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NVIDIA - results and outlook ahead of analyst expectations

NVIDIA's third quarter revenue more than trebled to $18.1bn, ahead of market expectations of $16.1bn .

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NVIDIA third quarter revenue more than trebled to $18.1bn, ahead of market expectations of $16.1bn. This was largely driven by the Data Center division, which benefited from high levels of activity in the development of Artificial Intelligence (AI).

Underlying operating profit rose from $1.5bn to $11.6bn. This reflected higher revenue, gross margins, and only relatively modest cost increases.

The jump in profits drove an improvement in free cash flow to $7.0bn compared to a $0.2bn outflow. NVIDIA ended the period with net cash of $8.6bn.

Fourth quarter revenue is expected to land within 2% of $20bn, ahead of analyst forecasts which were looking for guidance of $17.8bn.

The shares fell 1.6% in after-hours trading.

View the latest NVIDIA share price and how to deal

Our view

NVIDIA's growth is being supercharged by the Artificial Intelligence (AI) boom. Its high-tech chips are used to train models like ChatGPT and its Data Center division is smashing the ceiling of analyst expectations.

Other so-called generative AI products and services are becoming increasingly important, with tech companies spending big on gearing up their own offerings. The chips needed for this are the backbone of the business model, and their advanced capabilities allow NVIDIA to earn higher margins than chip companies with a greater bias towards consumer electronics.

We're impressed at NVIDIA's efforts to position itself as a key enabler of AI adoption and development. The likes of META, Amazon, Alphabet and Microsoft have been making big promises about their intentions to integrate AI into their offerings. They're all customers.

AI has the potential to transform a wide range of industries from healthcare through to education. Whilst there can be no guarantees, we think this underpins forecasts of high double-digit growth in the AI market beyond the end of the decade. Much of the growth is expected to be driven by infrastructure spending, which caters to NVIDIA's strengths. The continuing evolution of NVIDIA's technology stack means it's well placed to maintain its dominant position.

One headwind to watch is the escalation of tension between Washington and Beijing over semiconductor exports in both directions. Until recently, NVIDIA has been able to keep its route to the Chinese market open, but further restrictions imposed by the Biden administration are now expected to have a material impact on sales to the region. That's being more than offset by strong demand elsewhere, but the longer-term impact is less clear. Starving China of high-end chips could accelerate local efforts to close the technological gap. But given how high NVIDIA's set the bar, that won't be easy or quick.

The balance sheet is in very reasonable health too, with net cash of over $8bn floating around, helping NVIDIA to stomach ups and downs and fund innovation.

There's a lot to be excited about. But the company's stratospheric growth has not gone unnoticed by the market, with it now being one of just a handful with a market value of over $1 trillion. The valuation sits below the long-term average on a forward price-to-earnings basis, which doesn't look too demanding to us. But there is considerable pressure to deliver, perhaps reflected in the market's subdued reaction to these results.

NVIDIA key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 22nd November 2023