Instant Reaction: Nvidia Gets Tepid Reaction to Forecast, Ups Investor Rewards

0:02Bloomberg Audio Studios. Podcasts. Radio. News. This is a breaking news update from Bloomberg. Instant reaction and analysis from our 3 ,000 journalists and analysts around the world. We've got a great group of people joining us to talk all things NVIDIA, including our own Ed Ludlow. He's the co-host of Bloomberg Tech. He joins us from our San Francisco Bureau. Kunjan Sabani is Bloomberg Intelligence Senior Semiconductor Analyst. Paul Meeks is also with us, Head of Technology Research at Freedom Capital Markets. And Jay Goldberg of Seaport Research Partners is joining us as well. Once again, Jay is the only analyst tracked by Bloomberg who has a sell rating on NVIDIA's stock.

0:50He's got a price target of$140. Paul, your reaction? Pleased with these numbers? It seems to me that everything is in order. Like everybody else in the preview commentary, the most important metric that they could release ahead of a call was this revenue guide, and it looks fine. I'm a little bit, I don't want to say dubious, but a little bit confused by the change in the reporting structure. Why would a company do that? A company like NVIDIA that has such a following right now, so many analysts covering this, some people consider it a macro event when it reports earnings. Why change reporting structure right now?

1:33One of the things that they are doing is they're trying to build a walled garden, just like Apple did in a previous technology transition, by going beyond the GPUs and interconnecting in the data center, all the different pieces. So this may not be some sort of dodge, you know, because the company typically is first class, very transparent, but it might be just reflective that they are moving beyond just selling GPUs and they want to organize their business to prove it. Kunjan, let's bring you back in here, Bloomberg Intelligence Senior semiconductor analyst and just get your initial thoughts on these first few numbers.

2:19Yeah, look, everything looks kosher, like your earlier guest was saying. You know, they have made us habituated to expect them to come out and expect and to beat by such a range, mid-single digits. And that's a problem. When you do that, it has become sort of a baseline, no longer something that stands out. If they didn't beat with this magnitude, that would be something worse. I do like the buyback announcement and to address that resegmentation, I think we like that move. I mean, look, our model has been trying to guesstimate this breakdown that they're giving in the data center business by the type of end customers for a while now.

2:55It's always painful to really get that out of them and figure it out. So we like that move that now they are coming up and disclosing that breakdown. That also allows people to really see that it's not just the four top cloud customers that they're buying and running the business for NVIDIA. There's also growth coming from other vectors that people often miss out because it was not publicly showcased. And Ed, we are just getting a headline crossing that the company is saying that no shipments of data center hopper products to China. How does that live up to the expectations of what you and Jensen Wong had discussed?

3:34Ed Ludlow:I don't know how you did that so quick. I literally just posted that in the blog before you read it out. This is real time, Ed. Basically, that's the base case assumption. I mean, what Colette Cress, the CFO, is pointing out literally in her CFO commentary as opposed to figuratively is that this is the fiscal first quarter financial year 27. You know, the base case assumption was no product data center wise to China. So it meets that expectation. Reminding me in that note that in the first fiscal quarter of the fiscal year 26, they had almost$4.6 billion of sales in that same period one year ago.

4:11Ed Ludlow:So that's all we're learning, really. There was some other stuff that I scanned through on the revenue highlights of the CFO commentary. I thought we'd learn more. But right now, that's it. What's the question you'd ask about that on the call if you were given the chance, Ed? Why did you tell everyone in March that you were ramping up your supply chain and that you had both orders from Chinese companies along with the U.S. licenses to issue those orders? Why did you say that? You know, if the state of play is clearly based on the president's visit, that China is not going to permit its tech companies right now to place those orders.

4:46Ed Ludlow:And why did Ed Ludlow not ask Jensen that more explicitly on Monday? That's probably what I would reflect on. Hey, you know, you can even Monday morning quarterback your own work and pretty easy to do that. It was a great interview with Michael Dell as well, too, from Las Vegas. Hey, I want to bring back Paul Meeks, head of tech research at Freedom Capital Markets, and also Kunjan Savani, Bloomberg Intelligence Senior Semiconductor Analyst. They're joining our roundtable. Kunjan, you mentioned that you like this additional$80 billion in share buyback. Why is that a good use of cash? Like convince people that that's a good use of cash in your view.

5:19I mean, given the stage we are in, like I said, like, you know, every quarter now in terms of near term numbers, it's basically table stakes that to beat by mid single digit. They've already given a two year pipeline of a trillion dollars. So I don't know what else they could do just in terms of the print to really get excitement. So buyback usually is a good strategy. And remember, they're generating enormous amount of cash that right now, despite all the big investments they're making, massive multi-billion dollar investments they're making. They don't have other way what to do with that cash.

