Dissecting Nvidia’s Earnings: Growth Concerns and Market Reactions

Joining me to dissect Nvidia earnings is Melissa Otto, Head of Visible Alpha Research at S&P Global.

Melissa, happy Friday.

Good morning to you.

Thank you so much for joining us.

So I do want to dive straight into those Nvidia earnings results.

So why did the stock barely move and given the price action, why is there such apathy when it comes to the Nvidia earnings here?

Morning, Remy, it's great to be here.

Thanks for having me on.

Uh, I think there's a couple of issues going on with Nvidia at the moment.

Uh, they did beat expectations on the top line and bottom line in the quarter, however, looking ahead, Their guidance also was good, but their, their, their revenue guidance was good, but the gross margin came in a smidge light of expectations.

So there may be a little bit of concern there around higher costs starting to show up in the gross margin.

The second thing that is probably even more important is that next year's expectations are for a significant slowdown in both revenue growth and profit growth.

So investors may be saying, are the best days of high growth momentum behind Nvidia?

Melissa, while Wall Street may have shrugged, Asian markets did soar.

We saw LG Electronics, Hyundai jump over 25% after Jensen Huang touted the next five years of physical AI, meaning robotics as well as automated vehicles.

So how realistic do you think this timeline is for physical AI, and does the company truly have it all covered, as the CEO Jensenang claimed on the earnings call?

It's hard to say.

I mean, one thing I can say though about generative AI applications is that domain expertise is really important.

It, it's fundamentally critical for the process and the way that the AI is trained and the infeerrenencing is The inferencing output is completed for that to actually capture the very specific workflow and domain and persona of the actual person that's using it.

So, for some things that's very straightforward, but for others it's much more complicated.

So I think it really depends on what areas they're seeing the largest growth and and where they're going to potentially see upside and how complicated that is.

Melissa, while I have you here, I do want to ask you about the hyper scaler dependency.

So Nvidia is trying to diversify away from giant data center operations and also focus on governments as well as enterprise clients and.

Hyperscalers are still projected to spend a whopping $725 billion on AI this year and increasingly building their own custom chips.

So how vulnerable do you think the company's gross margin is if these massive tech giants successfully pivot to their own in-house silicon here?

Yeah, it's, it's, it's a looming question around this, around the company.

Uh, I think one of the things that they did this quarter that was interesting is they provided more transparency about The track record and trajectory of both the hyper scales, and they added a new line item in their in their data called um edge computing and this is interesting because they've now taken the data center business.

And sliced it out into two new line items and then they added a third edge computing.

So it does give the investment community a lot more clarity and transparency around what the key drivers are of some of these numbers and how we can potentially forecast them going forward.

I do want to ask you about the supply chain.

So Asian suppliers now account for most of Nvidia's production costs, but where is the geopolitical risk here, especially following Jensen Huang's recent trip to China with the American president here.

It's a wild card.

I, you know, it's, it's very unclear how it's going to shake out, what the issues are going to be, um, at the end of the day, uh, they, when they guided, they did say there, there are, um, there, there really isn't any Chinese revenue embedded in the expectations at the moment.

So if something positive did come out of that, that would be, um, incremental upside.

And finally, Melissa, before I let you go, I do want to ask you about the competition.

So Nvidia easily chalks up more than sales in a single quarter than its next three largest rivals combined.

So given this influx of new AI chip options out there, do you think Nvidia's absolute dominance in the data center market is guaranteed, or are you starting to see some cracks in their armor?

It's the Nvidia has a strong position because of the KUA software and the KUA programming language, and so there's an entire ecosystem around.

Nvidia and around data centers that is embedded and grandfathered into that and into Kuda, so it, unless The chips can fully diversify away and create their own new programming language around this.

I, I think it's gonna be challenging.

Um, it's gonna be very, uh, I, I.

I think um Nvidia is probably going to continue to anchor themselves around that, and, and they will be in a strong position.

The, the key thing will be though, um, with competitors is, is whether or not they're, they're going to be able to penetrate Kuda and and whether they could derail that, and we haven't seen any evidence of that yet.

Well, Melissa, always great talking to you.

We will have to leave it there for today.

Thank you so much for joining us and have a great holiday weekend.

You too, Remy.

Take care.

Happy Friday.