Nvidia CEO Jensen Huang has done it again. The leading AI chip company delivered better-than-expected quarterly sales and more than double year-over-year profits. Business is so strong that management is now more comfortable than ever in providing future financial guidance. The company’s second-quarter fiscal 2027 revenue rose 106% to $96.22 billion, beating the consensus of $92.165 billion, according to estimates compiled by data provider LSEG. Adjusted earnings per share (EPS) increased 128% to $2.46, also beating the LSEG consensus estimate of $2.10. NVDA YTD Mountain Nvidia YTD stock initially fell slightly in the paper Wednesday evening, but quickly reversed and rose more than 4% after the post-earnings conference call began and CFO Colette Kress made it clear that the buy-side’s disappointment with the results was due to capacity constraints. Given these results, it’s clear that Nvidia stock is cheaper than it appears based on future earnings, as it has been throughout history. We reiterate our rating of ‘1’, the equivalent of ‘buy’, and raise our price target from $260 to $280. The bottom line is that demand is simply not being sustained. That momentum is accelerating, with sales growth accelerating for four consecutive quarters. Still, Wall Street appears to have significantly underestimated the size and pace of the AI adoption opportunity. This realization reversed the stock price as talks began, with Kress saying the team now expects 2028 revenue to increase 70% compared to 2027. Analysts had expected sales growth to be only about 45% during this period. This is notable because of the magnitude of the forecast upside, and is the first time the team has provided guidance a year in advance. This speaks to the company’s confidence in its ability to achieve its forecasts. During a question and answer session, CEO Jensen Huang said, “Our demand is well above 70%, but with our supply we can confidently deliver 70%. And we will continue to work with our supply chain to increase that ratio.” The gross profit margin outlook was slightly lower than expected, and Kress blamed the crisis on the relentless rise in memory prices for the remainder of the current fiscal year and in 2028. CFOs expect memory prices to rise further into next year. That’s a negative for most companies, but it was a boost for Micron, the club’s name, whose stock rose more than 3.5% in after-hours trading. But NVIDIA’s revenue growth more than makes up for the memory crunch. In the morning, analysts are expected to be inundated with upward revisions to their profit forecasts. In addition to this result, Nvidia announced an expanded partnership with Amazon’s cloud arm. With this expansion, Amazon Web Services (AWS) plans to deploy an additional 2 million Nvidia graphics processing units (GPUs) in 2027 and 2028. AWS also plans to install Vera central processing units (CPUs), either as part of a larger Rubin system or on a standalone basis. “Amazon also plans to adopt (Nvidia’s) complete physical AI stack of Omniverse, Cosmos, Isaac and Jetson to power its warehouse robot fleet,” Kress said. Nvidia’s graphics processing units (GPUs) are the primary driving force behind the AI revolution, powering accelerated data centers being built rapidly around the world. The company’s chips, including central processing units (CPUs), are part of a platform that includes the hardware and software needed to power AI workloads. Competitors: Advanced Micro Devices, Intel, Broadcom, and custom AI chips (from Alphabet’s Google, Amazon, etc.) Recent purchases: August 31, 2022 Started: March 2019 There’s a lot of attention on Nvidia’s return of capital to shareholders. During the quarter, the company returned a record $26 billion to shareholders through share buybacks and dividends. Kress has already committed to returning 50% of free cash flow to investors through dividends and stock buybacks, but added: “We have returned 60% on a year-to-date basis, and we intend to return increasing amounts of excess free cash flow, excluding strategic uses, going forward.” Jim Cramer has been pushing for Nvidia to implement an Apple-style stock buyback strategy, so this is a step in the right direction as far as we’re concerned. In conjunction with its May earnings release, Nvidia also announced an $80 billion stock buyback authorization and an increase in its quarterly dividend from 1 cent to 25 cents per share. Financial Commitments In its earnings release, Nvidia provided an update on the $366 billion in financial commitments it has made through contracts, partnerships and investments. The company