NVIDIA Corp (NVDA) USD0.001

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NVIDIA reported second-quarter revenue up 56% to $46.7bn ($46.5bn expected). All divisions grew by double-digit rates, with Data Center revenue up 56% to $41.1bn ($41.4bn expected). Underlying operating profit rose 51% to $30.2bn.

Free cash flow was flat at $13.5bn and net cash, including leases, stood at £46.5bn at the end of the period.

For the third quarter, revenue is expected to be around $54.0bn plus or minus 2%, excluding chip sales to China.

The board has approved an additional $60bn share buyback, and a quarterly cash dividend of $0.01 per share.

The shares were down 2.9% in pre-market trading.

Our view

NVIDIA delivered another impressive quarter. The immediate reaction felt a little harsh to us, but it has a history of soft trading on earnings day given lofty expectations. Still, we’ve already seen profit forecasts move higher off the back of these results and expect that to continue as the market digests these numbers.

The China story is key. Despite an agreement with the US government, sales of its deliberately reigned in chips are struggling to get the necessary approvals, and NVIDIA hasn’t included any Chinese sales in its official guidance. If these restrictions ease, management estimates an additional $2–5bn in revenue could flow through next quarter. We are cautiously optimistic that this revenue will materialize, creating meaningful upside to guidance.

As AI adoption grows, the focus is shifting from training to putting those learnings into action (inference), which could in fact be the larger opportunity. There are some rivals emerging in the inference space, but by selling powerful complementary technology to its competitors, NVIDIA can also benefit from their success.

It’s not just the chips that make NVIDIA’s product so appealing, the CUDA software platform that enables users to optimise the hardware is key. Building large scale datacentres is also a massive networking problem, and NVIDIA has products at hand to help optimise its chips at large scale.

This full stack solution is what really sets NVIDIA apart, and we expect its dominance in the space to continue. Its chip architecture is evolving at an unprecedented pace, with new products coming out annually. Each evolution provides more computing power and, importantly, significantly better energy efficiency.

Customer concentration is often seen as a weakness, with NVIDIA reliant on cloud and tech giants for most of its revenue. But each giant serves millions of end users - if one slows, others can step in. Meanwhile, demand from governments is surging, with sovereign AI sales expected to hit $20bn this year and growing rapidly.

A key strength is its capital-light model, which stems partly from its outsourced manufacturing approach. When paired with strong cash flow and a solid balance sheet, this setup supports buybacks and dividends, though nothing is guaranteed.

We think NVIDIA is a best-in-class outfit and one of the most attractive ways to gain exposure to the AI theme. The valuation, at around 30 times next year’s earnings, isn’t too demanding and we see scope for continued strong earnings growth. That said, it's not as attractive as earlier in the year and near-term sentiment will likely be driven by developments in China, which are uncertain.

Environmental, social and governance (ESG) risk

The semiconductor sector is medium-risk in terms of ESG. Overall, this risk is managed adequately in Europe and North America but has considerable room for improvement in the Asia-Pacific region. Its reliance on highly-specialised workers means labour relations is one of the key risk drivers. Other risks worth monitoring include resource use, business ethics, product governance, and carbon emissions.

According to Sustainalytics, Nvidia’s management of material ESG risks is strong.

As the market leader in power- hungry GPU processors it’s recognised for paying close attention to the energy efficiency of it products. Business ethics concerns are addressed by Nvidia’s compliance committee, which comprises the CFO and several other senior managers. Additionally, a third-party hotline is available for both employees and third-party stakeholders to anonymously submit ethical concerns. Its human capital initiatives are also strong, which is reassuring given the talent gap in the industry. However, diversity amongst the workforce could still be improved.

The author owns shares in NVIDIA .

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.

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