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Nvidia - shares rise on better-than-expected results

Nvidia's second-quarter results exceeded expectations. There was record revenue of $13.5bn, which was more than double the same period last year.

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NVIDIA's second-quarter results exceeded expectations. There was record revenue of $13.5bn, which was more than double the same period last year. Performance is being driven by demand for the group's high-tech chips which are increasingly being used in AI products. As such, Data Center revenue was the standout performer, with revenue of $10.3bn, up 171% year on year. Gaming and Automotive revenues rose by double-digit percentages, while Professional Visualization declined.

Operating profit has risen to $6.8bn, up from $499m last year. Free cash flow was $6.0bn, up from $2.6bn and there was net cash of $6.3bn as at the end of July.

Revenue for the third quarter is expected to be around $16.0bn, which is higher than analysts expected.

Nvidia shares rose 6.7% in pre-market 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 NVIDIA's business model, and their advanced capabilities allow NVIDIA to earn higher margins than chip companies with a greater bias towards consumer electronics. But there's also a software element to the AI story. NVIDIA's enterprise software accelerates the development of AI applications, as well as offering off-the-shelf 'pretrained' models. Software revenues are currently small, but we see this as an opportunity to increase recurring revenues and further improve profitability.

CEO Jensen Huang sees the recent breakthroughs in AI as an inflexion point for broad adoption across every industry, and he may well be right. 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.

All-in, we don't think the step change in growth will be a flash in the pan, though there can be no guarantees.

Whilst AI is the area management are shouting loudest about, hyper growth also brings with it challenges. Not least of which is pressure on supply chains. NVIDIA should be able to handle this for now, but it's something to look out for.

Another concern is the escalation of tension between Washington and Beijing over semiconductor exports in both directions. Nvidia has been producing less powerful versions of its top chips to export to China to fit with new rules, and so far things are holding up. But it's an important region for Nvidia so it's something to keep an eye on. Meanwhile in gaming, the industry on which NVIDIA's ultrafast computing architecture was built, is still being impacted by a challenging consumer environment.

The balance sheet is in very reasonable health too, with net cash of over $6bn floating around, helping Nvidia to stomach ups and downs and fund innovation.

There's a lot to be excited about. And because of that, the valuation is elevated but we don't see this as unreasonable when considering the earnings potential. But investors should remember this does increase the risks of downwards pressure if performance disappoints. Fears of a global recession remain elevated there could be more volatility to come. Meanwhile, the rapidly evolving nature of AI means customer preferences could ebb and flow regardless of the economic environment.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 24th August 2023