Nvidia FQ2 27 – Party Extension

Nvidia extends the party another 12 months.

• Great results along with longer-term guidance of 70% YoY FY2028 revenue growth extends the party for another 12 months, but the tepid reaction of the shares is a sign of concerns around gross margins and creates an opportunity.  
• FQ2 26 revenues / EPS were $96.2bn (up 106% YoY) / $2.22, broadly in line with forecasts of $92.2bn / $2.09.
• Data Center led the way again by growing 117% YoY and now makes up 93% of revenues.
• There are also signs of diversification as Hyperscaler share of revenues has dropped from 60% of Data Center revenues in FQ2 26 to 45% in FQ 27, and there are signs that this will continue.
• This means that everyone else is starting to build their own infrastructure, pointing to a widening of customers either offering compute for sale or enterprises building their own private clouds.
• This is clearly where the growth is going to come from in FY 2027, meaning that Hyperscaler capex will grow by much less than Nvidia is forecasting, which will come as a relief to those concerned about balance sheet integrity.
• However, these smaller customers are also far less well-off, meaning that they will need financing to build infrastructure, which points to the deals that Nvidia announced during the quarter that many have written off as circular financing.
• I describe these as circular-ish because the support Nvidia and others are providing is not Nvidia buying its own silicon but making it financially viable for others to do so as well as other types of transactions such as using equity to buy silicon.
• However, these companies are now all linked together financially, meaning that a ripple in the system could set off a tsunami that brings the whole thing to a crashing halt.
• Hence, I see this as much lower risk than the telecom equipment companies lending the operators the money to buy their equipment, but it does increase the risk of a systemic crash if something goes wrong.
• It is the rapidly widening customer base that has underpinned the headline 70% YoY revenue forecast for FY 2027, which was way above consensus, which was looking for 45% YoY.
• Nvidia stated that this figure is still constrained by capacity and hinted that revenue growth in 2027 would be much higher than 70% YoY if the constraints were removed.
• Nvidia remains sold out at least 12 months in advance, and so this forecast is a realistic assessment of the demand that customers have expressed.
• However, plans can change, and if demand softens as a result of compute being so expensive to purchase (as Anthropic is finding with Fable 5), then there is the possibility that things slow down next year.
• However, for the short to medium term it’s full speed ahead, although memory has dented Nvidia’s short-term margin outlook, which in turn soured sentiment.
• FQ3 26 revenues / gross margins are expected to be $105.8bn – $110.1bn ($108bn) / 73.5% – 74.5%, but there will be margin pressure in FQ4 26 with gross margins falling to something closer to 71%.
• This is a result of memory, but I believe that margins will recover in FQ1 28 as the recent price rises start to make themselves felt.
• This means that the FY2028 EPS number is likely to be something in the region of $16.5 per share, meaning that the shares are trading on 13.4x FY2028 PER, which looks like a bargain to me even taking into account the slowdown risk in calendar 2027.
• I am going to have a look at Nvidia with a view to taking a position on valuation grounds.
• The catalyst will be gross margin recovery, and the market’s realisation that memory is a blip that Nvidia has already adjusted for.