Nvidia Stock Soars After-Hours On 265% Revenue Growth

TAIPEI, TAIWAN - 2023/06/01: Jensen Huang, President of NVIDIA seen at a press conference during the ... [+] COMPUTEX 2023. The COMPUTEX 2023 runs from 30 May to 02 June 2023 and gathers over 1,000 exhibitors from 26 different countries with 3000 booths to display their latest products and to sign orders with foreign buyers. (Photo by Walid Berrazeg/SOPA Images/LightRocket via Getty Images)

SOPA Images/LightRocket via Getty Images

Nvidia’s market value has been growing so fast — up more than five-fold since 2011, according to CNBC — that the AI chip designer’s stock price was poised to plummet.

But Nvidia defied the pessimists when it reported results for the quarter ending January 2024. After posting faster than expected growth in the last quarter and raising guidance for the current quarter, investors sent the stock up nearly 9% after-hours.

Since Nvidia’s role in the widespread adoption of Generative AI is still in its early stages, the stock remains a great investment.

Nvidia’s Q4 Performance And Prospects

By the standards of almost any company, Nvidia’s fourth quarter 2023 performance was outstanding. And fortunately for investors, Nvidia beat expectations and raised guidance.

Here are the key numbers from CNBC:

Q4 2023 revenue up 265% to $22.1 billion — $1.5 billion more than analysts’ consensus of $20.6 billion for the period ending Jan. 28, according to London Stock Exchange Group. Q4 2023 adjusted earnings per share up 804% to $5.15 per share — 56 cents per share more than the analyst consensus of $4.59, according to Barron’s. Q1 2024 revenue guidance of 300% growth to $24 billion — $2,4 billion more than the $21.6 billion analysts’ consensus, according to the Wall Street Journal 2024 revenue forecast of y% growth to $z billion — about $f billion below the consensus forecast of “just under $92 billion for the current fiscal year ending in January 2025,” noted the Journal. a 56% jump from the just-ended fiscal year.

Nvidia CEO Jensen Huang described AI as hitting “the tipping point” and indicated demand for the computing power that underlies it remained astronomical. “Demand is surging worldwide across companies, industries and nations,” the Journal reported.

Why Nvidia Leads The AI Chip Race

Nvidia dominates the AI chip market — with 80% to 95% of the AI chip market, according to The Globe and Mail — and has been building competitive advantages for more than 15 years to sustain its leadership position.

Nvidia’s Differentiation Strategy

If a company wants to lead its industry, it must choose one of two strategies:

Differentiation — where the company delivers more value to customers than competing products and charges a price premium; and Low-Cost Producer — where a competitor sets its price well-below the industry average and reaps scale economies enabling it to reduce its costs below its price.

As I wrote last August, Nvidia is a differentiator as evidenced by customers’ willingness to pay a significant price premium and to wait for over a year to obtain its chips. According to the New York Times NYT NYT , Futurum Group analyst Daniel Newman said, “Customers will wait 18 months to buy an Nvidia system rather than buy an available, off-the-shelf chip from either a start-up or another competitor. It’s incredible.”

Nvidia chips are expensive; however, the company argues they enable companies to save time training their Large Language Models — which more than offsets the price premium.

The price for each Nvidia H100 ranges from $15,000 to more than $40,000. AWS Vice President David Brown said Amazon’s AI chips are a bargain compared to Nvidia’s.

Nvidia CEO Jensen Huang disagrees. “If you can reduce the time of training to half on a $5 billion data center, the savings is more than the cost of all of the chips.” he said in the Times report. “We are the lowest-cost solution in the world.”

Nvidia’s Competitive Advantages

Nvidia’s competitive advantages flow from its ability to adapt to new opportunities faster than rivals and a page it took from Apple AAPL — creating a community of programmers who happily build software to run on your hardware.

Naveen Rao is an entrepreneur who sold his startup that built GPU chips for gaming and AI to Intel. Rao saw Nvidia adapting GPUs for AI far more rapidly than did Intel. He left Intel and started a software company, MosaicML where he compared Nvidia chips to its rivals. Rao told the Times, “Everybody builds on Nvidia first. If you come out with a new piece of hardware, you’re racing to catch up.”

Nvidia’s competitive advantages make it difficult for rivals to gain market share. The Times reported these competitive advantages include:

Launching CUDA. In 2006, Nvidia announced CUDA — software for programming GPUs for other fields such as physics or chemical simulation. In 2012, researchers used the chips to identify a cat with precision. Hiring an AI team. Nvidia hired a team to train LLMs — gaining early insights into what AI practitioners wanted. Using that market intelligence, Nvidia built libraries — to perform tasks common to AI development — thus saving the developers’ time. Building faster chips every few years and expanding to complete computers. Nvidia consistently delivered faster chips every few years. In 2017, it began tailoring GPUs to handle specific AI calculations, sold chips or circuit boards for other companies, and provided complete computers aimed at faster AI processing. Introducing RTX 4800 and B100 chips. In January 2024, Nvidia launched RTX 4800 chips for consumer devices — primarily aimed at gamers but also useful for AI — with the ability to “generate AI video 150% faster than the last-generation model,” CNBC wrote. In late 2024, Nvidia is expected to launch a new AI system called B100. Morgan Stanley analyst Joseph Moore called the B100 “a strong advancement of state of the art,” the Journal noted. Bank of America BAC analyst Vivek Arya expects the price of B100 products to be 10% to 30% higher than the popular H100 system, reported the Journal. Forming partnerships with Big Tech companies and investing in startups. Nvidia collaborates with large technology companies such as ServiceNow NOW NOW and Snowflake and funds startups. Nvidia invested in a $1.3 billion June 2023 financing for Inflection AI, which used to money to help finance 22,000 H100 chips.

These competitive advantages are difficult for rivals to copy. Moor Insights semiconductor analyst Patrick Moorhead told CNBC, “Nvidia has a double moat right now in that they have the highest performance training hardware. Then on the input side of the software, in AI, there are libraries and CUDA.”

Where Nvidia Stock Will Go Next

If Nvidia can continue to exceed high growth expectations, its shares will keep rising. However, the case for an Nvidia growth slowdown includes the following headwinds:

Demand from big tech buyers could slow. D.A. Davidson analyst Gil Luria wrote Nvidia sells large numbers of GPUs to Microsoft, Amazon, Meta and Google — any of which could scale down their AI investment plans if demand slackens, noted CNBC. GPU lead times are shortening. Analyst Paulo Santos noted lead times for Nvidia's GPU orders have decreased from between 8 and 11 months down to “just 3-4 months, indicating a potential future sequential growth peak,” noted Seeking Alpha.

Nvidia bulls include Melius Research recommended buying the stock. “If the upgrade from the A100 to the H100 is any indication, the Total Cost of Ownership benefit for data center operators will be enticing enough to fuel the upgrade and make 2025 a growth year,” noted analyst Ben Reitzes according to CNBC.

Analysts do not see much upside. Fifty three of them set an average 12-month price target for Nvidia of $700 a share — representing 3% upside according to CNN Business.

Goldman Sachs’s trading desk has called Nvidia — which tends to fall after earnings reports before resuming an upward climb — “the most important stock on planet earth,” noted Bloomberg.

After Nvidia’s boffo earnings report, the stock became even more important.