Why Nvidia earnings have soared

Nvidia’s sales and profitability are through the roof as the chipmaker, once thought of as just another gaming GPU supplier, has cannily ridden the wave of multiple tech revolutions.

The headlines were everywhere recently, and we do mean everywhere. Nvidia’s stock price soared upwards on the back of its second fiscal quarter results, and the news wasn’t just good. It was exceptional.

The company recorded revenues of $13.51 billion, billions of dollars more than analysts predicted. To put that figure into perspective, that’s twice its revenue against the same period in 2022. Nobody gets too upset if you take in double what you did last year, especially when your net income jumps 843% year on year as a result.

That makes for a hot stock, with share prices tipping well over $500. That’s a tripling of value over the year, with little sign of slowing down any time soon. Nvidia itself is bullish about its prospects, vowing to buy back $25 billion of shares. This not only keeps confidence in the company high – it keeps share prices up.

So why is Nvidia suddenly making record revenues amidst significant global financial doom and gloom?

Diversifying from gaming helps Nvidia’s earnings soar

For the longest time, Nvidia’s core market was gaming. Its constant competition was with AMD, over both value and premium graphics card sales. Or GPUs as they’re commonly called.

Gaming is still part of Nvidia’s DNA – and it was up 22% year on year – but gaming GPUs are now only a part of the mix.

In more recent history, those GPUs were highly sought after by the cryptocurrency crowd. The precise mathematical equations that are ideal for throwing videogame polygons around were also a great match for the formula-driven approach of cryptocurrency.

While Nvidia undeniably made bank from crypto buyers, it also had issues both with supply and disclosures around the impact of cryptocurrency on its bottom line. It settled a costly lawsuit with the US SEC last year.

Nvidia has shown significant willingness to diversify elsewhere too. Consider the Nvidia Studio project. This provides a hardware and software platform for visual content creators, rather than that more traditional gaming market.

Then there are its moves in the automotive space. It’s a significant player in the move towards self-driving vehicles, even if that’s one area where it saw less revenue year on year. According to Nvidia’s Chief Financial Officer Collette Kress, that’s largely attributable to the slowdown of sales in China.

That hasn’t stopped it from developing new solutions, or indeed hiring Wu Xinzhou, former head of autonomous driving at Xpeng to potentially head up its automotive businesses.

Meanwhile, other diversification moves notably haven’t paid off for Nvidia, especially when it tried to acquire ARM only to see itself blocked by regulators.

Nvidia bet big on AI – and won

All of which could make for humdrum reports and a less than stellar reception in the share markets, were it not for the fact that Nvidia also identified AI as a key growth area years ago. It has invested billions into the underlying infrastructure that AI needs: number-crunching silicon, essentially.

Nvidia, naturally, has played to its strengths. It has engineered specifically around using GPUs or GPU-style silicon to meet the needs of a rapidly expanding AI economy.

Think of an AI development, whether it’s the supply chain, drug development, the fight against climate change or the ChatGPT bot that might be coming for your job. Odds are that there’s custom Nvidia silicon sitting somewhere behind the scenes.

Nvidia is betting big on AI. Not just in the recent past, but also in its future.

Speaking to Reuters, Nvidia CEO Jensen Huang stated that he felt that the shift from traditional data centres to ones using Nvidia chips, paired with AI-led generation, was going to drive the company’s fortunes in the foreseeable future. “It’s hard to say how many quarters are ahead of us, but this fundamental shift is not going to end. This is not a one-quarter thing,” he said.

Nvidia’s biggest challenge might be itself

Nvidia isn’t alone in world of automotive AI, mind you. While it has tie-ups with the likes of Jaguar, if you dive beneath the hood of a current model Tesla… well, you’ll invalidate your warranty for a start, but you’d also find one of rival AMD’s Ryzen GPUs instead of Nvidia silicon.

Nvidia also has many rivals in the AI space, but few have the competitive edge that Huang’s company currently enjoys. That’s reflected both in the immense jump in revenues AMD has seen, and the increased scrutiny it has been under as a result.

The more likely issue that could constrain Nvidia – and one that it’s faced before – is one of simply supplying enough of its custom silicon to a market in an absolute frenzy over all things AI. Financial analysts point to Nvidia’s reliance on a handful of semiconductor plants for building its chips, most notably Taiwan Semiconductor Manufacturing (TSM), as a potential weakness.

That’s exacerbated by the world’s supply chains. While these aren’t in as woeful a state as they were a couple of years ago, at the height of the pandemic, there are still bottlenecks in production stemming from those times. Nvidia has reportedly been using multiple chip fabs where feasible to manage some of these issues, but if you’re keen on Nvidia-led AI then you might want to join the queue now. There could be something of a wait.

Nvidia stock according to analysts

What’s also interesting here is that while Nvidia itself is buying back a whole host of shares – a classic play by any company that figures its stock is undervalued, so there’s easy money to be made reinvesting in the company – the share markets took a more cautious view of Nvidia’s real value. 

As always, it depends on the financial analyst you put your – pun not intended – stock in. The FT suggested that Nvidia’s modest rise in share price after the earnings result reflected where predictions suggested Nvidia was heading, while Bloomberg suggested it was more to do with wider market trends.

Then again, most analysts didn’t see Nvidia’s massive revenue gains coming this quarter, so maybe there is something in this AI game after all.