5:50So a buyback always is a sort of preferred go-to for us analysts that does reward shareholders from time to time. Paul, I do want to get your thoughts on just the market's initial reaction. Actually, our Bloomberg coverage, the headline, NVIDIA gives a disappointing forecast as chip competition mounts. So we do know that number,$91 billion, but disappointing. What do you make of that word? I think it's BS. Yeah, I think it's just fine. And we'll get some more commentary as we get into the call starting at five o 'clock Eastern. But now the stock is trading after hours flattish. And, you know, the stock had had a pretty big run up in recent weeks after it essentially was a poor performer from July of 25 until just a few weeks or months ago.

6:49And so I don't think that there's any problem at all with the guidance. I think if they do announce Chinese business, take whatever revenues you're expecting for that fiscal year and add 15 % to it. So it's only going to be icing on the cake. But I feel pretty good about it. But Jensen will do what Jensen does, right? He's the AI Jesus, and he's an evangelist, and make us all feel better about the long term. I'm not necessarily worried about what they printed or even this guidance. But this guidance is not disappointing. I think it's fine because you know what? It'll be$91 billion, and then they're going to upside it like they always do.

7:28So this will be much better at the end of the day than the whisper. We're speaking to Paul Meeks, head of technology research at Freedom Capital Markets. Also with us, Kunjan Sabani, Bloomberg Intelligence senior semiconductor analyst, and our own Ed Ludlow, a Bloomberg Tech co-host holding down the fort in the San Francisco studio. The company gave investors a sales forecast saying that revenue in the three months ending in July will be$91 billion. The company said in a statement, though analysts estimated$87 billion on average. Projection surged as high as$96 billion, according to data compiled by Bloomberg.

8:02I want to bring back Kunjan Sabani, Bloomberg Intelligence Senior Semiconductor Analyst. I know, Kunjan, you've got to run in just a couple of minutes. What's your note going to be headlined tomorrow? From the press release, I would say everything looks fine. No need to panic. No need to worry. And the stock seems to be turning around, by the way, as we are going through this roundtable. All right. Kunjan Sabani's got to run. Bloomberg Intelligence, Senior Semiconductor Analyst. Our roundtable, though, continues. We've got Paul Meeks, Head of Technology Research at Freedom Capital Markets, and Ed Ludlow, Bloomberg Tech co-host.

8:33Hey, Ed, I want to go back to you as you've had a little bit of time to digest this and actually read some of the coverage, too, from a big team here at Bloomberg News that's reporting on this. What continues to stick out to you from these results?

8:46Ed Ludlow:Yeah, if you put the numbers to one side, right, so$91 billion plus or minus 2 % in the fiscal second quarter, you know, it puts that outlook or that guide pretty firmly in the bullish part of the consensus or forecast on the sell side. And buy side expectations were very high. So what's the extra bit here? What is beyond NVIDIA selling GPUs at the level that we would expect? And if you read CollectCrest, the CFO's commentary, it's that extra content in the data center. InfiniBand networking, SpectrumX, Ethernet, NVLink systems, which is what combines a lot of the servers in aggregate to form that supercluster or supercomputer, that seems to maybe account for some of the beat in the quarter gone and the confidence in the outlook to come.

9:30Ed Ludlow:And we are bouncing around. Now we're modestly higher, two-tenths of 1%. We were lower. I think your last guest, Paul himself, said, right, you're not going to get everything from the earnings release. Let's wait and see what Jensen Huang has asked and what he says. Paul, I do want to go back to you just kind of on some of your thoughts on the company's data center expansion, because NVIDIA had announced a few weeks ago investing as much as$2.1 billion in the data center developer Iren, or I'm not sure is it Iren or Eren. You have a hold rating on that company. What are you kind of looking for for NVIDIA to talk about with that partnership?

10:10I don't know if they'll specify it because NVIDIA, because it generates so much free cash flow, as you may have noticed the last couple of weeks and months, they seem to be sprinkling the infield with$2 billion for everybody like Oprah. If they do highlight IREN, you know, IREN is a neocloud. And what they did with IREN, it was pretty unique because first of all, they bought some capacity for NVIDIA's own use, not to resell to customers. And then they also don't necessarily have a warrant, but they have a right to purchase more iREN stock and actually a significant amount, but it's tied to NVIDIA and iREN delivering GPUs together.

10:53And I think they get the full payout once they've supplied iREN and its customers 600 ,000 of their GPUs. So it is a unique deal. It is a little bit different, but NVIDIA with all of its cash, It's been doing two things. It has been acting like a venture capitalist to plant seeds throughout the entire ecosystem. Remember my point that they're going beyond GPUs. And because they don't really have anything else to spend on, they're buying back some stock. Ed Ludlow, you interviewed the Iron CEO on Monday. What was your take on the company's plans for this kind of partnership?

