Nvidia FQ1 27 – Efficient Market

The market has a very good grip on the outlook

• Nvidia reported another steady beat and raise, which was treated with relative indifference as the market has become very efficient in terms of pricing in the relatively predictable 12-month outlook.
• FQ1 27 revenues / EPS were $81.6bn / $1.87, slightly ahead of estimates of $78.9bn / $1.75 in a sign that the quarter played out pretty much exactly as Nvidia expected it to.
• Once again, all of the action was in the data centre where FQ1 27 revenues came in at $75.2bn, which was just ahead of expectations of $73.5bn.
• The two big stories from the report are the capital return to shareholders and the new reporting structure, as these are a far clearer signal of what management is thinking than any official commentary.
  • First, reporting structure: where there will now be two reporting lines, data centre and edge computing.
  • Within data centre, there will be two sub-categories, hyperscaler and ACIE, which is everything in the cloud that is not a hyperscaler.
  • This is a clear sign of the transition that Nvidia has been signalling for some time, that rapid growth is now likely to be found outside of the data centre.
  • This makes sense because hyperscalers are now spending so much that if they don’t slow down materially, they will go bankrupt.
  • Many companies are not going to want to run their workloads in a public cloud and so are likely to build some AI infrastructure inside their own organisations.
  • Furthermore, as the industry matures and the use cases diversify, there will be a need for infrastructure at the edge of the network, in devices themselves, which Nvidia has already launched products to address.
  • By splitting this part out from hyperscalers, the market will be able to see this rapid growth, and Nvidia hopes that the market will give it credit for it.
  • Second, dividend and buy back: where the dividend has been raised 25x to $1.00 per year and another $80bn in share buy-backs has been authorised.
  • These are good methods of increasing returns to shareholders when the share price appreciation slows, but it is often taken as a sign that growth is slowing.
  • Given the speed with which Nvidia has become the most valuable company in the world, this slowdown is inevitable, but the market knows it and has already priced this in.
• The net result is that Nvidia is signalling that the very rapid growth is coming to an end, but this is not the end of the story, as there are plenty of other avenues for the company to earn revenues.
• This, combined with another very steady guide, continues to demonstrate that Nvidia has excellent visibility on a 12-month basis.  
• Here, FQ2 27 revenues / adj-gross margins are expected to be $89.2bn – $92.8bn / 74.5% – 75.5%, just ahead of consensus, which is forecasting revenues of $88.2bn.
• This type of careful expectations management is what Nvidia has done for the last few years now, and the market has come to expect it.
• This is why the shares have barely moved in after-hours trading, and I am not expecting any fireworks over the next few months as all of the volatility has moved further down the supply chain and into the more speculative and risky names.
• Nvidia remains pretty fairly priced at 26.3x FY 2027 PER, where the inevitable slowdown in growth has already been priced in.
• Nvidia remains the gold standard for AI silicon, but as the market is now very efficiently pricing in the outlook, I think price appreciation will be slow and steady from here.
• I don’t see any mispricing in the shares, and so I am not inclined to take a position in the company one way or the other.
• This is especially the case as the adjacencies I have been sitting in for some time are finally starting to be noticed by the market.