Nvidia(NASDAQ: NVDA) was in sizzling form on the stock market in 2024, thanks to the stunning growth the company achieved quarter after quarter, which explains why the market was waiting for the third quarter results of fiscal 2025 (for the three months ended October 27) with bated breath.
The semiconductor giant’s report came out on November 20, and unsurprisingly it delivered stronger-than-expected results thanks to healthy demand for its graphics processing units (GPUs) used in data centers to train and deploy artificial intelligence. (AI) models. However, initial investor reaction to the company’s earnings appears negative as the stock has moved lower in the two sessions following the results.
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Does this mean Nvidia’s white-hot rally has hit a speed bump? Or will the stock overcome this hiccup and resume its journey north to deliver more gains for investors in 2025? Let’s find out.
Nvidia reported record quarterly revenue of $35.1 billion in the third quarter, up 94% from the same period a year ago. This figure was well above the company’s expectations of $32.5 billion and also exceeded consensus estimates of $33.17 billion. Nvidia’s non-GAAP (generally accepted accounting principles) earnings rose 103% from the same period last year to $0.81 per share, well above the consensus estimate of $0.75 per share.
This guidance was the icing on the cake, as Nvidia expects fiscal fourth quarter revenue to hit $37.5 billion at the midpoint. That was slightly higher than the Wall Street estimate of $37 billion. However, the stock fell in premarket trading for a number of reasons.
First, Nvidia’s revenue expectations for the current quarter would translate into a year-over-year increase of nearly 70% from last year’s $22.1 billion. This indicates a relative slowdown in the company’s growth. Second, the company has targeted a non-GAAP gross margin of 73.5% for the current quarter. That figure was 76.7% in the year-ago period.
However, smart investors should consider looking past both of these factors. The company is still growing at a tremendous pace despite having already achieved a huge revenue base. A 70% year-over-year revenue increase, while slower than previous quarters, is still quite solid when we consider its main rival with a smaller revenue base, AMDhas grown at a much slower pace.
Moreover, the margin pressure will not last long. The lower margin that Nvidia expects for the current quarter is due to the increase in production of its next-generation Blackwell AI chips. The company wants to maximize production in an effort to meet the huge demand for these chips, and that will impact margins in the short term.
As CFO Colette Kress noted during the last earnings conference call:
Our current focus is on responding to strong demand, increasing system availability and offering the optimal mix of configurations to our customers. As Blackwell grows, we expect gross margins to moderate to the low 70s. When the slope is complete[ed]we expect Blackwell margins to be in the mid-seventies.
The near-term margin pressure shouldn’t last long, as Nvidia says demand for its Blackwell processors is “mind-boggling” and that it is therefore “racing to scale up supply to meet the incredible demand… [from] customers.”
The good thing is that Nvidia expects to supply more Blackwell chips in 2024 than it originally expected. Even then, the company points out that demand for these chips will continue to exceed supply, and it will continue to work to improve production through 2025. Nvidia expects its Blackwell revenue to continue to rise every quarter next year, and it expects expects quarterly sales from chips made on the latest architecture to surpass the previous generation Hopper architecture by April next year.
Once the transition from Hopper to Blackwell is complete and Nvidia is able to produce enough of these chips to meet the massive demand, it should be able to maintain healthy revenue and profit growth in 2025 and beyond.
Nvidia’s fourth-quarter guidance indicates it is on track to end the year with $123.5 billion in revenue (adding fourth-quarter guidance to revenue in the first nine months of fiscal 2025 ). Management’s comments appear to have given analysts confidence that the company will be able to deliver another solid performance next year.
As the chart shows, Nvidia’s revenue estimates for fiscal year 2026 (which starts from the end of January 2025) have gone up.
NVDA revenue estimates for current fiscal year data based on YCharts
Meanwhile, analysts expect corporate earnings to grow another 48% to $4.27 per share in fiscal 2026. However, if demand for Blackwell processors remains strong and contributes significantly to revenue, there is a good chance that it could exceed Wall Street forecasts. After all, Nvidia has exceeded consensus expectations in each of the past four quarters by consistently delivering stronger-than-expected growth.
Blackwell could help keep this trend going next year, which is why investors can still continue to hold shares of Nvidia, or even buy more of it. That’s because Nvidia currently trades at 33 times forward earnings, which is close to tech-laden Nasdaq-100 the index’s forward earnings multiple is 31.3. If Nvidia manages to deliver stronger earnings growth and the market decides to reward the company with a premium valuation, it should be able to offer more upside potential in 2025.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Advanced Micro Devices and Nvidia. The Motley Fool has a disclosure policy.
Will Nvidia’s blockbuster results be enough to send the stock higher? was originally published by The Motley Fool
