Nvidia Reports Historic Revenue Growth but Warns of Slight Profit Margin Decline
Nvidia has shattered records with its latest quarterly earnings, posting revenues of $96 billion and positioning itself as the most profitable company ever, despite a market valuation exceeding $5 trillion. The company expects to double its revenues annually and aims to become the first to reach $1 trillion in annual revenue by 2028, outpacing SpaceX's forecasted timeline. Investment firm Motley Fool described Nvidia's recent quarter as "historic for the modern capital market." CEO Jensen Huang projected a 70% revenue growth for the next fiscal year, surpassing the previous 45% expectation, which drove Nvidia's stock up 5.5% in after-hours trading.
Unlike other tech giants facing profit pressures from increased spending on chips, servers, and data centers, Nvidia benefits from these trends. Major cloud companies like Amazon, Google, Meta, and Microsoft are significantly increasing their capital expenditures, fueling demand for Nvidia's products. A rapidly growing segment for Nvidia is the "neo-cloud" sector, including companies like CoreWeave, Crux, Together AI, and Nebius, which build and lease GPU server farms. This segment grew 138% to $40.3 billion last quarter, outpacing the 101% growth in traditional cloud customers.
Nvidia's CFO, Colette Kress, explained a new economic model where the company earns twice from cloud and AI rental firms: once from selling hardware and again through revenue-sharing agreements. Nvidia supports these companies with financing partnerships, guaranteeing minimum demand levels that help secure loans for server farms. This model underpins Nvidia's optimistic outlook, with annual revenues currently at $550 billion and expected to grow further by fiscal 2028.
However, Nvidia faces supply constraints, particularly in memory chips produced by TSMC, which limit further sales growth. Rising memory chip prices have forced Nvidia to increase GPU prices by about 15%, maintaining strong sales but squeezing profit margins. After two quarters of 75% gross margins, Nvidia forecasts a slight decline to 74% next quarter despite beating revenue expectations.
Investment expert Orel Levy noted that the margin pressure partly stems from transitioning to producing the new "Hopper" GPUs, which may initially have higher costs and lower yields. Additionally, Nvidia's customer payment terms have lengthened to 60 days, raising concerns about cash flow quality. Strategic commitments jumped from $119 billion to $279 billion to secure memory and component supplies. While AI demand remains robust, margin pressures, cash flow quality, and rising liabilities are emerging challenges for Nvidia going forward.
