 millones de dólares a los accionistas en forma de 7,5 millones de acciones recompradas por 3.280 millones de dólares y dividendos en efectivo. Al final del segundo trimestre, a la empresa le quedaban 3.950 millones de dólares bajo su autorización de recompra de acciones. El 21 de agosto de 2023, el comité de dirección aprobó $25.000 millones adicionales en recompra de acciones, sin vencimiento. NVIDIA planea continuar con la recompra de acciones este año fiscal.That $25.000 billion is a huge sum for any company. And by approving that level of spending, Nvidia is working to ensure that future profits are spread across fewer shares, increasing profitability per share and therefore value.
While there have been supply chain issues for chip companies in particular in recent years, the company insists they can keep up with demand in the coming quarters. "In terms of our supply, yes, we expect to continue to increase our supply over the next quarter as well as into the next fiscal year," Kress told analysts.
There is little Nvidia can do to control the economy, or even fully influence market demand for its chips. The company has shown that by making chips like the H100 it can drive demand, but no one considers that Nvidia is in complete control of the destiny of its market. But you can invest in your future and your shareholders. And he is doing it.
You have to pay attention to Nvidia's rest of 2023 R&D spending and how much it changes from its QXNUMX levels. If it is seen that the figure grows even more, it will serve as evidence that the company is not comfortable with the results.
