NVIDIA(NASDAQ: NVDA) has been in top form on the stock market in 2024, thanks to the impressive growth the company has been posting quarter after quarter, which explains why the market was awaiting its Q3 FY 2025 results (for the three months which ended on October 27). holding your breath.
The semiconductor giant’s report was released on Nov. 20 and, unsurprisingly, returned better-than-expected results thanks to healthy demand for its graphics processing units (GPUs) that are used in data centers for training. and implement artificial intelligence. (AI) models. However, investors’ initial reaction to the company’s results appears to be negative, as the stock has fallen in the two sessions following its results.
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Does this mean Nvidia’s red-hot rally has hit a speed bump? Or will stocks overcome this setback and resume their northward journey to deliver more gains to investors in 2025? Let’s find out.
Nvidia posted record quarterly revenue of $35.1 billion in the fiscal third quarter, an increase of 94% from the same period a year earlier. The figure was well above the company’s guidance of $32.5 billion and also surpassed consensus estimates of $33.17 billion. Nvidia’s non-GAAP (generally accepted accounting principles) earnings rose 103% from the prior-year period to $0.81 per share, well above the consensus estimate of $0.75 per share.
The guidance was icing on the cake, as Nvidia expects fiscal fourth-quarter revenue to hit $37.5 billion at the midpoint. That figure was slightly higher than Wall Street’s estimate of $37 billion. However, the stock fell in pre-market trading for a couple of reasons.
First, Nvidia’s revenue guidance for the current quarter would translate into a year-over-year increase of nearly 70% from last year’s reading of $22.1 billion. This points to a relative slowdown in the company’s growth. Second, the company has forecast a non-GAAP gross margin of 73.5% for the current quarter. That figure stood at 76.7% in the same period of the previous year.
However, smart investors should consider overlooking both factors. The company continues to grow at a fantastic rate, despite having already achieved a huge revenue base. A 70% year-over-year increase in revenue, while slower than previous quarters, is still pretty solid considering its main rival with a smaller revenue base, amdhas been growing at a much slower rate.
Furthermore, the pressure on margins will not last long. The reduced margin that Nvidia forecasts for the current quarter can be attributed to increased production of its next-generation Blackwell AI chips. The company is looking to maximize production in a bid to meet the huge demand for these chips, and that will have a short-term impact on margins.
As CFO Colette Kress commented on the latest earnings conference call:
Our current focus is on increasing demand towards strong demand, increasing system availability and providing the optimal mix of configurations to our customers. As Blackwell ramps up, we expect gross margins to moderate into the 70s. When the ramp is fully[ed]We expect Blackwell’s margins to be in the mid-70s.
The pressure on near-term margins shouldn’t last long, as Nvidia says demand for its Blackwell processors is “staggering,” which is why it is “racing to scale supply to meet the incredible demand… [from] customers.”
The good thing is that Nvidia expects to ship more Blackwell chips than it originally expected in 2024. Even then, the company notes that demand for these chips will continue to outstrip supply and it will continue working to improve production in 2025. Nvidia expects its revenue to Blackwell will continue to increase with each quarter until next year, and quarterly revenue from chips made with the latest architecture is expected to surpass the previous generation Hopper architecture in April of next year.
Once the transition from Hopper to Blackwell is complete and Nvidia manages to produce enough chips to meet the massive demand it is seeing, it should be able to maintain healthy growth in its revenue and profits in 2025 and beyond.
Nvidia’s fiscal fourth-quarter guidance indicates that it is on track to finish the year with $123.5 billion in revenue (adding fourth-quarter guidance to its revenue in the first nine months of fiscal 2025). Management’s comments appear to have given analysts confidence that it will be able to deliver another strong performance next year.
As the chart shows, Nvidia’s revenue estimates for fiscal 2026 (which will begin in late January 2025) have increased.
NVDA Revenue Estimates for Current Fiscal Year Data by YCharts
Meanwhile, analysts expect the company’s results to grow another 48% in fiscal 2026 to $4.27 per share. However, if demand for Blackwell processors remains strong and contributes significantly to its revenue, there’s a good chance it could beat Wall Street’s forecasts. After all, Nvidia has surpassed consensus earnings estimates in each of the last four quarters by consistently generating stronger-than-expected growth.
Blackwell could help it maintain that trend next year, which is why investors can still hold onto Nvidia stock, or even buy more. This is because Nvidia currently trades at 33 times forward earnings, which is close to the tech-laden level. Nasdaq-100 index future earnings multiple of 31.3. If Nvidia manages to generate higher earnings growth and the market decides to reward it with a premium valuation, it should be able to generate more upside in 2025.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
Will Nvidia’s successful results be enough to drive the stock higher? was originally published by The Motley Fool
