Nvidia Is Getting Hit for Doing Everything Right, So Here's Our New Target
NVDA shares may weaken today, but that doesn't mean it'll fall to support levels. Let's assess what to expect and how it all connects to Marvell tonight.
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Nvidia's NVDA quarterly report last night bested expectations and so did the company’s outlook for the current quarter. Here, we'll look at what happened, our new targets, and how to look at the earnings in the context of what to expect tonight when Marvell Technology MRVL reports.
First, the numbers. Earnings per share of $0.68 were ahead of the $0.65 market consensus. Revenue that roared more than 120% higher year-over-year and 15% sequentially to $30.04 billion blew past the $28.74 billion market consensus. Gross margins for the quarter, meanwhile, came in as expected, around 75%, up from nearly 70% in the year-ago quarter. Revenue guidance for the current quarter of $31.85 billion to $33.15 billion was also ahead of the $31.7 billion consensus.
The only real bone to pick in Nvidia’s results was the gross margin outlook for the current quarter of 74.4%-75.0% and around 75% for the full year. That implies a slightly weaker gross margin in the next two quarters compared to last year and the preceding two quarters. That reflects sampling of Nvidia’s upcoming Blackwell products in the current quarter and the production ramp in the following quarters. That ramp means operating expenses will tick higher in the near term, keeping a lid on meaningful margin expansion.
Here's the thing, this was already baked into Wall Street expectations with operating margin expectations for the next two quarters averaging 59% compared to almost 63% for the first half of the year. So, when we look at Wall Street firms that are lifting their price targets this morning, and there are a bunch of them, they're doing so reflects stronger-than-expected revenue on those already adjusted margin expectations, which is leading to stronger than expected profit dollars.
An added sweetener to this is the new $50 billion share repurchase program announced alongside last night’s earnings. Combined with the $7.5 billion left under its current authorization, Nvidia has ample firepower to help support the shares just like it did in the July quarter. During that period, Nvidia repurchased $7.4 billion in stock at an average cost basis near $111.50.
As nice as this added firepower is, and it should be helpful to forward EPS figures, as it's executed, we would have preferred to see even a modest dividend boost. It was a very solid quarter, however, and the Nvidia story continues to track very well.
What is our response? We are boosting our Nvidia price target to $155 from $148, keeping our "One" rating intact.
We still see upside revenue guidance and demand for Blackwell that is well above supply. In yesterday’s pre-earnings alert that anticipated the potential for Wall Street to have a somewhat meh attitude to Nvidia’s results following the recent 30% move in the shares. In that alert, we shared that if we saw NVDA shares pull back to the support levels near $110 it would be an opportunity for newer members and those underweight NVDA shares. We continue to think that, especially given the nudge to our price target, but given the confluence of price target increases and bullish comments, NVDA shares may not be at that support level for long if at all.
Fortunately, we used market pullbacks between February and May to build up the portfolio’s exposure at a very favorable cost basis. But given the upside of almost 30% to our revised target, we continue to rate NVDA shares a "One." Should we see the typical September performance in the market pressure NVDA shares lower, that could make for an even more compelling opportunity.
The Marvell Link
But let's connect the dots of Nvidia's earnings to Marvell Technology’s tonight. Nvidia’s data center business rose 16% sequentially and was up more than 154% compared to the same reporting period last year, hitting $26.3 billion (88% of revenue) for the July 2024 quarter. Nvidia management said on the earnings call that the quarter’s compute revenue grew more than 2.5-times and networking revenue grew more than two-times from the last year. Cloud service providers represented roughly 45% of data center revenue and more than 50% stemmed from the consumer, Internet, and enterprise companies.
We see this as very positive for Marvell’s quarterly results tonight and its data center business. Recent comments from Cisco CSCO supported our view that AI adoption will drive a rebound in enterprise networking and carrier infrastructure demand in the coming quarters. We would be disappointed if Marvell does not support that thinking as part of the updated outlook it will present tonight.
The Pro Portfolio is long MRVL, NVDA.
