NVIDIA Has Blockbuster Quarter, But You Can't Ignore This Risk... | $NVDA Earnings Analysis

When the pandemic started, NVIDIA was already a $200 billion company, which sounds like a lot, but it has grown to over $3.3 trillion today, and the growth rates that the company puts up somehow, it's been able to sustain at a rate that most people, including myself, didn't think that the company could. And despite some serious headwinds during the quarter, it reported another really impressive quarter. So we see that the stock is up after hours, but what really happened, and what do investors have to keep their eye on moving forward, because there were some dark clouds kind of gathering that are worth discussing in the company's quarter. Let's take the next couple of minutes trying to figure that out. My name is Brian Stoffel. At the time of this recording, I do not own shares of NVIDIA. And I want to give a shout out to finchat.io for sponsoring today's video. You'll see a whole bunch more from them in a minute. So this was NVIDIA's, I know this is weird for all of you nitpickers out there. I'm not getting this wrong. This is the first quarter of fiscal 2026. Yes, 2026 for the company that ends of all odd days on April 27th. As I said, when the stock market opens, it'll be between 3.3 and 3.4 or $3.2 trillion on the top line. Revenue is up 69%, which is impressive because it's 69%, but also because it came in ahead of both analysts and management's guidance. But also because there's a big asterisk with that beat as well. In a good way for the company, earnings per share were up 27% and came in ahead of analyst estimates. Now here's the big thing. The company said that on April 9th, NVIDIA was informed by the U.S. government that a license would be required for exports of its H20 products into the China market. Important ship for AI age. And as a result of this, the company incurred a $4.5 billion charge associated with excess inventory and purchase obligations as demand for it diminished because of this necessary license. Now the important thing is that NVIDIA was unable to ship about 2.5 billion of it in the first quarter. Now already the company beat expectations despite this $4.5 billion charge. And this too, that charge isn't really a revenue headwind, but I the company did a really good job of beating it. You'll see some people out there saying you should add $4.5 billion onto the company's revenue, which I disagree with. It's the $2.5 billion that's on the top line. And it's the $4.5 billion that was taken away from the bottom line. That's in my opinion, the correct math. Now, when we get to margins, all of these margins include the effect of that. So it does skew things a little bit, but it's also worth putting this in perspective. In the first quarter of last year, the company's margins were insane. I mean, you were talking about a chipmaker with nearly 80% gross margin that went down to 60.5%. Now, if we look at this on a non-gap basis, it would have fallen, but to a much more reasonable 71.3%, but that huge charge is the reason that it fell so much. Either way, margins are normalizing. I know all of them are red and in general, that is a bad sign for stocks, but look, a gross margin of 60%. If you don't count those H20 charges, it's over 70%. Those are very good. An operating margin of about 50% is very, very good. A net margin of over 40% is still very, very good, but it's worth noting that those are normalizing and that'll be important to remember when we get to valuation in a minute, but we're not there yet. Free cash flow exploded. It didn't quite double, but it was up a lot. Net income was up nicely. The balance sheet is in very, very good shape with a net cash position of over $45 billion. Let's go down the income statement and see what happened here. As I said, revenue is up 69%. Now, the cost of that revenue exploded. Part of that is because of that H20 charge, but part of it is because the company is not fetching those insane gross margins that they were before. I don't think that's the end of the world. They had to come back to reality, but again, that will be worth considering when we talk about the company's valuation. Because the cost of that revenue went up so much, gross profit was only up 31%. That's coded red because if your revenue grows 69%, you want your gross profit to grow even more. In this case, gross profit only grew at a third of the rate. Now, the good news is that operating expenses were only up 44%, but that wasn't enough to cancel out that huge charge and the natural normalization of gross margins. Operating income was actually only up 28%, net income less meaningful up 26%. It is worth noting that the diluted average shares outstanding did decrease by 1.1%. There's a whole lot going on there. I'll also mention in the conference call that management said that there would be a material adverse impact of losing access to the estimated $50 billion AI market in China. It's somewhat unresolved in terms of what will happen there. The company did say it expects to take an $8 billion hit in the current quarter moving