Nvidia beats estimates, but market enthusiasm is curbed

The time has come, and Nvidia has reported 3Q revenues above forecasts at $35.1bn, beating estimates of $33.2bn. Data centre revenue, which is the growth engine at Nvidia, was also stronger last quarter, it increased by $30.8bn, vs $29.1bn expected. Although data centres and GPUs are its most important market, Nvidia managed to surpass revenue expectations for most of its business lines, including auto, professional visualization and gaming. However, there was a hitch. The market is so far not fully convinced on the outlook for the current quarter, and this has weighed on Nvidia’s stock price performance in the after hours. At one point it dropped more than 2%, which is a mild reaction compared to the past 8 quarters, where the average move has been 8%.

Why so conservative?

Ahead of the earnings report, analysts were trying to gauge what the appropriate forecast would be for future Nvidia revenues, given its size and dominance in the AI infrastructure industry. Some analysts had expected Nvidia to point to revenues of $40bn for this quarter, however, this was wide of the mark. Nvidia has said that Q4 revenue will be $37.5bn, +/- 2%. This means that Nvidia’s actual forecast for Q4 revenue is between $36.75bn and $38.25bn. The average analyst estimate was $37.1bn, so there is a chance that revenues could come in below estimate for the current quarter. Although Nvidia is still expected to report monster revenues for Q4 that are still growing, this is a touch disappointing. The market would have exploded to the upside if Huang and co. at Nvidia had forecast revenues of $40bn for Q4, however, this looks like a conservative revenue forecast in our view.

The details within the earnings report suggest that Nvidia could beat estimates for this quarter, and the conservative forecast from the company could be designed to temper market expectations, which had been getting out of control in recent months.

Next generation GPUs ready to go in Q4

The update from the company is strong. Nvidia will ship both its current Hopper GPU and its latest generation GPU, the Blackwell, from this quarter. It will also ramp up production of the Blackwell from next year. The company can only report anecdotal demand for the Blackwell GPU at this stage, but the news is good. Blackwell demand is expected to exceed supply for several quarters next year. This suggests two things: 1, it gives Nvidia significant pricing power, which should boost revenues and 2, it should be working around the clock to ramp up production and meet demand, to capitalize on all the potential for the Blackwell.

Blackwell holds the key to a $4 trillion valuation for Nvidia

Overall, this earnings report is a mere appetizer before the main event, which is the Q4 earnings report, which will not be released until February. All eyes will be on the sales generated by Blackwell GPUs in Q4, and how that transforms future revenue forecasts. This is when revenue forecasts could be above $40bn per quarter, due to the expected uplift in price for the Blackwell product. It could also give Nvidia’s market cap a boost to $4 trillion.

Nvidia customer concentration increases

Nvidia’s customers are some of the biggest AI accelerators in the world. However, the concentration of Nvidia’s customers remains a concern in Q4. Cloud computing providers, some of the world’s biggest tech companies, make up 50% of Nvidia’s sales. Three months ago, that was 45%. Thus, Nvidia’s customer base is getting more concentrated, which could be a mild cause of concern for investors as we move through to year end.

The quiet market reaction may persist for now

Overall, Nvidia’s report was strong. There was a small disappointment in future revenue forecasts, however, there is no doubting how central Nvidia is to the AI revolution. As we mention above, this earnings report was never going to be as enlightening about the next phase of the AI infrastructure roll out, we need to wait to see how demand for Blackwell GPUs pans out and how this boosts Nvidia revenues further.

This is why there has been an unusually quiet reaction to this earnings report. Nvidia’s share price usually moves + or – 8% after an earnings report, and the initial move after the earnings release is far milder than that. This could be the calm before Thursday’s storm, or the market could be in a holding pattern and Nvidia’s stock price could trade in a tighter range until we get a clearer idea about how Blackwell demand will impact revenues.