AI Boom, Improving Supply Will Drive Nvidia’s Q1 Results

Nvidia (NASDAQ: NVDA) is expected to publish its Q1 FY’25 results on May 22. We expect the company to have another upbeat quarter, as tech companies and developers continue to invest heavily in building and deploying generative AI into their apps. This is driving a windfall for Nvidia, whose high-end graphics processing chips currently remain the gold standard for AI workloads. We expect Nvidia’s revenue for the quarter to come in at $24.6 billion, slightly ahead of the consensus estimates and roughly 3.8x last year’s number. We expect earnings to come in at roughly $5.58 per share, marginally ahead of consensus estimates and up from just about $1 last year’s quarter. So what should investors expect as Nvidia reports its Q1 FY’25 results? See our analysis of Nvidia Earnings Preview for a closer look at what to expect as Nvidia publishes earnings.

Nvidia’s data center business is likely to remain the primary driver of the company’s earnings for the quarter, led by the Hopper GPU computing platform and the InfiniBand end-to-end networking solutions as customers across various industries have been investing in training and interfacing generative AI and large language models. Over the previous quarter, computing-related revenue grew more than 5x year-over-year, while networking revenue tripled. Supply for Nvidia’s Hopper products is also improving, and this is likely to help sales over Q1.  Nvidia’s accelerated computing chips remain meaningfully ahead of rivals such as AMD and Alphabet’s Tensor processing units in terms of performance at the moment. Moreover, the company has built an ecosystem around its AI tools, with its programming languages, and software, which are helping the company drive incremental sales and lock in customers.

Nvidia is also becoming extremely profitable due to the AI surge. Net income over Q4 rose to $12.29 billion up from $1.41 billion in the year-ago quarter. Things could remain strong over Q1 as well, as Nvidia benefits from favorable component costs and better scale.  For Q1, Nvidia is guiding for adjusted gross margins of around  77% per the company, plus or minus 50 basis points.  Nvidia could also benefit from a more favorable product mix skewed toward complex data center products, as well as higher software-related sales.

Amid the current financial backdrop, NVDA stock has seen extremely strong gains of 610% from levels of $130 in early January 2021 to around $925 now, vs. an increase of about 40% for the S&P 500 over this roughly 3-year period. However, the increase in NVDA stock has been far from consistent. Returns for the stock were 125% in 2021, -50% in 2022, and 239% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that NVDA underperformed the S&P in 2022. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for other heavyweights in the Information Technology sector including MSFT, AAPL, and AVGO, and even for the mega-cap stars GOOG, TSLA, and AMZN.

In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could NVDA face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Looking at Nvidia’s current market price of $925 per share, the stock now trades at about 35x consensus 2025 earnings and 29x 2026 earnings. This is not an unreasonable multiple, considering Nvidia’s heady growth. That said, there are risks as well. Firstly, the big surge in GPU demand that we are currently seeing could potentially ease, as the initial training phase of AI large language models slows down. After the training of models, the phase of utilizing these models could shift toward lower-power requirements, or potentially even on-device capabilities, reducing demand growth for GPUs. Moreover, at the current valuation, the market might be pricing in that Nvidia will essentially own the AI chip market. However, this may not be the case. Players such as AMD are investing considerably to catch up in this space given the high stakes. Additionally, big tech players such as Google, Microsoft, and Amazon are also doubling down on developing their own AI and machine learning-related silicon. This could also pose a risk for Nvidia, as the big tech players remain the company’s largest customers. We value NVDA stock at $731 per share, about 20% below the current market price. See our analysis on Nvidia Valuation: Is NVDA Stock Expensive Or Cheap? for more details on what’s driving our price estimate for NVDA stock.

[1] Returns as of 5/20/2024
[2] Cumulative total returns since the end of 2016

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