11:29Ed Ludlow:Yeah, so, you know, co-CEO Daniel Roberts. You know, Iron is a NeoCloud that is largely dependent on NVIDIA architecture. And what is so interesting is we're talking about the industry being in a position where demand is fast outpacing the industry's ability to supply. But, you know, as Iron would tell it, the bottleneck is not NVIDIA being able to get the server designs or the GPUs into place. It is everything else. it is the utilities trying to get the infrastructure in place to switch that data center online. It's the concrete, the manual labor, the tin can that needs to go around it. So it's very interesting to hear that experience through their experience of what it's like to try and build.

12:13Ed Ludlow:And NeoCloud is just a data center for AI workloads. Simple, right? But NVIDIA doesn't appear to be the holdup here. Let's bring back Jay Goldberg, Seaport Research Partners analyst there. He, again, is the only analyst tracked by Bloomberg with a sell rating on NVIDIA. Jay, I imagine that this report is not enough, and I don't want to get in trouble with compliance or anything, but not enough for you to change your rating on NVIDIA? Nothing I've seen here sort of meaningfully alters the trajectory of how I think of NVIDIA's prospects. What is your bear case on the company and how do you see it?

12:51How do you see the stock falling so much in just the next 12 months? So just to be clear, I've never told people to short NVIDIA. I've always positioned my take as an underperformed. Go back to when you interviewed me in May of last year. That was what I was saying. And I think that stuff played out, right? It's just underperformed. It's a good company, but it's hard for them to live up to$5 trillion market cap expectations. And we've seen that this year, like they've underperformed the SOX and the SMH ETF, they've gone up whatever, 20, 30 percent this year, I think, and lots of other names in the sector have gone up a lot more.

13:32And it's just a function of how big they are. And I think if you look at the results, I mean, one of the things that stood out to me was they're increasing the dividend, which is a great signal, but it's a massive increase. And right. It's sort of signaling that they're running out of ways to grow faster. Like, couldn't they use that those funds in a different way? I just want to point out, you have a sell rating on the stock. $140 is your price target. And that is a period of 12 months. Yes. OK, so you're not telling people to short the stock, but you don't but you believe that the valuation should be$140 per share, not$220 a share.

14:10Yeah, I'll obviously revisit that today. But certainly, I think it's hard to get excited about the stock when there are better opportunities out there. Paul, come on in. I imagine you disagree with Jay there. Is it easy for you to get excited about NVIDIA still? Well, Jay had some very good points. And I obviously admire him and his work. But I would tell you that this is not a situation like Cisco was right before the Internet bubble popped, where it was trading in a couple hundred times earnings. If you believe, and I don't formally cover NVIDIA, I cover the neoclouds, but if you believe the consensus estimate for next fiscal year.

14:52Now, this would be the fiscal year for NVIDIA that ends January 31st of 28, which is really calendar 27. Right now we are trading at about half of the growth rate expected in that year. Well, Jay had some very good points, and I obviously admire him and his work. But I would tell you that this is not a situation like Cisco was right before the internet bubble popped, where it was trading at a couple hundred times earnings. If you believe, and I don't formally cover NVIDIA, I cover the NeoClouds, But if you believe the consensus estimate for next fiscal year, now this would be the fiscal year for NVIDIA that ends January 31st of 28, which is really calendar 27.

15:39Right now, we are trading at about half of the growth rate expected in that year. And we're trading at an S &P 500 multiple. Actually, I calculate about one clip below that. And here's a company that really hasn't seen much multiple expansion over the years. It's all been in delivering the mail. And so my point is I'm not necessarily disagreeing with the trend longer term and it is hard to grow something this large. But we're trading at less than a market multiple. It's not actually expensive at all. If it was expensive, then I'd probably swing from bull to bear. But it's cheap. Ed, I do want to bring you back in, just going back to the China story here, because we've seen this company's revenue, the revenue that they generate from China declining quarter after quarter.

16:36They're now continuing to exclude China revenue from their outlook for the second quarter. Does NVIDIA need business from China at all?

16:46Ed Ludlow:So there's the basics, the numbers, which is the quarter did not include any hopper-based systems to China. And the outlook for the current fiscal second quarter in financial year 27, as you said, does not reflect any China revenues or shipments to China. And what Jensen Huang and Colette Crest, the CFO, have said is that China, from a starting place of zero, baseline zero, is a$50 billion opportunity. But if you, again, get out of the income statement, the story with China was a critically important end market for data center. And as Jensen Wang would like to say often, 50 % of the world's AI research or the researchers themselves are in China or from China.