forward because of this change in policy from the administration. That is an overhang that I don't think we should necessarily look at as permanent, but we also cannot dismiss as something that might disappear by tomorrow. To get more insight for what was going on, let's head on over to FinChat.io, a site that I use every day. Simply click the first link in the show notes below and you can see these stats. One thing I want to point out is that these stats are available mere minutes after the company reported earnings, which is incredible. What I pulled up here is where the company gets its revenue from. It's interesting because you see before the launch of ChatGPT, it was actually gaming revenue where Nvidia generated most of its sales. It also has professional visualization and teeny tiny bits down here. You know what? I can't even pull it up. They're so small, but it's for automotive and OEM. But then the green, the data center, the AI boom, you can see that is the story. I've also pulled up the growth rate here. So while the growth rate is slowing, I've got to put this in perspective, it is slowing to 73% growth. That is still very impressive. And based on management commentary in the conference call, it doesn't look like it's going to slow down dramatically anytime soon. At the same time, I've also pulled up here where that revenue, those sales are happening. Now, the supply chain can be complicated and the end, the end, like the end destination for these chips might not necessarily tell the whole story. But here, what I, what you see is these are chips being sent to U.S. customers. These are chips being sent to China, including Hong Kong customers. These are Taiwan customers, Singapore customers. Now you can see the dramatic attempt at diversifying the supply chain here with the growth of Singapore, where there was barely any chips being sent there two years ago. And now there's $9 billion worth of chips. And then we've got the other countries. What I just want to pull up here is first, this is the growth of the U.S. revenue. That's, I'd say somewhat actually less important. What's interesting here is you can see that China is important with 121% growth this quarter, despite that change in policy. What happens here is not immaterial and it's worth keeping your eye on. At the same time, customers can diversify simply by maybe not Taiwan, but going through Singapore and with 123% growth, that is still growing quite rapidly. So that's one that there's no specific guidance I can give that will tell you what's going to happen there. It is just to say that, look, this is important and we can't sleep on the fact that this is happening. At the same time, the company is calling for 50% revenue growth. That's actually lower at the midpoint than what analysts were hoping for, 52% growth. But there's that $8 billion hit that the company is talking about and waning demand in China because of that hit. And so the fact that it basically is within a whisper of analyst estimates, despite this fairly significant headwind, really speaks the demand that Nvidia still has for its chips. And they talked a bunch about how AI agents are taking over and they really are kind of a new class of workers, even whether that frightens you or excites you, depends probably on whether or not you're a worker that is threatened by this or a shareholder who benefits from it. But the trend is there either way. And so that is impressive. So all these things are in place for the company. Now, what should investors watch moving forward? First, I think it's going to be really important to watch gross margins. Now, obviously, they can be affected by those one-time issues that cropped up this quarter. So you've really got to dig in to see because, look, the fact that AI chips are so in demand has to lead you to believe that everybody out there, AMD, even other companies, are going to come up with good enough alternatives as quick as they can to lower their costs. At the same time, they don't have the lead that Nvidia does. And their CUDA architecture does provide somewhat of a moat. And if it starts to lose that moat, it is in gross margins where that will show up first. Second, keep an eye on revenue growth, obviously. Third, listen for any commentary on Blackwell, their newest iteration, and its sales in data centers because you know that that is the most important revenue stream. And finally, capital allocation. Because, look, the company has $45 billion in cash. It can do things with that. The only problem is $45 billion is a ton of money. But compared to roughly a $3.3, $3.4 trillion company, it's hard to know what the best way to use that cash is. Overall, there is no doubt in my mind that the moat is widening and the thesis is very much on track. Now, you might have heard me say that I don't own shares of Nvidia. Despite that, and despite the fact that I built up a 20-25% cash position in my portfolio, my portfolio is still beating the market by a wide margin, up nearly 19% this year versus a relatively flat S&P 500 and NASDAQ. But as you can see, over the last 10 plus years, in the