said it “partnered with an extensive network of suppliers to secure the critical components needed to meet demand for years to come. Our commitments increased to $279 billion from $119 billion in the prior quarter, primarily related to memory procurement.” Cloud services contracts totaled $29 billion, including $25 billion in data center leases that have not yet begun, $25 billion in equity investments, and $8 billion in capital investments. “Securing the land, power, and shell for our data centers is the next critical step in building out our AI infrastructure,” Nvidia said, with a $56 billion investment. The company has also agreed to provide $105 billion in financing for a large data center project in Ohio, with ChatGPT creator OpenAI to be the tenant on a 20-year lease and provide $3.5 billion in land, power and AI cloud shell guarantees. All of this adds up to approximately $530.5 billion in commitments. This is certainly not for nothing, but we think it’s completely manageable given the demand for AI and the free cash flow that Nvidia plans to generate over the next few years. Kress defended the merits of the company’s investment. “We know some people call this circular financing, but we see it differently.” She added, “Given the strength of demand, we believe these investments are valid. The business they will generate for us, the ecosystem they will build, the NVIDIA platform, and the return on equity on invested capital will be excellent. And our risk is limited.” Quarterly Commentary Data Center sales for the quarter were $89.02 billion, significantly exceeding expectations of $86.3 billion. This was an increase of 117% year-over-year and an 18% increase quarter-over-quarter. (As a reminder, NVIDIA changed its reporting framework last quarter to better represent current and future growth drivers.) There are two subsegments within the data center. Public cloud and hyperscale revenues from the world’s largest consumer internet companies (Amazon, Microsoft, Meta Platforms, Alphabet, etc.) doubled to $48.7 billion, beating expectations. “The cloud industry’s backlog now exceeds $2 trillion, and capital spending by the top five hyperscalers is expected to reach nearly $800 billion in 2026 and $1.3 trillion in 2027,” Kress said on the conference call. AI Clouds, Industrial, & Enterprise (ACIE) revenue comes from AI-dedicated data centers and AI factories across a variety of industries and countries. Revenue here was $40.3 billion. This represents 138% year-over-year growth, but Street wanted more. “Growth was driven by the addition of neo-cloud capacity to meet growing demand from enterprises, AI startups and government agencies, as well as hyperscalers purchasing capacity to supplement their own builds,” Kress said on the conference call. Edge computing segment sales include many of Nvidia’s legacy parts. We’re talking about devices for agents and physical AI, such as personal computers (PCs), game consoles, workstations, robotics, cars, and so-called AI radio access networks. The division’s revenue totaled $7.2 billion, up 27% from the same period last year and comfortably beating expectations. Similar to last quarter’s momentum, demand for Blackwell workstations remains strong, partially offset by lower PC demand as higher memory prices drive up consumer costs. Although the gross margin of 75% was one notch lower than expected, the result still represented a 250 basis point (2.5 percentage point) year-over-year expansion, and the team attributes the improved profitability to Blackwell Ultra’s increased share of sales. Guidance Looking ahead to Nvidia’s current fiscal third quarter of 2027, management’s outlook was solid for revenue, but as mentioned earlier, gross margins missed the target. The company expects sales of $108 billion (plus or minus 2%), beating the LSEG consensus estimate of $104.2 billion. Note that the guidance continues to reflect zero data center computing revenue from China. So if sales resume there, it will be purely on the upside. But again, we don’t expect that to happen anytime soon. Adjusted gross profit margin is expected to be 74% plus or minus 50 basis points, lower than the 75.1% forecast compiled by FactSet. On the conference call, Kress cited rising memory prices and predicted gross margins would decline from 71% to 72% in the fourth quarter, before recovering to about 72% to 73% in fiscal 2028. TheStreet had expected 74.9% in the fourth quarter and 74.9% in fiscal 2028. (Jim Cramer Charitable Trust has long held NVDA, AMZN, META, MSFT, META. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
