Nvidia FQ1 25 – Rush!

Competition crushed in the stampede.

• Nvidia contemptuously swept aside both its critics and its competition and reported another huge set of results that confirmed that the AI frenzy and the bubble continue to grow and inflate.
• FQ1 25 revenues / Adj-EPS were $26.0bn / $6.12 ahead of forecasts of $24.6bn / $5.60 and Nvidia signalled that the strength will continue.
• FQ2 25 revenues are expected to be $28.0bn +/- 2% again ahead of consensus of $26.6bn.
• The real story of these results was FQ1 25 gross margin which came in at 78.9% (almost unheard of in the semiconductor industry) up 12.5% points from FQ1 24.
• This is the clearest signal that Nvidia can charge whatever it wants for its silicon and still, the customers will beat down the door and buy everything that it can make.
• Nvidia was also untroubled by one of its largest customers delaying its orders to wait for newer chips as there are more than enough other customers waiting to take AWS’s place in the queue.
• This supports my view that fiscal 2025 revenues will be determined by how much capacity Nvidia has reserved at TSMC as it is clear that it can currently sell everything that it makes at superb gross margins.
• It is also a signal that nobody wants to buy chips from the competition many of whom are struggling to make any sales unless they address a very specific niche in the market.
• The main driver once again was the data centre which grew by 26% QoQ and a massive 427% YoY as it is here where most of the investments are being made.
• Gaming, enterprise metaverse, automotive and robotics also grew well but are now a rounding error in the accounts with data centre making up 87% of total revenues.
• This means that the outlook for the short to medium term as well as the valuation of the shares is almost entirely dependent on the generative AI investments in the cloud and at the moment there is nothing but good news.
• However, at some point, it will become clear that the LLMs that power generative AI have no understanding of causality and remain unable to reason.
• This is important because these are two crucial abilities that the machines need to become truly intelligent.
• The hyperscalers and AI ecosystem proponents are leading the market to believe that LLMs have these characteristics even though the empirical evidence indicates the opposite.
• Hence at some point, there is going to be a reckoning when generative AI fails to live up to its promise and there is a correction just like there is every single time the market gets worked up in a frenzy like this.
• For better or for worse, Nvidia is on this rollercoaster and when the correction comes it will be unable to get off, but it will incur far less pain than anyone else.
• This is because Nvidia is the only one making real money out of generative AI at the moment and this will continue even in a downturn as generative AI has a lot of use cases even with the machines being unable to reason or understand causality.
• This is reflected in Nvidia’s valuation which is really not that bad as a result of the huge increases in both revenues and margins.
• With the shares at $1,000, Nvidia is on FY25 PER of 37x or so which is broadly in line with Microsoft, but Nvidia is growing much faster.
• This means that when the correction comes, Nvidia is likely to fall less than its peers making it the safest pure AI play in my opinion.
• However, I would continue to prefer to look more laterally on AI themes at things like nuclear power or enablers of inference at the edge like Qualcomm (and pretty soon MediaTek) as better ways of gaining exposure.
• I have positions in both and remain comfortable to sit tight.