green, it is already 6x. I say that because the main way that I've been able to do this is by using what I call the ADAPT framework. If you'd like an absolutely free ebook on the ADAPT investing framework, simply click the second link in the show notes below and we'll send that to you. But let's get back to Nvidia and talk about their valuation. And for that, again, we're going to finchat.io. So I've pulled up a couple of different metrics. This first metric is the company's forward PE ratio. Now, right now, it's trading at about 33x forward earnings. It's not cheap. It's not ridiculously expensive. And it's worth noting that is right about in line with the median over the last 10 years. So I would say based on that, it seems fairly valued. We can also look at the company's forward price to free cash flow ratio, which is sitting at about 35x forward price to free cash flow, which is not cheap, but not crazy expensive. And like the previous one, right in line with analysts' estimates. So all in all, this looks like a pretty fairly valued company. Of course, that's not the only way that we can look at this. We can also do a reverse discounted cash flow analysis. Now, we can do a regular reverse discounted cash flow analysis. And for this, all we have to do is type in the ticker symbol, NVDA. We put in the trailing 12 month free cash flow, which for NVIDIA is $72.1 billion. Yes, billion dollars. Now, if we do that, and I think the stock is trading for, let's say, about $140 after hours, we want this green box to be as close to 140 as we can get it. And it looks like about 20%. So what does that mean? It means that with a 10% discount rate, if we assume that today's free cash flow margins of 49%, 49%, you'll be hard-pressed to find a hardware manufacturer that has 49% free cash flow margins. But if we assume, and I think it's a rather generous assumption that they can keep up those margins over the next 10 years, well, then they need to grow revenue by 20%. Let's put that 20% revenue growth number on the shelf here and remember it. But I want to show you another way of calculating this is by calculating it based on the technical definition of a company's discount rate, which takes into account its beta. And NVIDIA has a rather high beta of two. Basically, it's twice as volatile as the broader market. Now, if we put the same free cash flow in here of $72.1 billion, give it a normal terminal growth rate. Now, the discount rate is much higher for NVIDIA because of that high beta. Because of that, the growth rate needed to justify today's stock price is much higher. It's not 25%. Could it be about 28? It's about 28%. So one of them was 20%. Another one says 28%. Let's cut the difference and say NVIDIA needs to grow its revenue by 20 to 24% per year. Let's say 24% per year over the next 10 years to justify today's stock price. Well, what is it expected to do moving forward? Again, we can pull this up using FinChat. All I have to do is drag this out. And what I see is, is that over the next couple of years, it's expected to grow 52% this year, then 24%, then 16%. So if they hit these numbers and actually they even beat them by a little bit, that's still just three years out of seven. It would need between 15 and 20% revenue growth per year on average between years three and 10 to justify today's stock price. Is that reasonable? Is it not? I leave that for you to answer. This is not a stock that I own, but those are the expectations that are baked in. And finally, if we look at this from a technical standpoint, which I would only suggest doing if you have a high conviction in the stock and you believe in the valuation, and you're just looking to see when is a good time to feel comfortable making this purchase, we can look at it from a technical standpoint. And so what I've pulled up here is the company's in the red line here is it's 200 days, simple moving average to me is clearly in stage three. Now, just because a company enters stage three, where it plateaus after a big gain, doesn't mean it's going to enter stage four. It can reenter stage two where it accelerates ahead. And what I would say is keep an eye on these two lines here, right? Here's where there's some level of resistance. It's somewhere between 140 and 145 and $150. And there's support somewhere around a hundred dollars. So if it goes higher than 145 or 150 and really high volume, that might be an opportunity to add shares. Or if it enters, I would say, especially if it gets down near a hundred without any news that makes you doubt whether or not it can hit that free cashflow margin and it can hit that revenue growth rate. Well, and that would also be a good time where you could add shares. So overall, I think this was a very solid quarter for NVIDIA. Keep an eye on those gross margins. Keep your ears open for how the geopolitical situation could affect losing that China market if that were to happen. But keep in mind that the momentum is still on in a business sense, very much behind this stock. What did you think of NVIDIA's earnings? 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