17:33Ed Ludlow:And so, you know, if you buy Jensen Wang's mile high, bigger picture view of what is going to happen with AI, the build out of AI training and transition to running of systems of inference, to their mind, being a participant with China is critically important. And again, you know, in that interview Monday, and I'm sorry to go back to it, but, you know, the word he uses, he uses deliberate. The demand from Chinese tech companies is, quote, incredible. It's just they're not permitted by the Chinese government to do business with NVIDIA. Yeah, certainly on the call, a lot of questions and perhaps some more answers when it comes to the China business for NVIDIA.

18:11I want to bring back and remind everybody that was just Ed Ludlow. He's the Bloomberg Tech co-host. You can catch him every day on Bloomberg TV at 11 a.m. Wall Street time. Jay Goldberg, Seaport Research Partners, joins us, too, along with Paul Meeks, Head of Technology Research at Freedom Capital Markets. Jay, I want to send a question over to you about the reporting structure and the reporting framework for NVIDIA. I don't know if you had a chance to see this yet, but this caught Ed's attention. It caught our attention when these numbers crossed at 420. Lynn Duan from our Bloomberg technology team, she's a tech editor.

18:45She writes that the company is transitioning to this reporting framework that in the future, NVIDIA will report for two separate market platforms, Data Center and Edge Computing. The company says the data center segment will include business with the hyperscalers and those building AI-focused data centers. Edge computing will highlight the devices itself for PCs, game consoles, robotics, and the like. I know this is a little bit of a wonky sort of accounting question, but as an analyst, I know you want to see clearly defined areas when it comes to segment reporting. What's your initial reaction to this new reporting structure?

19:19So at one level, it makes sense. I have to think through it, but data center is really where people are focused on. It's kind of the number that only it's the only number people care about, right? It's the only number that people care about, with the exception of my 14 year old son, who only cares about the gaming GPUs and is going to be very saddened by this news. OK, he'll still get the gaming GPUs. They just won't be reported out separately. It's yeah, it's getting harder to get them and they're not getting updated as fast as he'd like. But well, that's interesting because that's the DNA of the company.

19:50that's the dna of the company yeah ed you're a gamer come on in here i'm a gamer i'm a gamer but you're a gamer 2j i'm willing to forgive them on their pace of gaming gpu upgrades ed i know this is not the number that everybody's focused on but since this is nvidia's d indeed nvidia's dna and you're our gamer what do you make of the gaming gpu issue they're leaving it to someone else now What is it?

20:14Ed Ludlow:I don't know that it's an issue. I mean, you know, again, I'm just, you know, NVIDIA is changing the reporting structure. I get that. So it's just not highlighting gaming, but gaming is not the growth engine. It's tiny for this company. It's tiny, but like, again, maybe you just consider the GPU that goes into a gaming console or your home rigged gaming PC. it's still at the edge what people say is at the edge you're running computation at a device local to you and um you know the story that jensen wong has been telling on on the road right think ces or gcc whatever whatever it is whatever event it's that the role of the gpu in the video games industry is now as much about the development of that video game its ability to generate pixels right rather than animate um that's the story for nvidia with gaming the gaming industry is nvidia gpus and data centers still as much as it is about the gpu and by the way i got like this frankenstein's monster acer it's got you know an amazing nvidia gpu in it and an intel processor and core but like so what man it's all about the data center it is all about the data centers hey um speaking of the data centers i want to bring paul meeks back in here ian king and Dina Bass writing separately on the live blog.

21:39Ian talking about hyperscalers still being the biggest providers of sales for that unit, but others, AI clouds, industrial enterprise grew quicker quarter over quarter. It's a trend that investors will want to see accelerate to remove the concern that it's too dependent on customers who have their own components and an incentive to move away from NVIDIA. Dina Bass weighing in and saying that at the same time, the greater growth in non-hyperscaler customers does point to the idea that indeed folks like Google and Amazon, while they remain huge NVIDIA buyers, are trying hard to expand the workloads they can put on their own chips and get more of their cloud customers to choose them over NVIDIA GPU.

22:16You cover the NeoClouds, you understand what the hyperscalers want. What do you make of that sort of revenue diversity question and the companies that have their own ability to do this, pushing their customers into their own products. So I agree with the push and pull here. Obviously, it's important that over time that enterprises go direct, not through hyperscalers to broaden this market. I think it's a very positive trend. NVIDIA, of course, will be a beneficiary. On the other hand, particularly this announcement the other day with Google. Yes, Google and Amazon in particular, are working very hard on their homegrown chips.

23:03And it looks to me like they don't want to just lower their own costs by using their own chips internally. But in Google's case, they're going to sell these chips on the merchant market. And so over time, it could be a threat. Why? Because Google has very deep pockets, almost endless resources to compete. When you have other companies that say they can compete over time with NVIDIA, be careful because these guys have the best balance sheet there ever was. But Google probably can make a go of it. And I imagine Amazon will be on their heels.

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